Originally posted by @Josh Rogers :
When figuring out a MAO, where do I get an idea of the buyers fixed costs? I know each buyer may have special agreements that may make his or her fixed costs different, so how do I go about getting this figure from a buyer who I may not have met yet?
Can you clarify your question regarding fixed costs? Your Maximum Allowable Offer should be whatever your end buyer will pay less your desired margin. In my market, most buyers (and hard money lenders) will do their Maximum Purchasing Price (and Lending Amount) at 75% After Repair Value less Repairs so our wholesaling Maximum Allowable Offer is typically 75% After Repair Value less Repair Estimate less Desired Margin.
Let me know if that helps!
@Marvin McTaw , I am referring to another method used for calculating MAO which is called the "Fixed Costs Method" This formula is similar to your, but it includes a few more variables such as purchase costs, holding costs, selling costs. Again, this is just another method for calculating MAO, however, all of the reading I have done has suggested that it is more effective to use this method as it includes what the end buyer will factor into his/her calculations.
However, it seems as if you have already established a good enough system with the standard MAO formula, so would you say that one is better than the other? If not, I will test out the standard MAO calculation formula, as simple is always better. My biggest concern is using the correct formula so that I can market a fair and competitive price to my buyers. I do not want to make a fool of myself by inflating my figures.
@Josh Rogers - neither way is right or wrong, they are just different. When wholesaling contracts for properties, we don't need to know the exact cost to renovate a property but as a developer, you definitely should. If you are planning to rehab the property, I would certainly suggest you follow the fixed cost method. I would also think that the fixed cost method is probably more accurate but takes longer to compute.There are more variables to consider and get wrong.
The big reason I suggest the simpler method is because every buyer's renovation costs are different. They have their personal situations and different exit strategies. For example, it may make sense to do a house addition which changes so many variables like the holding cost and renovation budget.