Real Estate Investing with Brian Evans Jr.
"What is MAO?"
So you’ve determined your investment home’s cost of repairs needed. Now we have to determine an offer amount to give the seller.
If a seller is adamant about all cash and you want to write a check with investor money or even wholesale it, then this is the formula that you’re going to follow. It’s called the MAO formula. MAO, stands for Maximum Allowable Offer. It’s not a new formula. It’s a pretty common, well known formula in the real estate investing market.
After Repaired Value, ARV x 70% – repairs = MAO.
Let’s throw some numbers in there to help explain. So we have a $100,000 home times 70%, minus $15,000 in repairs, MAO is $55,000. If you’re going to pay cash for a property that’s about $100,000 in value once fixed up, it needs $15,000 in repairs, you will write a check for the maximum of $55,000.
In fact, that should be ideally where you would wholesale it at. You’d want to try to buy it a little bit less than that. That’s a ballpark. If you do bring a check, you do not pay more than $55,000. You’re going to have a maybe difficult time wholesaling it at that price, maybe. Very conservative numbers, but this is what’s going to keep you out of trouble. Keep your risks low, keep your risks on the seller.
Your goal is to buy the property at or below MAO any time you plan to pay cash for a property or even wholesale it. The only time you’re allowed to pay more than MAO on a cash purchase is only if you can find a buyer to pay more than what you’re paying for it before you close.
Let’s say MAO on another property you have is $60,000. Well, what do you do? Get it under contract and maybe somebody will pay you $70,000 or $75,000. It’s about getting under contract at a price that you believe is low enough to be able to sell it for and hopefully make some money. The lowest deal that I’ve ever made is, profit is about $3,000 and change. Despite all the problems, I don’t know if I’ve ever really lost money net wise on a deal. There’s been some where it’s pretty darn close, but not many.
It’s all about buying it low, selling it for more than what you buy for, period. That’s it. So again, don’t complicate it!