Every real estate wholesaler will hear the term maximum allowable offer. It’s important to know what this is and how to calculate it. Paying a price that will allow investors to make a profit is the key to your success. Once you have mastered the art of negotiating a price at or below MAO, your real estate investing career will flourish.
What is the Maximum Allowable Offer?
The maximum allowable offer in real estate is the highest purchase price that you’re able to pay for the property. Factors such as market value, estimated repairs, holding costs, and desired profit margin affect the formula. Above all this formula is considered a safe zone when negotiating pricing with your sellers.
How to Calculate Maximum Allowable Offer
There are different formulas for max allowable offer based on your exit strategy. For example, the highest price that a wholesaler can pay on a property will be much less than a rehabber. Similarly, both will have limits on what they can be to be able to make a profit.
Once you’ve memorized the formula for mao in your head, it will become second nature. This will be the point in your negotiating that you will have to stop increasing your offer. Otherwise, you’ll get stuck with a contract or a property that you can’t sell.
Here are some examples of MAO formulas for real estate investors:
Real Estate Wholesaling MAO
The wholesaling houses formula is one that generates the lowest offer to sellers. The lower percentage you use in the formula, the better deal you’re getting. This will determine your profit. Keeping the mao for wholesale real estate in check will help you become a favorite person for your buyers to hear from.
Part of the mao formula is knowing the After Repaired Value (pronounced “arv”). This is a representation of the value of the house after any needed repairs or upgrades are made. When it comes to determining ARV, some investors use estimates. Others will drill the number down to fine art.
ARX x .60 – Repairs
ARV x .80 – Repairs
Typically the difference in these two formulas will represent the profit that the investor makes from wholesaling the deal to the rehabber. The better you are at negotiating the wholesale deal, the more profit you will make. A cash buyer will use this formula, along with many other factors, to determine if the property meets his criteria.
Having an offer calculator is a great tool! There are many on the market that will help you construct a smart offer to your sellers.
If you’d like something a little more simple, download this MAO spreadsheet. Use it as you would a throw back multiplication table.
FREE MAO CHEAT SHEET
Download the Free MAO Cheat Sheet that you can carry in your pocket or car, and never pay too much for a property again!
Negotiating the Max Offer for Real Estate
Part of the victory of a real estate negotiation is creating a win-win transaction.. When making your offer to the seller, the maximum offer should always be in your thoughts. Open your negotiations be offering much less than your max offer. This will leave options for you to increase your price as well as ask for favorable terms in the deal.
Why You Shouldn’t Offer Your Highest Price to Begin With
You’re going to get caught up in the excitement of talking to a motivated seller, and you may even think that they’re going to get away from you without signing your contract. Some investors are even embarrassed to offer their Maximum Allowable offer, much less anything lower than that!
Sellers always ask more for the house than what they’ll accept, and buyers always offer less than what they’ll pay. Learn the psychology behind negotiating prices with people, and you’ll understand that you don’t have to come busting out of the gate with your highest offer.
What is reasonable to offer below asking price?
There’s something very powerful about a motivated seller telling you what their asking price is on a house. It becomes embedded in your mind like a little evil monster, and sometimes it’s hard to shake it. You may find yourself trying to come “close” to their asking price even though it’s not a deal. Don’t try to justify why their asking price is fair. Instead, keep your mao formula in mind and be smart.
In conclusion, it’s wise for you to know your numbers and play to win. By offering the seller a price that will create big profits for you, this journey as a real estate wholesaler will be highly profitable.