The MAO Formula (How We Buy!)
MAO stands for Maximum-Allowable-Offer.
I learned the MAO formula from my mentor Ron Le Grand and it is probably the best formula in the real estate business.
Ron always likes to say, “If you're upkeep is greater than your income, than your outgo will be your downfall.” In real estate investing, the MAO formula is what keeps you from being in a bad situation.
Maximum allowable offer, or MAO, is probably the best and safest formula to use when purchasing real estate of any stripe. When it comes to financing real estate, you must have unencumbered cash-flow to cover debt service. And the best way to do this is to buy real-estate properly.
This is where the MAO formula is important. It equals value of the finished fixed-up asset - minus 20 percent for profit - minus 10 percent for holding - minus the fix up cost.
You should NEVER PAY MAO!
Maximum Allowable Offer (MAO) = After Repaired Value (ARV) – 20% profit – 10% holding – fixup
You should always pay below MAO to keep yourself safe. It is human nature that once you break a rule it becomes easier to repeat. This will put your real estate business in pain and probably out of business eventually.
Consider a $100,000 Example
Let's view an example investment where the finished value of the property is $100,000. So, you would take $100,000 and subtract $20,000 for profit, $10,000 for holding, and then you would also subtract your fix up. But, let's say there was no fix up. So, you're buying a house that is clean and ready to go. Then the MAO (maximum allowable offer) for that house is $70,000. But if the fix up was $10,000, you would only be able to pay $60,000. If the fix up was $30,000, you would only be able to pay $40,000 the maximum allowable offer or MAO. Since we never pay MAO you should not go any higher than $38,000 or $39,000. The lower the amount you are below MAO, the safer you will be.
The MAO formula has made more deals profitable in real estate than any other. It is secure position because it keeps the LTV (loan to value) somewhere between 55 and 75 percent. Whereas some gurus out there would teach you that you could go as high as 90 percent loan to value. If you do that to real estate business, you'll eventually hit a wall and you could have major financial trouble. Financial trauma can occur for a variety of reasons - so it's best if you use the MAO formula to purchase your investment in the best position.
Profit Is Made
Your profit is made when you buy, and your profit is realized when you sell. Buying with the MAO formula is crucial to becoming profitable in the real estate business.
Where MAO Works
This MAO formula works whether you're buying to resell on a wholesale basis, buying to resell to the cash market, or to buying to resell to people who get loans through a realtor. It works whether you are going to become a landlord and rent the property out or sell on a land contract or a lease option. The reason it works so well on all these different types of purchases is because you are “in” at a profitable level.
Even if you're buying a Junker and you don't even want to fix it up, using the formula allows you to purchase the property at a price commensurate with what it will rent at in a distressed state. Because distressed property will always rent at a discount compared to one that is fixed up.
Maximum Allowable Offer (MAO) = After Repaired Value (ARV) – 20% profit – 10% holding – fix-up
Remember … You Never Pay MAO!
- Joshua Dudgeon
