Hey awesome investors! It’s Cody back again with another life-changing look at investing and the 6 stages to success. Start with Part 1 here.
When we last met, we talked about acquisition and how to estimate your property values simply.
Today’s lesson is short, sweet and… yep, you guessed it: simple. A simple formula, actually, that will help you determine what to offer sellers.
MAO, Not LMAO
Not to be confused with laughing my a#@ off, MAO is going to be your new best friend.
I know you throw up in your mouth a bit whenever you hear the word math, but I promise you this math is simple. If I can do it, so can you.
So what is MAO? It stands for Maximum Allowable Offer, and it’s the formula that you’ll use to determine what you should offer your sellers.
And it goes something like this…
ARV (After Repair Value) X Investor Discount – Repair Estimate – Wholesale Fee – Estimated Closing Cost = MAO
Easy right? Simple multiplication and subtraction.
But now you’re probably wondering what numbers to plug into this formula, and I’m happy to say I’ve got your covered.
Rules of Thumb
Use these (typical) numbers when calculating your offer:
- Investor discount: 25%-40%
- Estimated closing cost are about 3% of the ARV (+ 3%-6% for agent commission if you want to include that as well)
Let’s throw some numbers at this bad boy. You’ve got a house with 3 bedrooms, 2 bathrooms, 2-car garage, 1,200 square feet. The seller wants $100k. The house needs about $8,000 in repairs. As the wholesaler, I want to me $5,000 on this deal.
The ARV is about $125K. And 3% of the ARV comes to $3,750, which is my closing cost. The investor discount is 25%.
So now, plug and play, fiends…
125,000 X 25% – 8,000 – 5,000 – 3,750 = 77,000
Your maximum allowable offer is $77,000.
You know that they want $100k, and you also now know that your MAO is $77k… now what?
Well, remember, you’re using the MAO as your maximum number. You want your initial offer (and subsequent offers) to be less than your MAO, so you negotiate your way up to that magic number.
But what if you’ve been negotiating like a champ and the seller still won’t accept your $77k? You started at $60k, they came down to $90k. You upped it to $70k, they came down to $87k. You even went to $80k and they came down to a firm $85k. Do you do this deal for $85k, which is nearly 10 grand above your MAO?
Is it okay to offer above your MAO?
Of course! I do it all the time. It is absolutely okay! Here’s why… your MAO is simply a jumping-off point… a range to help guide you through the negotiation process.
Use the MAO as a gauge for your strategic target offer, then be sure to sell your property for more so you can make that money.
Winging it almost never works, so my advice is to cast a wide net. Fire in all directions and get control of as much real estate as you possibly can! Cherry pick the best deals to either add to your portfolio or flip, then place everything else in your wholesaling basket.
Just because we can – let’s add a little a final piece to the puzzle…
Let’s say your seller actually accepted your $77k offer for that deal. What do you market it for to buyers and investors? Well, if you as the wholesaler, want to make $5k-$7k, then that means you need to market it at $82-$84 – several grand more than the $77k so you get your wholesaler profit.
You’ve got the comps, you’ve calculated the offer and now you need to get back in front of your seller to actually make the offer in person. We’ve talked about phone strategy, but coming up, we’ll cover in-person strategy. And that, my friends, is what’s up next in this epic investing series.
Stay tuned, and stay classy.
Trackback from your site.