We are brand new to wholesaling and have been spending the past month immersing ourselves in webinars, podcasts, training, etc. We have all of the formulas down for building a deal, determining ARV, rehab budgets, etc. We've even invested in deal analysis software. The ONE THING that is eluding us is that EVERY formula (be it software or not) starts with one thing: the price that you will acquire the property (which is obviously NOT what it is listed for). I've been searching all over but I cannot find a formula that will help determine THIS particular number (that everything else is dependent upon). What I have been doing in my mock deals is looking at comps and using an average number based upon square footage in the comps. But I don't know if this correct or not! Does anyone have a formula for determining what your purchase price should ideally be compared to list price? Or am I missing something obvious?
Hi @GaNeane Lewis and welcome to BiggerPockets!
Yes, that missing factor you are referring to is known as the Maximum Allowable Offer, or MAO (pronounced "mayo"). You can (and should) search here on BP for posts and podcasts on how to approach the MAO calculation. Below are the basics.
First, there will be a different MAO depending on how money is to be made from the investment. For fix-and-flip deals, MAO is calculated based on the ARV and the repairs needed. For buy-and-holds, MAO is determined by repairs and Net Operating Income (NOI), which is rental revenue less operating expenses.
For example, for fix-and-flips the standard MAO formula is MAO = (70% * ARV) less Repairs less Wholesale Fee. So, if ARV is $100K and total rehab expenses are estimated to be $20K, a wholesaler would need to get the property under contract below $50K (.70*100K - 20K) in order to earn a wholesale fee at all. How much below $50K will dictate the size of the wholesale fee earned.
That's just a start (my two good typing fingers are now worn out!), but I hope that helps!
Thanks for the response Mitch! I do know how to calculate the MAO. However, using the example in the software that we use, in order to analyze the deal the first thing you input is "purchase price" meaning what you would purchase the property for, and then it goes on to analyze.
I use a specific formula to arrive at the MAO, however that also starts out with knowing the ARV. I also know the formula to figuring that out but you still need to know the value of the house vs. the listing price.
I think it is ENTIRELY possible that I'm overthinking things right now it simply missing something in plain sight lol
@GaNeane Lewis Yep, I think I'm missing the point, then. If this software requires that you input a purchase price, exactly what is the output of this program? What analysis is it performing that you don't already know?
If it's calculating ROI, for example, then I can imagine a scenario where you might need to provide an initial guess of a purchase price, and would then have to iteratively adjust the purchase price up or down to get to the exact investment return you need. If that's how this software works, then I'm just suggesting there's a faster and more direct method.
Now I'm curious: What am I not getting?
You are absolutely correct. The software does allow you to shift the numbers in order to get the return you are looking for. I think I'm overthinking things and thinking that ALL the numbers must be static.