MAO vs 70% rule

[Louise Whidby]

ok someone has just threw a monkey wrench in all that I have learned from BP. It's all about the numbers,,,, I hear this all the time. So I finally learn how to do the 70%, 65% rule and now I plan on putting an offer on a Short Sale Monday. I think I have it all figured out until a colleague starts helping go over my numbers and she is talking a totally different language than I! Now Im confused as hell.....She is speaking on MAO. I have never been taught this system

3 Comparible Sold properties 128K.......

Short Sale listing price (is this called the FAIR MARKET VALUE) $95K? Which one of these numbers am I multiplying the 70%- repairs- my fee?....

[Will Barnard]

Louise, MAO is just an abbreviation for maximum allowable offer. The 70% rule is simply a formula to get to your MAO, thus no need for the "vs." between them. They go hand in hand.

I happen to be a huge proponent of the 70% rule (& 65% & 75% rules). J Scott and I have discussed our two similar but different approaches to this and have determined time and again that our final numbers are so very close, including our ROI (return on investment).

Therefore, I like and prefer using the formulas as you only need to know two figures, the ARV and the rehab costs. With these two figures, you can arrive at your MAO using the 70% rule (or any of the other % numbers). The only two things an investor must consider is that you must use the appropriate % for the different ARV figures and you may need to make adjustments if you have extra expensive financing costs.

Example, in J Scott's example published in the link above, the MAO came to be $50,000. If you use the 70% rule! it would have been $52,000 for the MAO. $100k times .70 minus the $18k rehab equals $52k MAO. Now, as I stated above, different exit values (ARV) require different rules. For me, anything at or below $100k ARV I would be using the 65% rule! and then my MAO on J's example would have been $47k.

In a different example where the sit value was $300k, I would use the 75% rule and would be perfectly safe and profitable. In yet another, with an exit over $800k, I am back down to 70% and as the ARV rises! I use the 65% rule again. The reasons behind this vary with the exit values. With low exit values, you have little room for error and thus need a larger % spread to cover that risk! I.e. the 65% rule. In multi million dollar deals, you can easily have hundreds of thousands of dollars in fluctuations plus holding times and costs are typically higher, thus a larger % spread is yet again required! hence 65% is used. With $250k to $600k spreads, it is typically easy to find comps, lock in a firm rehab number and have little in unforeseen problems, thus 75% rule will work great.

In J Scott's case, he has done lots of flips that most have very similar exit values around the $100k mark, so he has a ton of hud1 statements to show fixed costs. If you are new, only have done one, or do a wider range of exit values like I do, it is not as easy to have an accurate average in fixed costs to apply, plus it is one more figure (with plenty of additional figures inside it) to calculate and account for. The % rules account for these costs and are built n! making that formula extremely easy and extremely fast to arrive at your MAO.

That all said, if you want to see extremely accurate numbers and dig into all the costs you will have, J's formula will get you there better than the % rules.