The Ultimate Guide to Calculating the Maximum Allowable Offer (MAO)

There is more than one way to do this. However, here are the three common methods. Whichever one you use, you should take the time to do a deep dive into the numbers during the Due Diligence/Inspection Period to ensure you have a profitable project.

This first one is the most widely used method that many Investors choose. It is called the 70% Rule of Thumb. This method is quick to calculate the Maximum Allowable Offer (MAO) while in the field looking at deals and properties.

Method #1 to Calculate MAO – The 70% Rule of Thumb:

ARV = After Repair Value (What it will sell for once it is fixed up)

ARV x 70% – Estimated Repair Costs = MAO

Example:

MAO =  $200,000 (ARV) x 70% – $30,000 (Rehab Cost) = $110,000.

The Maximum Allowable Offer in the Deal Example above using method #1 to calculate is $110,000.

 

The second Method is similar to the first in that you are calculating numbers of the proposed deal on your own to establish a maximum allowable offer. This one requires you to use a spreadsheet or a piece of paper to list each line item cost so you can estimate in advance what the entire deals costs will be in order to calculate your MAO.

 Method #2 to Calculate MAO – All Cost Calculation:

ARV – Rehab Cost – Closing Costs – Cost of Funds – Holding Costs – Real Estate Commissions – Your Desired Profit = MAO

Example:

MAO = $200,000 (ARV) – $30,000 (Rehab Cost) – $20,000 (Closing Costs, Cost of Funds & Holding Costs) – $12,000 Real Estate Commissions (6% of ARV)  – $28,000 (Your Desired Profit) = $110,000

The Maximum Allowable Offer in the Deal Example above using method #2 to calculate is $110,000.

 

Method # 3 to Calculate MAO – Unique Calculator to Your Business

Maybe you have a partner who funds your deals, or maybe you are a wholesaler who works with certain investors who require certain margins in deals; whatever your unique situation might be it is sometimes best to use a calculator you created or someone working with you created for your particular type of deals. This is usually a lot quicker and easier.

For members of Wealth 212˚’s Keystone Funding Network they have a calculator in their member center to help quickly estimate profits in the field so they know where to write in their MAO.