# MAO Calculations - what am I doing wrong? - Posted by BSD

Posted by BSD on April 05, 2010 at 15:09:32:

A correction needs to be made, but I do see a way to edit the message.

The line: “This is supposed to cover all expenses including profit of at least 20% (and 0% purchasing/finance/holding/closing costs).” should read:

“This is supposed to cover all expenses including profit of at least 20% (with the remaining 10% covering purchasing/finance/holding/closing costs).”

MAO Calculations - what am I doing wrong? - Posted by BSD

Posted by BSD on April 05, 2010 at 15:06:41:

I am in Southern California and looking to get into rehabs.

I have heard several ways of calculating Maximum Acceptable Offers (MAO) on wholesale/retail deals. The one that I am most familar is Ron Legrand’s which is:

After Repair Value (ARV)*.70-repairs.

On a hypothetical property with an ARV of \$100K needing \$25k in repair, the formula produces the following MAO:

100,000*.70-25,000=\$45,000.00

This is supposed to cover all expenses including profit of at least 20% (and 0% purchasing/finance/holding/closing costs).

However,

If I were to break down the costs in this hypothetical, my MAO should be significantly less (relatively speaking).

ARV 100,000

Profit 20,000
repairs 25,000
Loan 10,000
Purchase Costs 1,200
Utilities 2,150
Selling costs 2,750
Total Costs 61,100

MAO = \$38,900

Here is a break down for each category:

Purchase Costs
Closing Costs 200
Inspection Costs500
Appraisal Fee 500

Total = 1200

Hard Money Loan (6 months payoff)
4% pts 4,000.00
Annual Rate of 12% 6,000.00

Total 10,000.00

Selling Costs
6% Commission 1,200
Listing Fee 200
1.5% Closing Costs 300
Home Warranty 500
Termite Letter 150
Home Inspection 400

Total 2,750

Holding Costs (6months)

Taxes (1.5%) 750
Insurance 500
Utilities 900

Total: 2,150

Is this simply a case of Legrand’s formula being too generic or am I over estimating my actual costs?

Thanks!

Re: MAO Calculations - what am I doing wrong? - Posted by Dave T

Posted by Dave T on April 09, 2010 at 19:34:39:

This may work for a retail flip, but in a wholesale deal you have to leave some profit on the table for your buyer.

I am told that in a typical wholesale deal, you are assigning a contract and therefore have no financing or holding costs.

The formula for a wholesale deal might be:

MAO = ARV x 70% - rehab/repair cost - your profit. The wholesale buyer’s profit comes out of the 30% ARV that you leave on the table.

Re: MAO Calculations - what am I doing wrong? - Posted by Keith

Posted by Keith on April 05, 2010 at 15:18:23:

Its your hard money loan. Hard money is expensive. If you are going to use it you may have to adjust your percentage down to 65% or even 60% of ARV to still maintain your desired profit margin.

Keith