How to Calculate the Maximum Allowable Offer (MAO) on Investment
September 11, 2018, By Jorge Vazquez
It’s important for real estate investors to calculate the maximum they can pay for a property, and make a good profit after it is rehabbed and either sold or leased to tenants. So in this article, we want to show you how to calculate the Maximum Allowable Offer (MOA) for investment property.
As we begin, remember that investors make their money when they buy a property. Investors must purchase properties at the right price to make a profit. Therefore, accurately calculating the Maximum Allowable Offer is essential to profitability.
Fixed Cost Method of Calculating the Maximum Allowable Offer
One of the most consistent and accurate methods of calculating the Maximum Allowable Offer is the Fixed Cost Method.
Although the name “Fixed Cost Method” is a little deceiving, because several of the calculations include more than just fixed costs, the theory is very sound.
The general idea of calculating the Maximum Allowed Offer is to estimate the After Repair Value (ARV), deduct the fixed costs and rehab cost, and deduct the profit (or equity)* you plan to make. The resulting number, then, is the Maximum Allowed Offer.
- ARV – Fixed Costs – Rehab Costs – Profit / Equity = MOA
*Note: If you are flipping the property, you calculate the profit you plan to make from the deal. If you are holding the property and leasing it to tenants, you calculate the amount of equity you plan to have in the property when everything is complete.
Estimate the After Repair Value (ARV)
The first calculation needed to determine the Maximum Allowable Offer is the After Repair Value.
This calculation estimates the value of the investment property after it has been rehabbed, and it is ready to sell or lease to tenants. The process of estimating the ARV includes:
- Review information about the property you may purchase.
- Review comparable properties (i.e., the comps).
- Compare the comps with the property you are considering, and estimate the ARV.
Learn More: How To Estimate A Property's After Repair Value (ARV)
Estimate Your Fixed Costs
Now with the After Repair Value, you can estimate the fixed costs, which include all costs other than rehab expenses.
Although fixed costs change from project to project, some of the more common costs include:
- Inspection.
- Lender fees and financing.
- Taxes.
- Utilities.
- Insurance.
- Warranty.
- Closing costs.
- Commissions.
- Selling expenses, such as advertising and MLS fees.
Estimate Rehab Costs
Estimating rehab costs can be the most difficult part of calculating the Maximum Allowable Offer because there are so many unknowns that can break the budget.
Therefore, it is important to estimate rehab costs with a contractor who is experienced with investment properties and understands the appropriate fit and finishes for the project.
Perhaps most importantly, the rehab budget should include a contingency for unknown expenses, which the contractor can help estimate based on possible issues that might arise.
Learn More: How Much Do I Need to Start Investing in Real Estate?
Set the Profit / Equity
Now, set the amount of profit or equity you would like to have after the rehab is complete.
If you are flipping the property, this is the amount of profit you would like after the deal closes and all expenses are paid. And if you are holding the property and leasing it to tenants, this is the amount of equity you would like to have in the property when everything is completed.
Doing the Math
At this point, all is left is to plug the numbers into the formula.
- ARV – Fixed Costs – Rehab Costs – Profit / Equity = MOA
Here is an example:
- ARV = $170,000
- Fixed Costs = $22,000
- Rehab Costs = $30,000
- Profit / Equity = $40,000
- MOA = $78,000
