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When the market gets hot, real estate newbies pay too much for houses!
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Have you ever heard the term MAO? Its pronounced “mayo,” and it's actually an acronym for “Maximum Allowable Offer”. This is the LARGEST amount of cash that you can offer to your seller and still be able to make a profit.
The formula for MAO is simple. It’s ARV (which is another common acronym used by real estate investors that stands for “After Repaired Value”) multiplied by $.70 minus repairs. Some investors use slight variations of this formula, but in MOST cases, you won’t see a formula that has a multiplier GREATER than $.75. The formula was created for a reason: So you don’t offer the seller too much for their house, and not be able to sell it/close on it.
So why am I even writing this? I want to warn you about paying too much for a house-- Paying MORE than MAO. It will only waste your time, the seller’s time, and cause you to get egg on your face.
As the real estate market improves, more and more people will start to flock toward real estate investing, especially wholesaling. There are two types of real estate newbies in this group. Those who have done their research, and those looking to make a quick buck.
The latter might not understand the formula for making sensible offers, and will be out there, recklessly making offers to sellers in an effort to put these properties under contract, and feel like they’ve gotten a step ahead in their quest to be successful.
This is unfortunate. You see, these guys are your competition. Even though you’re doing your research and making intelligent offers to the sellers that you’re certain can be sold off to another investor, these nitwits are coming behind you and offering MORE just to land the deal. This just might keep the seller happy. That is, until they learn that the investor who made their overpriced offer isn't able to perform on the contract. That sweet deal will leave a bitter taste in their mouth pretty quickly then.
Most always, ESPECIALLY if you have a follow up system in place, these sellers will come back to you when the deal falls apart, asking if your offer if still on the table. That’s when you can mop up the mess of the investor that got ahead of himself, and show the seller how to deal with a true professional. Someone who knows what they're doing.
Getting overpriced contracts signed with sellers isn’t what’s important in this business. What REALLY matters is that you’re able to solve the problems that the sellers are facing quickly, offer them the cash to fix things, and see your offer through to the closing table. If you’re paying too much, then you’ll never make it there. Be a wholesaler that you can be proud of. Make offers to sellers that you’re confident about being able to sell. Close Deals. Make money. And create win-win situations for everyone.