What is MAO in real estate?

In the dynamic world of real estate investing, mastering key metrics like Maximum Allowable Offer (MAO) and After Repair Value (ARV) can be the difference between success and failure. Whether you’re a seasoned investor or just dipping your toes into the market, understanding these concepts is essential for making informed decisions and maximizing profits. Besides, we’ll delve into the intricacies of MAO and ARV, explore related topics, and provide practical insights to help you navigate real estate deals with confidence.

What does Mao mean in wholesale?

For wholesalers, the MAO is the highest price they can offer to a seller to ensure they can still assign the contract to another buyer and make a profit. The concept and calculation are similar to other real estate investments but with a few nuances specific to wholesaling.

Also, MAO serves as a safeguard against overpaying for properties, ensuring that investors maintain healthy profit margins and mitigate risks. Thus, investors can make informed decisions and negotiate effectively with sellers by calculating the maximum offer they can afford.

What is an MAO calculator?

An MAO calculator is a tool used by real estate investors, especially wholesalers, to quickly and accurately determine the Maximum Allowable Offer (MAO) they can make on a property. This calculator automates the process of considering various factors involved in real estate investment, ensuring that investors do not overpay for a property and maintain their desired profit margins.

Key Components of an MAO Calculator

A MAO calculator typically includes input fields for the following components:

1. After Repair Value (ARV). The property’s estimated market value after all necessary repairs and renovations are completed.
2. Repair Costs. Also, the total estimated cost required to repair and renovate the property to bring it to its ARV condition.
3. Discount Rate. The percentage of the ARV accounts for the investor’s target profit, holding costs, closing costs, and market risks. This is commonly set at 70% but can vary based on market conditions and investment strategies.
4. Other Costs. Any additional costs associated with acquiring, holding, and selling the property, such as closing costs, holding costs (taxes, insurance, utilities), and assignment fees for wholesalers.

In summary, an MAO calculator is an invaluable tool for real estate investors, providing a quick, accurate, and consistent method for determining the maximum offer they should make on a property. By leveraging this tool, investors can streamline their evaluation process, minimize risks, and enhance their profitability in real estate transactions

How to calculate ARV and MAO?

MAO is the highest price you can pay for a property to ensure a profitable investment. Here’s the formula and steps to calculate it:

MAO=(ARV×Discount Rate)−Repair Costs−Other CostsMAO=(ARV×Discount Rate)−Repair Costs−Other Costs

1. Determine ARV
   • Use the ARV calculated as explained above.
2. Set the discount rate
   • A common discount rate is 70%, which includes a profit margin and covers holding and closing costs. This can vary based on market conditions and risk tolerance.
3. Estimate repair costs
   • Get detailed repair estimates from contractors or use a cost estimator to determine the total repair costs required to bring the property to its ARV condition.
4. Account for other costs
   • Include other costs such as closing costs, holding costs (taxes, insurance, utilities), and any assignment fees if you’re wholesaling.

Example Calculation for MAO

Using the ARV from our previous example ($215,000), assume:

• Discount Rate: 70%
• Repair Costs: $40,000
• Other Costs: $10,000

Calculate MAO:

• MAO=($215,000×0.70)−$40,000−$10,000MAO=($215,000×0.70)−$40,000−$10,000
• MAO=$150,500−$40,000−$10,000MAO=$150,500−$40,000−$10,000
• MAO=$100,500MAO=$100,500

Thus, the maximum allowable offer you should make on the property is $100,500.

How to calculate ARV?

In general, calculating the After Repair Value (ARV) and the Maximum Allowable Offer (MAO) are critical steps for real estate investors. Here’s a detailed guide on how to determine both values effectively.

Calculating ARV (After Repair Value)

ARV is the estimated market value of a property after all repairs and renovations are completed. Here’s how to calculate it:

1. Find Comparable Properties (Comps)
   • Location: Look for properties in the same neighborhood or within a close radius.
   • Size: Ensure the properties are similar in square footage and lot size.
   • Condition: Compare properties that are in a similar condition to what your property will be after repairs.
   • Features: Look for properties with similar features, such as the number of bedrooms and bathrooms, and amenities.
2. Analyze sale prices
   • Collect data on the sale prices of the comparable properties.
   • Ensure these properties have been sold recently, preferably within the last six months.
3. Adjust for differences
   • Make adjustments for any differences between your property and the comps. For example, if a comp has an extra bathroom, adjust the price to match your property’s expected value.
4. Calculate the ARV
   • Average the sale prices of the comparable properties, adjusted for differences, to estimate the ARV of your property.

Example Calculation for ARV

Suppose you find three comparable properties in the same area:

• Comp 1: Sold for $210,000
• Item 2: Sold for $220,000
• Comp 3: Sold for $215,000

Average the prices:

ARV=$210,000+$220,000+$215,0003=$215,000ARV=$210,000+$220,000+$215,000​=$215,000

Thus, the ARV is estimated to be $215,000.

Bottom line

In conclusion, mastering MAO and ARV is essential for success in real estate investing. By understanding these key metrics and related topics, investors can make informed decisions, negotiate effectively, and maximize profits. Whether you’re flipping properties, wholesaling, or rehabbing, incorporating MAO and ARV calculations into your investment strategy will set you on the path to success in the dynamic world of real estate. Also, utilize MAO calculators for efficiency and consistency, and always base your offers on solid data and careful analysis. Last, Happy investing!

Written by Vanessa Gallanti. May 26, 2024

Enthusiast about planning, project management, construction materials and technology, and construction. A civil engineer from Los Andes University and a content writer for Kukun.