The MAO of Real Estate Investing
MAO is the "maximum allowable offer" that an investor should make on a property.
The calculation is either 65% or 70% of the after repair value (ARV) less repairs and other costs.
The MAO formula calculates an offer price that should allow an investor to make a profit while reducing the chance of losing money on the deal.
This formula is mainly used for an all cash offer on a property that the investor intends to flip.
MAO = 70% * ARV - repairs - other costs The range used in the calculation accounts for the investor's skill in successfully completing a rehab project.
Beginning investors should use 65% while more established investors can use 70% in their MAO calculation.
In order to be successful in flipping properties, there are two crucial costs an investor must be able to calculate: the ARV and the rehab cost.
The ARV should be based on comparable sales in the neighborhood and/or the use of an appraisal.
Comparable sales should be within the prior six months.
Investors who do not have access to comparable sales should enlist the service of a real estate agent who can provide this data.
This agent should be the same agent the investor will use when they are ready to list the property for sale.
The second critical cost is the estimate for the rehab.
New investors can solicit three bids from contractors.
The average of these bids will provide a reasonable expectation of the cost that can be used in the MAO calculation.
Experienced investors are usually able to estimate rehab costs without getting bids from contractors.
Regardless of the percentage used in the calculation, the investor should always pad their rehab estimate by 10% to allow for unforeseen repairs and potential cost overruns.
The ARV should include the potential commission paid to the real estate agent.
Most investors will list a property at 3-5% below market price to attract a quick sale.
Let's look at an example of calculating MAO.
Investor finds a house that is in need of repairs.
Recent sales in the area range from $96,000 to $102,000.
The rehab estimate is $12,000.
Real estate commission is 6% of the selling price.
ARV$100,000 70% of ARV $70,000 Less Rehab cost ($12,000) MAO $58,000 In the above example the investor can expect to sell the property at a 5% discount of the ARV for a quick sale or $95,000.
From this selling price the investor can expect to pay 6% in real estate agent commissions.
The net cash to the investor would be $89,300.
When you subtract $70,000 (purchase price plus the rehab cost), the investor can expect to make a profit of approximately $20,000.
While using the MAO formula is not a guarantee of making a profit, investors who utilize the formula can reasonably expect to realize a profit between 15% and 25% of the ARV.
The calculation is either 65% or 70% of the after repair value (ARV) less repairs and other costs.
The MAO formula calculates an offer price that should allow an investor to make a profit while reducing the chance of losing money on the deal.
This formula is mainly used for an all cash offer on a property that the investor intends to flip.
MAO = 70% * ARV - repairs - other costs The range used in the calculation accounts for the investor's skill in successfully completing a rehab project.
Beginning investors should use 65% while more established investors can use 70% in their MAO calculation.
In order to be successful in flipping properties, there are two crucial costs an investor must be able to calculate: the ARV and the rehab cost.
The ARV should be based on comparable sales in the neighborhood and/or the use of an appraisal.
Comparable sales should be within the prior six months.
Investors who do not have access to comparable sales should enlist the service of a real estate agent who can provide this data.
This agent should be the same agent the investor will use when they are ready to list the property for sale.
The second critical cost is the estimate for the rehab.
New investors can solicit three bids from contractors.
The average of these bids will provide a reasonable expectation of the cost that can be used in the MAO calculation.
Experienced investors are usually able to estimate rehab costs without getting bids from contractors.
Regardless of the percentage used in the calculation, the investor should always pad their rehab estimate by 10% to allow for unforeseen repairs and potential cost overruns.
The ARV should include the potential commission paid to the real estate agent.
Most investors will list a property at 3-5% below market price to attract a quick sale.
Let's look at an example of calculating MAO.
Investor finds a house that is in need of repairs.
Recent sales in the area range from $96,000 to $102,000.
The rehab estimate is $12,000.
Real estate commission is 6% of the selling price.
ARV$100,000 70% of ARV $70,000 Less Rehab cost ($12,000) MAO $58,000 In the above example the investor can expect to sell the property at a 5% discount of the ARV for a quick sale or $95,000.
From this selling price the investor can expect to pay 6% in real estate agent commissions.
The net cash to the investor would be $89,300.
When you subtract $70,000 (purchase price plus the rehab cost), the investor can expect to make a profit of approximately $20,000.
While using the MAO formula is not a guarantee of making a profit, investors who utilize the formula can reasonably expect to realize a profit between 15% and 25% of the ARV.
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