How to Calculate a Maximum Allowable Offer

••• real estate image by Andrei Merkulov from Fotolia.com

Maximum allowable offer (MAO) is the maximum price point at which investors in a real estate deal can realistically expect to pull in a profit while minimizing the risk of losing money. If you exceed your calculated MAO then you essentially ensure that you'll lose money and minimize your chances of pulling in even a small profit. While the MAO formula is designed to increase reward while minimizing risk, it's no longer beneficial if you don't estimate the value of your property and your repair costs accurately. The slightest miscalculation can throw your MAO completely off-base, causing your risk:reward ratio to flip and lose you money.

Calculating the After Repair Value

Calculate the property's After Repair Value (ARV), which is the value of the property once all repairs have been completed. The best way to do this is to research what comparable properties within your property's vicinity are selling for. Then add up all of the similar property values and divide by however many there are to arrive at a solid ARV estimation of your own.

Calculating the Repair Estimation

Calculate the property's Repair Estimation (RE), which is the total cost needed to properly repair the entire property. The best way to do this is to acquire a list of average general repair or addition costs and tally up what needs to be fixed on your property. For even more accurate an estimate you could contact local contractors and ask for repair quotes to help tweak your cost estimates. Be sure to include any potential financing charges in your estimate.

Calculating the Maximum Allowable Offer

Input the calculated amounts for the property's After Repair Value and Repair Estimation into the Maximum Allowable Offer formula: .70(ARV) - RE. For instance, if your ARV estimate was $17,000 and your RE value was $2,340 your formula would be .70(17000) - 2340 and your MAO would calculate out to be $9,560.

Strive for Accuracy

Putting in some extra effort and legwork into calculating your property's After Repair Value and Repair Estimation really is worth it in the end. The more accurate these values are, the more accurate your MAO will be and this will ultimately help you minimize your risk and maximize your reward.

You May Need to Tweak

Although you can become very skilled at calculating MAO through experience, it's rare that you'll estimate the value perfectly. Always try to learn something when your MAO estimate turns out to be inaccurate. Why wasn't your prediction on target? What can you learn from this to help yourself calculate more accurate MAO values in the future? Even if you do hit the bulls-eye with your estimate, take note of everything you did to make such an accurate estimate and continue these methods in the future.

Seek Professional Advice

It's completely natural to be scared that your MAO will be inaccurate the first few times you calculate one. To help remedy this, feel free to have your own estimated MAO checked by a professional appraiser or realtor, just in case.

References

About the Author

Joshua Galligan started writing in 2007 and specializes in writing about marketing, nutrition, and finance. Galligan completed four independent writing classes at Quincy College in Quincy, Mass. in early 2007 and a creative writing workshop in southern New Hampshire soon thereafter.

Photo Credits

  • real estate image by Andrei Merkulov from Fotolia.com