So you’ve found what you think is a great deal. It’s a single-family home in a neighborhood that is on the upswing. You notice homeowners in the neighborhood fixing up the properties and making improvements. This is promising, you think to yourself. But you need to figure out some things, like the Max Allowable Offer you should make on the property.
You’ve been watching home prices in the area for months, waiting for a deal you can make some serious money on.
You know this property is going to need some work. The former property owner had been using it as a rental for years. And you’ve seen pictures of the interior. The kitchen, bath, and floors are going to need some updating.
In your research, you’ve got a good idea of the comps for that neighborhood and you’re sure you will be able to sell. The housing market is still hot, after all.
You feel confident you can make some money. But how can you know for sure?
Is it a good deal? Sometimes it’s not as obvious.
What is the Maximum Allowable Offer (MOA) in Real Estate?
The Max Allowable Offer in real estate is a concept that helps an investor know what they should offer on a property.
Every investor knows they need to turn a profit on each deal. To make that profit, you need to know your numbers.
Profitable outcomes begin with great deals. You must get a good price on the buy, otherwise the price on the sell won’t make you money (or make less money). Knowing your Maximum Allowable Offer by using the MAO formula is critical to your success.
How Do You Calculate the Max Allowable Offer?
To truly know if you’ll make money or not requires you to understand what the Maximum Allowable Offer on the property will be.
Before you run your numbers, you’ll need to know a few things about the property, including:
- The value of the property in its current condition.
- An estimate of the rehab—does it need a little or a lot?
- The After Repair Value (ARV)—after you do the repairs, what will the property be worth?
The MAO Formula
There are some different ways of calculating the MAO formula. Depending on an investor’s strategy, the type of property, as well as other factors can influence what you consider a “good number.” You might be risk-adverse for example. Maybe you’ve been burned a few times in the past. So your calculations might be on the conservative side, giving you more wiggle room if something goes wrong.
The most common MAO formula involves using the 70% rule.
Under the 70% rule, an investor should pay no more than 70% of the property’s After-Repair Value or ARV.
Adjust the Percentage as Needed
An investor can adjust his percentage depending on the value of the property. For example, if the property has a high ARV, the investor might want to adjust the percentage up to get a clearer picture of potential profits.
Investors can lower the percentage for lower-valued properties which bring lower margins based on that market.
Others might add closing costs to their totals.
Using the 70% Rule
Under the 70% Rule, the MAO Formula looks like this:
Max Allowable Offer = (ARV x 0.70) – estimate repair costs
To illustrate the MAO Formula in action, we’ll use a real flip property funded by Cogo Capital.
Cogo Capital Case Study
Location: Farmersville, TX
Property Type: Single family home
The ARV for the property is $193,000 and the investors repair costs are estimated at $80,000.
Using these numbers, we can now calculate the Maximum Allowable Offer.
Our Formula: Max Allowable Offer = (ARV x 0.70) – estimate repair costs
- Max Allowable Offer = ($193,000 x 0.70) – estimated repair costs
- Max Allowable Offer = $135,000 – estimated repair costs
- Max Allowable Offer = $135,000 – $80,000
- Max Allowable Offer = $55,100
Fortunately, this investor was able to get it at an even better price of $50,000, resulting in $40,000 profit!
Before and after of the Farmersville property
Get Your Max Allowable Offer
So, it’s time to crunch the numbers on that deal you’ve had your eye on. Is it truly a great deal? You can only know by doing the math.
Afterwards, you can walk into that potential deal knowing full well whether it is “great” after all. But you will only know after calculating the max allowable offer.
Cogo Capital provides some tools you can use when evaluating real estate opportunities. Use our Maximum Allowable Offer Calculator and get an idea about the earning potential on that property.
It’s easy and free!
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