MAO Calculator
Calculate your Maximum Allowable Offer (MAO) for real estate investments.
Your Maximum Allowable Offer (MAO) is:
Understanding the MAO Calculator
The Maximum Allowable Offer (MAO) calculator is a crucial tool for real estate investors, particularly those involved in flipping properties or rental arbitrage. It helps determine the highest price you can pay for a property while still achieving your desired profit margin, considering all associated costs. This ensures your investment remains financially sound and profitable.
The Math Behind the MAO Formula
The MAO is calculated by working backward from the After Repair Value (ARV) of the property. The general formula aims to ensure that your offer price, combined with all expenses, does not exceed the ARV minus your target profit.
Here's a breakdown of the inputs and the calculation logic:
- After Repair Value (ARV): This is the estimated market value of the property once all necessary repairs and renovations are completed. It's the projected selling price.
- Rehab Costs (Estimated): The total cost you anticipate spending on repairs and improvements to bring the property up to its ARV.
- Desired Profit Margin (%): The percentage of the ARV that you aim to profit from the deal. A common target is 15-20%.
- Selling Costs (% of ARV): These are the costs associated with selling the property, typically including real estate agent commissions, closing costs, title fees, and transfer taxes. This is usually calculated as a percentage of the ARV.
- Buying Costs (% of MAO): These are the costs incurred when purchasing the property. This includes closing costs for the buyer, inspection fees, appraisal fees, legal fees, and any loan origination fees. This is often calculated as a percentage of the MAO itself.
The formula can be represented as follows:
First, we calculate the target selling price after deducting selling costs and desired profit:
Target Selling Price = ARV - (ARV * Selling Costs Percentage / 100) - (ARV * Desired Profit Margin / 100)
Then, we subtract the rehab costs and buying costs from this target selling price to find the maximum amount you can spend on the purchase itself (the MAO). Since buying costs are a percentage of the MAO, we need to solve for MAO.
Let MAO be the Maximum Allowable Offer.
MAO + (MAO * Buying Costs Percentage / 100) + Rehab Costs = Target Selling Price
MAO * (1 + Buying Costs Percentage / 100) = Target Selling Price - Rehab Costs
MAO = (Target Selling Price - Rehab Costs) / (1 + Buying Costs Percentage / 100)
Substituting the Target Selling Price:
MAO = (ARV - (ARV * Selling Costs Percentage / 100) - (ARV * Desired Profit Margin / 100) - Rehab Costs) / (1 + Buying Costs Percentage / 100)
How to Use the MAO Calculator
1. Enter Rehab Costs: Input your best estimate for the total cost of repairs and renovations. 2. Enter ARV: Provide the estimated market value of the property after all repairs are done. 3. Set Desired Profit Margin: Specify the profit you want to make as a percentage of the ARV. 4. Estimate Selling Costs: Enter the total percentage of the ARV that you expect to spend on selling the property. 5. Estimate Buying Costs: Enter the total percentage of your offer price (MAO) that you expect to spend on acquisition costs. 6. Click "Calculate MAO": The calculator will instantly provide your Maximum Allowable Offer.
Example Scenario
Let's consider a property with the following details:
- Rehab Costs: $40,000
- After Repair Value (ARV): $300,000
- Desired Profit Margin: 20%
- Selling Costs: 8% of ARV
- Buying Costs: 4% of MAO
Using the calculator or the formula:
Target Selling Price = $300,000 – ($300,000 * 0.08) – ($300,000 * 0.20) = $300,000 – $24,000 – $60,000 = $216,000
MAO = ($216,000 – $40,000) / (1 + 0.04)
MAO = $176,000 / 1.04
MAO = $169,230.77
In this example, the investor should not offer more than approximately $169,231 for the property to meet their investment goals.
Why MAO is Important
Accurately calculating your MAO is fundamental to profitable real estate investing. It prevents overpaying for properties, which can lead to losses or significantly reduced returns. By using this calculator, investors can make more informed decisions, negotiate effectively, and increase their chances of success in the competitive real estate market.