It’s Time To Calculate Your MAO! (Maximum Allowable Offer) What Price To Offer The Seller
In Part #1 of this topic I discussed how to gather the information needed to come up with your offer. Now it’s time to calculate your MAO (Maximum Allowable Offer) is the maximum you can pay the Seller for a property. This number as to include your Assignment Fee which is the fee you charge for finding the deal. This is the price you tell the seller is your maximum offer. Stick to it.
Do not change the offer amount even if it seems to be too low. After to lock down the property with the seller you are going to market this property to potential investment buyers and they will need to make sure the deal has meat on the bone for themselves.
Below is how to calculate MAO on the property that will be assigned to a flip/rehab investor:
Main Formula: ARV x 0.70 – Repairs – Assignment Fee = MAO
ARV = $120,000
Repairs = $20,000
Assignment Fee = $10,000
The main formula applied looks like this: $120,000 (ARV) x 0.70 – $20,000 (Repairs) – $10,000 (Assignment Fee) = $54,000 (MAO)
ARV = $150,000
Repairs = $25,000
Assignment Fee = $15,000
The main formula applied looks like this: $150,000 (ARV) x 0.70 – $25,000 (Repairs) – $15,000 (Assignment Fee) = $65,000 (MAO)
ARV = $127,000
Repairs = $10,000
Assignment Fee = $8,000
The main formula applied looks like this: $127,000 (ARV) x 0.70 – $10,000 (Repairs) – $8,000 (Assignment Fee) = $70,900 (MAO)
How to calculate MAO on a property that will be a Buy and Hold (RENTAL PROPERTY)
In a previous post I discussed the, benefits-of-investing-in-rental-property-over-a-20-year-period One of those benefits is that landlords have CASHFLOW, which when evaluating rental property can allow an investor to pay a little more for the property than for a fix and flip. this is because they will get the money back in rent once the property is stabilized. Repairs for rental property is a lot cheaper because the investor will only fix the property enough to make it livable.
Repair cost for a rental is normally no more than $10K for a single family or per apartment unit. I have seen turn-overs cost us as little as $1,500 when they are just paint and cleaning, but this is not the standard. A typical turn-over is closer to $5,000 when the unit hasn’t been turned in the last 5 years and can get as high at $10,000 in older units.
The Main Rental Formula is: ARV x 0.80 – Repairs – Assignment Fee = MAO
ARV = $300,000
Repairs = $60,000
Assignment Fee = $15,000
The main rental formula applied looks like this: $300,000 (ARV) x 0.80 $60,000- $60,000 (Repairs) – $15,000 (Assignment Fee) = $165,000 (MAO)
The assignment fee is the fee you charge the buyer for finding the deal. Keep in mind that you won’t always get paid the number you plugged into the formula. Even if you make $1,000 profit, it’s still a win. All of your deals are not going to be huge profits, and there will be some that you talk about for years! Don’t lose out on a deal because you are trying to maximize your profits or being greedy.
On that note, always be marketing for new deals so you are never relying on just one. Remember, one deal is VERY close to no deals and you want to stay focused on filling your deal funnel.
Feel free to reach out to me on any questions on these formulas and feel free to plug a potential real estate deal into the Real Estate Calculator on @Mitch Jaworski’s website: www.scaredycatguide.com
You can also learn more about my live real estate investing trainings at: www.gualteramarelo.com
Cheers to your Success!