The Maximum Allowable Offer (MAO) Formula

Making A Successful Real Estate Deal with Edic Properties, Two Businessmen Shaking Hands

You are about to learn the most important formula in all of real estate investing. This is the number that will practically guarantee you a profit, minimize your risk – and remove your emotions from any given deal.

Here’s how to calculate your Maximum Allowable Offer:

First, Take the after repaired value (ARV), which you determine from your comparables…

Then you multiply the ARV by 70% if you’re using your own money to buy, or 65% if you’re using hard money.

Then you subtract your repairs, and are left with MAO.

(After Repair Value X .07) – Repairs = MAO

An example:

If you find a home that’s worth $100,000 dollars fixed up, and you’re going to use a credit line, you take $100,000 and multiply it by .7 (70%), which equals $70,000 dollars.

$100,000 – After Repair Value

X .07 – (20% Profit and %10 for closing and holding costs)

$70,000

Let’s assume the house needs $20,000 in work. $70,000 minus $20,000, leaves you with a MAO of $50,000. The most you could ever pay for the house is $50,000.

$100,000 – After Repair Value

X .07 – (20% Profit and %10 for closing and holding costs)

$70,000

-$20,000 – In repairs

$50,000 – Maximum Allowable Offer

When making an offer I would start around $45,000 to allow some negotiation room.

If you are going to use “hard money” to finance your deal, the numbers change…

Say we have the same house with an ARVof $100,000. You would multiply it by 65% instead, before you subtract the $20,000 in repairs. The most you can now pay for the house is $45,000.

You lower the multiplier from 70% and down to 65% to account for the points and fees charged by a hard money lender. Remember, you’re going to have an appraisal fee, an application fee, rehab draw fees and points. The 5% will cover all of the fees a moneylender will charge you. See the example below:

$100,000 – After Repair Value

X .65 – (20% Profit %10 closing/holding and 5% for Hard Money)

-$20,000 – In repairs

$45,000 – Maximum Allowable Offer

With a MAO of $45,000, your initial offer would be about $40,000.

There is no way you can make an offer to purchase a home, until your know your MAO.

Stick to the formula. Successful investors before you have used it, and still do… for a reason. It’s funny to me how many people will go through gyrations to save a few bucks in rehab costs – but won’t think twice about overpaying for a house…

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