What magic number should you offer to snag a great deal and still make a profit?
^^ That question pops into every real estate investor’s mind the moment they set eyes on a property.
Well, while there’s no “magic” anything in REI, there are formulas that can help, including Cap Rate, Loan to value ratio, Debt to equity ratio , PITI, gross rent multiplier, the MAO formula and more.
In this article, we are going to break done of these as indepth as possible: the Mao Formula.
In a nutshell, it’s your secret weapon for making smart offers.
By using the formula properly, you’ll be able to make offers with confidence. Let’s get those numbers dancing to your tune, shall we?
What Does “MAO Formula” Mean in Real Estate?
MAO — or Maximum Allowable Offer — is a snazzy way of figuring out the highest price (aka maximum!) a real estate investor can/should pay for a property while still making a profit. Think of it as your investment safety net.
In simple terms, this formula helps you avoid overpaying. It’s your go-to tool for ensuring the numbers stack up, and the deal closes with everyone winning. By calculating the MAO, you’re setting a financial boundary that keeps your investments safe and profitable.
Knowing your MAO lets you walk into every deal with eyes wide open, armed with useful info to help you negotiate like a pro.
What Are the Factors of the MAO Formula in Real Estate?
So, you’re ready to crack the code on the MAO Formula?
Let’s examine the key factors that make up this crucial real estate tool. Like I said, the Maximum Allowable Offer Formula isn’t some arcane magic — it’s built on solid, understandable components that any investor can master. That means you!
After Repair Value (ARV)
This is the somewhat roughly calculated value of the property once all necessary repairs and renovations are done.
Repair Costs
This covers everything from a fresh coat of paint to major structural issues. Estimates are vital here because underestimating can munch through your profits quicker than you can say “over budget.”
Fixed Costs
Extra expenses can sneak up on you — closing costs, insurance, property taxes — so make sure you factor them in.
Profit Margin
This is the amount of profit you want to make from the deal. It’s important to factor in your desired profit to ensure the deal is worth your while.
Ready to see how it all fits together? Let’s move on to the nitty-gritty of calculating the MAO Formula in Real Estate!
How to Calculate the MAO Formula in Real Estate?
Alrighty, now that you know the key factors, let’s jump into how to calculate the Maximum Allowable Offer (MAO) Formula. Let’s turn those numbers into a solid offer that keeps your investments profitable.
Step 1: Determine the After Repair Value (ARV)
To get this number, look at comparable sales (comps) in the area — properties similar in size, condition, and location — and market trends.
Step 2: Calculate the Repair Costs
Consider getting quotes from contractors — this will give you a more accurate figure.
Step 3: Add Up the Fixed Costs
This includes closing costs, insurance, property taxes, and any other fees that come with the territory.
Step 4: Factor in Your Desired Profit Margin
A standard benchmark is 10%-20% of the ARV — but this can vary depending on your personal goals and the deal’s specifics.
Step 5: Apply the 70% Rule
The 70% Rule is a staple in real estate investing. It suggests that you should pay no more than 70% of the ARV, minus the repair costs and other associated expenses. This ensures a 30% margin for profit and unexpected costs.
Step 6: Plug It All Into the MAO Formula
Finally, plug all these numbers into the Maximum Allowable Offer Formula.
Start with the general formula:
Then extend it to include all factors…
Example — Calculating Your MAO
Let’s break it down with an example, so it’s clear…
- Imagine you’ve found a sweet property with an after repair value (ARV) of $300,000.
- You estimate the repair costs to be $50,000.
- Your fixed costs — including closing costs, insurance, and property taxes — are $30,000.
- And you’re aiming for a profit margin of $40,000.
Here’s how you’d use the Maximum Allowable Offer Formula:
MAO = (ARV×0.70) − Repair Costs − Fixed Costs − Profit Margin
Plugging in the numbers:
MAO = ($300,000 × 0.70) – $50,000 – $30,000 – $40,000
First, calculate 70% of the ARV:
$300,000 × 0.70 = $210,000
Then subtract the repair costs, fixed costs, and desired profit:
$210,000 – $50,000 – $30,000 – $40,000 = $90,000
So, your Maximum Allowable Offer (MAO) should be no more than $90,000 to ensure a profitable investment.
And there you have it! Not so scary, right?!
By following these steps, you can calculate the Maximum Allowable Offer and make informed, profitable investment decisions.
How Is the MAO Formula Different from the 70% Rule?
Now, let’s clear up the confusion…
The Maximum Allowable Offer Formula and the 70% Rule are often mentioned in the same breath — but they’re not exactly the same.
The 70% Rule is like a quick reality check for real estate investors. It suggests you should pay no more than 70% of the ARV minus repair costs. Simple and sweet, right?
But here’s the twist — the MAO Formula is much more comprehensive…
It takes the 70% Rule and spices it up with other important factors like fixed costs, desired profit margins, and sometimes even holding and transaction costs. This detailed approach makes sure you’re covering your bases, accounting for every potential expense and profit and making your offer is precise and tailored to your investment goals.
For instance, a study by R. Barkham and D. Geltner, “Price Discovery in American and British Property Markets,” highlights the importance of informational efficiency in property markets. Understanding these market dynamics is crucial for setting accurate MAOs — ensuring your offers are well informed and strategically sound.
So, while the 70% Rule is a fantastic quick-check tool — the Maximum Allowable Offer Formula dives deeper, giving you a more accurate picture and helping you make smarter investment decisions.
Final Points — MAO Formula in Real Estate
Alrighty, savvy investor, we’ve journeyed through the nitty-gritty of the MAO Formula — your secret weapon for making smart real estate offers.
Now, you know you’ve got to consider the after repair value (ARV), repair costs, account for fixed costs, and factor in your desired profit margin. And, you’re equipped with the knowledge to apply the 70% Rule — and plug everything into the MAO Formula to make informed, profitable offers.
But remember, while the 70% Rule is a fantastic tool — it’s not a substitute for a detailed analysis. The MAO Formula provides a comprehensive picture — ensuring you account for all potential expenses and profits.
So, use the MAO Formula to refine your offers, minimize risks, and maximize returns.
Keep this trusty formula in your back pocket as you navigate the world of real estate investing — it’s a small yet mighty metric.
Now, do some math and make those smart offers!
