Exceeding MAO ensures more risk and much less reward.
Maximum allowable offer (MAO) is the maximum price point at which investors in a real estate deal can realistically expect to pull in a profit while minimizing the risk of losing money. If you exceed your calculated MAO then you essentially ensure that you'll lose money and minimize your chances of pulling in even a small profit. While the MAO formula is designed to increase reward while minimizing risk, it's no longer beneficial if you don't estimate the value of your property and your repair costs accurately. The slightest miscalculation can throw your MAO completely off-base, causing your risk:reward ratio to flip and lose you money.
Instructions
1. Calculate the property's After Repair Value (ARV), which is the value of the property once all repairs have been completed. The best way to do this is to research what comparable properties within your property's vicinity are selling for. Then add up all of the similar property values and divide by however many there are to arrive at a solid ARV estimation of your own.
2. Calculate the property's Repair Estimation (RE), which is the total cost needed to properly repair the entire property. The best way to do this is to acquire a list of average general repair or addition costs and tally up what needs to be fixed on your property. For even more accurate an estimate you could contact local contractors and ask for repair quotes to help tweak your cost estimates. Be sure to include any potential financing charges in your estimate.
3. Input the calculated amounts for the property's After Repair Value and Repair Estimation into the Maximum Allowable Offer formula: .70(ARV) - RE. For instance, if your ARV estimate was $17,000 and your RE value was $2,340 your formula would be .70(17000) - 2340 and your MAO would calculate out to be $9,560.
Tags: your property, After Repair, After Repair Value, Allowable Offer, best this, Calculate property
