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  • The MAO Formula: A Wholesaler's Best Friend | By: Mike Jacka

What is the MAO Formula?

MAO is short for Maximum Allowable Offer and provides wholesalers with a widely accepted formula for negotiating and wholesaling.  This really is a tremendous tool because it allows you to set goals and have an exact understanding of what you need to negotiate in order to wholesale the deal.  Without further ado… the MAO formula:

MAO = ARV * 70% - Estimated Repairs

Wholesaling is widely considered the most natural starting point for beginning investors for good reason.  Aside from the absence of any significant risk or investment of personal funds there is an even greater benefit…   when you understand the operations of wholesaling you will begin to recognize the inner workings of other investing techniques deployed by investors.  Here’s an example that illustrates this benefit and its real world application:

You receive a call from a motivated seller who received a piece of direct mail with your website’s address.  They’ve read your special report and filled out the seller form and now you’re gathering the details of the property and arrange for a time to see the property.  Between the call, the information from the seller form, and a tour of the property you have enough information to fill in the blanks.

1.     ARV (After Repair Value) you calculate based on comps comes out to $120,000.

So our formula stands at (MAO = $120,000 * 70% = $84,000), but the property is in need of some work and you need to estimate the repairs necessary to bring the property up to the ARV.

2.     Estimated Repairs requires you to be able to walk through a property and estimate what work needs to be done and estimate the cost of the rehab. 

In this example you estimate the repairs come out to roughly $25,000 and with that we can calculate the full MAO.

(MAO = $120,000 * 70% - $25,000 = $84,000 - $25,000 = $59,000)

A Little Note to Beginners about Estimating Repairs

Estimating Repairs is what scares many beginning investors from moving forward, but it isn’t as frightening as it seems.  You’re not required to have years of contracting experience to estimate repairs, all you need to understand is what to look for, how to measure, and what the going rates are.  Here’s a link to a video I created to set your phobia straight by guiding you through the process on a real property:  Estimating Repairs for Wholesalers

At this point you understand the role of Estimating Repairs and the After Repair Value and the good news is that all things considered those are the two estimates you need to be able to make.  But there are still two pieces remaining that haven’t been thoroughly defined:  Why it’s called the “Maximum Allowable Offer” and where this arbitrary 70% number comes from.  We’ll start with the latter…

Where Does the 70% Come From and What Does It Mean?

To put it plain and simple, the 70% is the investor discount that allows the rehabber/wholesale buyer to make their money when they buy.  Your role as a wholesaler is to bring deals to your buyers with enough of a built in discount so they make their profit when they buy from you because you’re wholesaling deals!  There are two parts to the 70% (a 30% discount off the ARV).

1.     10% of the discount is in consideration of additional costs to your buyer.
   
- 4%-5%
is to adjust for an assumed 6 months of holding costs.
- 1% covers the buyer’s closing costs.
- 3%
covers the buyers closing costs when they sell.

- 1%-2% remains as an additional hedge to minimize the buyers risk.

2.     20% of the investor discount is the built in profit for your buyer.  This is the profit they make when they buy your wholesale deal and gives the buyer enough of a spread to assume a reasonable risk vs. reward on the deal.

“I’ve Seen Others Recommend a 65% (35% Discount) for the MAO Formula… When Do I Use 65% instead of 70%?”

The 65% will make the deal that much more appealing to any buyer given the additional discount, but it also eats into your margin as we’ll explain shortly in the final part of this review.  But there are three sound reasons for going by 65%.

1.     The deal will wholesale faster with an addition 5% discount off the ARV is built in.

2.     Offering deals at 65% rather that 70% will draw the attention of more buyers.

3.     There is an additional 5% hedge against any misjudgments you may have made.

All things considered there is a rule of thumb that requires you to adjust to 65% and that is in effect when you know your buyer will be selling the house using a realtor.  This added 5% is to cover the typical 5% realtor commission of the ARV at the closing of the sale for your buyer.

In this case, if the buyer’s flipping operations always incorporate a realtor in their selling/exit strategies and to bring them a deal that incorporates the additional 5% of that expense in the MAO using the 65% rather than the 70% adjustment.  Taking the example from the beginning of this review and adjusting for the buyer who will be using a realtor you will be looking at an MAO formula like this:

(MAO = $120,000 * 65% - $25,000 = $78,000 - $25,000 = $53,000)

This is one of the many reason that it is necessary to abide by the needs of your buyers list to focus your marketing efforts.  Because if you have a ready buyer looking for a property with certain specifications in a particular area that isn’t commonly in an area preferred by other buyers on your list you have to negotiate accordingly.

Now for the million dollar question…

Why is it called “Maximum Allowable Offer?” 

You may have wondered by now, “Where’s my profit factored in?”

What some wholesalers haphazardly overlook that which is in plain sight is that the number that represents your maximum allowable offer.  In other words it is the most you can offer and as a wholesaler the most you can offer is $0.  This can best be spelled out by a very simply formula:

MAO – Your Contract Price = Profit, which you may know by the term ‘assignment fee.*’  Using our latest MAO example from the 65% example and using a standard assignment fee of $5,000 for your efforts we get this:

MAO = $53,000, minus your $5,000 assignment fee brings you to your target negotiation price which would be to get this property under contract for $48,000 and anymore you can negotiate will be added to your assignment fee.

*Note:  Never call it a commission because then you will be claiming the role of a real estate agent.  Investors make profit, assignment fees, and marketing fees.  Real estate agents make commission and the big difference is that in order to act as a realtor is that you need to be licensed, you don’t need a license to be a wholesaler/investor.

The MAO Wrap Up

The MAO formula is your wholesaling formula that creates profit twice when you buy, assignment fee for you, and a built in profit spread for your buyer.  First you’ll want to determine if you need to use 65% or 70%.  If you’re not sure the default should be 65% in today’s market.

Once you have that figured out you can then apply your ARV and estimated repairs to the formula to find your MAO.

The final step is adjusting for your profits which can typically range from $5,000 to $10,000.  Simply deduct your profit from the MAO and you have your target option price to negotiate towards.

If the thought of making $5,000 to $10,000 on a single wholesale deal seems a little farfetched, drop that idea right this minute!  Your buyers’ only concern is that the numbers will work for them, the amount you make below the MAO is your profit and no real buyer will hold it against you.

You make your profit when you negotiate below the MAO and your buyer makes their profit when they buy at the MAO price!