MAO. What These 3 Letters Stand For & Why They Are So Important.
One of the most deadly mistakes an investor can make is to pay too much for a property. This, repeated too many, times can crush a real estate investor’s career easily.
What is MAO? How do you calculate it?
MAO stands for Maximum Allowable Offer. This is the absolute maximum amount you can pay for a property based on your buying criteria.
It is imperative that you determine this number before you start making offers if you want to be a successful real estate investor and prevent the deadly mistake of overpaying.
So, how do you calculate MAO? There are multiple ways to do this. Here are a couple of methods:
The 70% Method- Many investors use this rule.
○ Determine the ARV (After Repaired Value)
○ Calculate 70% of ARV
○ Subtract the repairs needed
■ If rehabbing, this is the end of your calculation. You now have the MAO.
■ If wholesaling you should now subtract your wholesale fee to get the MAO
Itemized Method- This method will get you a more precise MAO.
○ Determine the ARV
○ Calculate all expenses and subtract from ARV
■ Repair costs, closing costs, commissions (front end and backend) and holding costs
○ Subtract the return that you want to net
■ If rehabbing you are finished with the MAO at this point.
■ If wholesaling you need to also subtract the return that your buyer needs to receive plus your wholesale fee, then you will have your MAO.
Here are some examples of these calculations so that you can see it in another way:
70% Method When Rehabbing
○ ARV is $100,000
○ Repairs needed are $30,000
○ $100,000 x .7 = $70,000 $70,000 - $30,000 repairs = $40,000 MAO
70% Method When Wholesaling (using the same numbers as above)
○ $100,000 x .7 = $70,000 $70,000 - $30,000 repairs = $40,000 $40,000 - $5,000 wholesale fee = $35,000 MAO
Itemized Method When Rehabbing
○ ARV is $100,000
○ Subtract the following from the ARV:
■ Repairs- $30,000
■ Closing Costs (Purchase and sale) $3,000
■ Holding Costs $5,000
■ Commissions $6,000
■ Total of these costs = $44,000 (30k + 3k + 5k + 6k = 44k)
■ Next factor in what you need to net. For this example we will use 16k.
■ $100,000 ARV - $60,000 (all costs plus your return) = 40k MAO
Itemized Method when Wholesaling
○ To calculate this number you can take the exact numbers from the above example for rehabbers and subtract your wholesale fee to get your MAO.
○ 100k - 63k (includes a 3k wholesale fee) = 37k MAO
*Please take note that the 70% method may need to be adjusted to fit your market and your specific strategy. In some very competitive markets the percentage may need to be adjusted upward to 73-80%
Now that you know what MAO is and how to calculate it, there should be no reason that you overpay for a property ever again If you do proper due diligence and analysis when determining your ARV and repair costs.
Here's to your success!
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