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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.
You're negotiating with a seller. His price is too high. Your price is too low. You're hungry for a deal. What do you do? Do you just give in and pay the seller what he's asking? What happens to your bank account in situations like this? Does it suffer?
Knowing your limit on the offer is essential to creating and sustaining a profitable real estate business. Newbies make the mistake all the time of paying more than they should for a house in hopes that they can make a few bucks.
The better strategy is to KNOW YOUR NUMBERS before you ever enter into negotiations with the seller, and know when to stop. You should never pay more than MAO [Maximum Allowable Offer] and this course will teach you why.
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A seller lead calls in. Based on the initial conversation she seems motivated. You've got a HOT ONE! Since you're a newb, you get overly excited and wanted to lock this deal up before she calls the next investor on her list. So what do you do?
Do you head straight over to Zillow, find the "Zestimate" and use that to come up with an offer? Guess what? That will get you into trouble EVERY TIME. Zillow's magic Zestimate doesn't take everything into consideration. For example Lot size, year built, and proximity to the subject property.
Everyone has become reliant on the Zestimate these days because it's a fast and easy number to reference. Ultimately, a certified appraiser or any investor with sense is not gong ot use Zillow to determine the market value of a property. There will be more in depth analysis deon on this property first.
What happens is that you shoot high, and overpay for the property. Then everything rolls downholl from there. You get resistance form your buyers, you look incompetent, you're not building credibility in your marketplace, and you will lose the deal.
Paying the right price for a property and offering it at the right price is what will keep you in the game. Making offers based on Zestimates because you're unwilling to do the research necessary will feel like running up an escalator after a while. Do your research and make sensible offer that your cash buyers will love you for. That will keep them coming back for more.
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.
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:
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.
Download the Free MAO Cheat Sheet that you can carry in your pocket or car, and never pay too much for a property again!
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.
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.
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.