Calculating MAO - Posted by WadeM (ATL)

import · January 21, 2003, 3:18pm

Posted by Jim Kennedy - Houston, TX on January 22, 2003 at 01:01:28:

MAO = Maximum Allowable Offer

Why is it important? Pay more than MAO and you’re in for a very expensive lesson on how NOT to buy property.

Best of Success!!

Jim Kennedy,
Houston, TX

“As long as one keeps searching, the answers come”.
– Joan Baez

import · January 21, 2003, 3:18pm

Calculating MAO - Posted by WadeM (ATL)

Posted by WadeM (ATL) on January 21, 2003 at 16:18:43:

I’m trying to understand the basic MAO calculation and can’t find an explanation in the archives of what is included in the 35% discount from the ARV.

I understand the basic calculation:
MAO = (ARV * .65) - rehab costs

But I want to understand what components of the purchase, holding, selling costs are included and what is their percentage of the overall formula. Does this include any allowance for real estate commission?

Thanks

wade

import · January 21, 2003, 4:17pm

Finally!!! MAO components. - Posted by Gary (WA)

Posted by Gary (WA) on January 21, 2003 at 17:17:15:

This post comes as a lesson fromt the school of hard knocks. The reason for using 65% of ARV - Repairs, is this will allow you to use “Hard Money Lender”. But it also works to help factor in other things such as profit, holding, and sellers cost.
I’m currently working on a Pre-Foreclosure deal that looks like this. (Granted I know this is not a Rehab, but the formula works none the less)
ARV = 170000
Profit = 20000
Sellers cost = 8500 (5% of ARV, This is high, but it works)
6 mos of carry = 6660 (6 x the pmt or 1110)
Excise tax = 3000 ( WA state has excise tax)
Repairs = 1000 ( Yours may and will differ )

MAO = ARV - Profit - Carry - Sellers Cost - Excise Tax - Repairs.
So MAO = 170,000 - 39,160
MAO = 130,840

So this is how mine currently looks. In my case I found the deal, and found the investor to bring the payments current. The rest of the situation looks like this. 105,300 left on the mortgage, and 17,800 in back payments and late charges. So that’s 123,100 to take care of the current mortgage.

So with 123,100 to take care of existing financing, the most we could offer is the MAO of 130,840. The owner wants to walk away, doesn’t want anything to do with the property, and doesn’t want to have a foreclosure on his record. So our MAO formula works. If we only want to make 20,000. Now then if we Use the LeGrand 65% - repairs. It works out that our MAO is only 109500.
Using that formula I have to walk away. Or get the seller to come up with the rest.
Some investors add other factors in. Some may not. Some use only Hard Money, Some Use a Line of Credit, Some have Cash, Some use a combination of all of the above. Additionally if you flip to someone else you need to factor in your profit as well. So you take your profit and subtract it to come up with a new MAo. If you Look at the Thread below for ‘Wholesale $ figures’, posted by Shannon. You will see that the more work required in a house, the more profit your rehabber, or investor will want to see.

I’m glad you asked.

I hope it helps everyone, and I hope everyone else will throw their additions and subtractions in.

Thanks

Gary (WA)

import · January 21, 2003, 7:01pm

Re: Finally!!! MAO components. - Posted by ned

Posted by ned on January 21, 2003 at 20:01:53:

Can someone explain what MAO stands for and why it is important?