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…