What Is MAO In Real Estate?
June 16, 2023 3-minute read
Author: Ashley Kilroy
In the dynamic world of real estate investing, one crucial factor helps successful investors pursue opportune deals: the maximum allowable offer (MAO). Determining the perfect offer price can be the key to unlocking profitability and securing a solid investment. By understanding how MAO real estate works, investors can navigate the complex landscape of property valuation, repair costs and potential profits. This concept helps empower investors to make wise decisions and enjoy financial success.
What Does MAO Mean?
Calculating the MAO is a way for real estate investors to determine how much they should offer in order to potentially purchase an investment property. The MAO refers to the highest price an investor can pay for a property and still benefit financially. It’s often calculated based on a specific formula or strategy to determine an investor's offer price.
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How Does MAO Work In Real Estate?
MAO is helpful for real estate investing because it maintains your profit margins in all situations. Specifically, it calculates profitability using the estimated after-repair value (ARV) of the property and the necessary costs of purchasing and repairing it.
As a result, MAO and the 70% rule can work together to keep your portfolio strong. The 70% rule is a guideline stating that you should pay a maximum of 70% of the ARV minus the repair expenses. In other words, the 70% rule is a reliable way to define your MAO.
For example, say you’re looking at a home with an ARV of $300,000. The 70% rule means your expenses for purchasing and repairing the home should be no greater than $210,000. This way, your profit will be at least 30% of the home’s value, or $90,000 in this case.
In addition, the estimated repair costs are $30,000. So, the highest financially feasible offer you can make (including closing costs) is $180,000.
How To Calculate The MAO When Buying Investment Property
As demonstrated in the example above, calculating the MAO on a piece of real estate is a straightforward process. The following elements comprise the formula:
The MAO Formula
Here are the numbers and figures to use when calculating the MAO:
After-Repair Value (ARV)
ARV is the property's approximate value after you complete all the necessary repairs and renovations. You can determine ARV by evaluating comparable sales in the area, considering factors like location, size and home condition, and researching recent selling prices of similar properties.
If you're lost trying to calculate ARV, a real estate agent can help. They have access to the multiple listing service (MLS) and knowledge of comparable properties (comps) in your area. By analyzing the sale prices of a few comps, you can estimate the ARV more accurately and factor in the cost of necessary renovations. Typically, real estate professionals use three to five comps and average the selling prices to determine the future value of your renovated property.
Every home has unique renovation expenses to bring the property to its optimal condition or marketability. They include cosmetic updates and substantial repairs like a new furnace or roof.
As of June 2023, repair costs can run between about $17,000 – $80,000 on average, according to HomeAdvisor. The type of repair determines your overall cost, so it’s crucial to be mindful of this factor when considering investment properties. For example, the average kitchen remodel costs up to $65,000, while a bathroom costs up to about $25,000. Therefore, identifying the needed repairs is vital to ensuring your purchase price is low enough to maintain a solid profit.
Aside from repair costs, fixed costs are a necessity when purchasing real estate. For example, you’ll pay the closing costs for your mortgage, insurance, inspections, appraisals and property taxes. Generally, these fixed costs are 3% – 6% of the purchase price. So, a $200,000 home would incur fixed costs of $6,000 – $12,000.
Profit Or Equity
Lastly, estimating your potential profit or equity is crucial to ensuring you’ll make money on the deal. You can do so by comparing the sum of the purchase price, repair costs and fixed costs with the ARV. Remember, the ARV isn’t a guarantee, but it should provide an accurate idea of how much the home will be worth when you put it up for sale.
The Bottom Line: Calculating The MAO Can Help You Make Smart Investments
MAO is a fundamental tool for real estate investors to determine the appropriate offer price for an investment property. Investors can calculate their potential profit or equity in a property by considering factors such as the ARV, repair costs and fixed costs. The MAO formula, often complemented by the 70% rule, helps maintain profitability by ensuring that the purchase and repair expenses fall beneath the property's market value at a healthy margin. By diligently calculating the MAO, investors can make informed decisions and maximize their returns in the competitive real estate market.
So, if you have your calculations outlined and are ready to make some offers, you can start the mortgage process today and start pursuing an investment property.
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