Written by David Dodge  

Welcome to our real estate training series! Today, we’re diving into a critical skill for any real estate investor: making the perfect offer. By using a proven method called the Maximum Allowable Offer (MAO) formula, you can ensure your offers are strategic, profitable, and based on solid numbers—not emotions. Whether you're a wholesaler, flipper, or new investor, this guide will walk you through the MAO formula and show you how to apply it effectively. Let’s get started!

Why the MAO Formula Matters

When making an offer on a property, it’s easy to let emotions or excitement cloud your judgment. The MAO formula helps you stay grounded by focusing on three key principles:

1. Work the Numbers, Not Your Feelings: Offers should be based on data, not gut instincts. This keeps your decisions objective and profitable.
2. Reduce Risk: By calculating the maximum offer you can afford, you minimize the chance of overpaying or taking on unmanageable risk.
3. Project Profit Margins: The MAO formula ensures you account for all costs and secure a predictable profit margin upfront.

By following this approach, you’ll make smarter offers and avoid costly mistakes.

What is the MAO Formula?

The Maximum Allowable Offer (MAO) is a simple calculation that determines the highest price you should pay for a property to ensure profitability. The formula is:

MAO = (After Repair Value (ARV) × Discount Rate) - Repairs

Let’s break down each component:

• After Repair Value (ARV): This is the estimated value of the property after renovations, based on comparable sales (“comps”). You can find comps using tools like:

  • MLS (Multiple Listing Service): The most accurate source, accessible through platforms like Batch Leads or PropStream if you don’t have direct access.
  • Free Websites: Zillow or Redfin are decent alternatives, though less precise.
  • Preferred Tools: Batch Leads is slightly better than PropStream, but both are reliable.

• Discount Rate: Typically set at 70%, this percentage accounts for costs and profit margins. However, the rate can vary (50%-80%) depending on the neighborhood and risk level, which we’ll discuss later.

• Repairs: The estimated cost to renovate the property to reach its ARV. Repair costs vary depending on the property’s condition and the scope of work. For example, one investor might estimate $10,000 in repairs for a modest ARV, while another might budget $30,000 for a higher-end finish, affecting the final ARV.

If you’re wholesaling, subtract an additional wholesale fee (typically $5,000-$15,000) from the MAO to ensure there’s room for your profit when assigning the contract.

Why Use a Discount Rate?

The discount rate is critical because it accounts for the costs of doing the deal and your expected profit margin. Here’s how it breaks down:

• Costs to Sell (10%): These include agent fees, closing costs, seller concessions, holding costs (utilities, insurance, taxes), and sometimes borrowing costs. A safe estimate is 10% of the ARV, though borrowing additional funds may increase this slightly.
• Profit Margin (10%-40%): The remaining portion of the discount rate is your profit. For example:
  • At a 70% discount rate, 30% comes off the ARV: 10% for costs and 20% for profit.
  • In competitive, high-end neighborhoods (A or B+), you might use a 75%-80% discount rate, leaving a smaller profit margin (10%-15%) due to lower risk and higher competition.
  • In riskier neighborhoods (D or F), use a 50%-60% discount rate to secure a larger profit margin (30%-40%) to offset higher risks like crime or poor schools.

The discount rate is a sliding scale based on the neighborhood’s quality:

• A-Class (75%-80%+): Low risk, high competition, better schools, lower crime. Offers need to be more aggressive.
• B-Class (70%-75%): Slightly less competitive but still desirable.
• C-Class (70%): Average neighborhoods, where most deals fall. Use 70% as a default.
• D/F-Class (50%-60%): High risk, low competition, poor schools, higher crime. Discount heavily for larger profits.

MAO Formula in Action: A Real-World Example

Let’s apply the MAO formula to a sample deal:

• ARV: $160,000 (determined by running comps).
• Repairs: $35,000 (estimated by walking the property or consulting with the seller).
• Neighborhood: C-Class (average), so we use a 70% discount rate.

Step 1: Calculate MAO
MAO = (ARV × Discount Rate) - Repairs
MAO = ($160,000 × 0.7) - $35,000
MAO = $112,000 - $35,000 = $77,000

The MAO is $77,000, meaning this is the maximum you should be willing to pay to ensure a profit.

Step 2: Build in Wiggle Room
You never offer the MAO outright. Offering the maximum leaves no room for negotiation and risks losing potential savings. Instead, start lower—say, $65,000-$70,000. Here’s why:

1. Negotiation Buffer: If the seller counters at $90,000, you have room to negotiate up to $77,000, meeting them closer to your MAO (e.g., $75,000).
2. Potential Savings: Sometimes, sellers accept a lower offer. If you offer $65,000 and they agree, you’ve saved $12,000 compared to offering $77,000 upfront.

Step 3: Make the Offer
Present your offer verbally (e.g., “Based on the repairs, market, and interest rates, I’m comfortable offering $65,000-$70,000”). If they express interest, send a formal written offer. If they counter, ask, “What number are you thinking?” and negotiate toward a number below your MAO.

Watch the Full Breakdown

For a step-by-step explanation with slides, check out my detailed YouTube video on crafting the perfect offer using the MAO formula:

Common Mistakes to Avoid

1. Offering the MAO: Always start below the MAO to leave room for negotiation and potential savings.
2. Ignoring Repair Costs: Walk the property or get detailed repair estimates to avoid underestimating costs.
3. Using the Wrong Discount Rate: Adjust the rate based on the neighborhood’s risk and competition. Don’t use 70% for every deal.
4. Letting Emotions Drive Offers: Stick to the numbers to avoid overpaying and eroding profits.
5. Wholesaling Pitfall: If wholesaling, ensure you’re buying at a great deal (well below MAO) to leave room for your wholesale fee and still offer a good deal to your buyer.

Take Your Real Estate Game to the Next Level

Ready to master real estate investing and start making $200,000-$300,000 in your first year without using your own money or taking big risks? Our coaching and mentorship program offers hands-on guidance from me and my partner, Mike. With personalized coaching and access to our exclusive mastermind, you’ll learn proven strategies to succeed in real estate. Spots are limited, so apply today! Visit www.reiskool.com to learn more and join our program.

Keep it simple, stick to the numbers, and start crafting perfect offers today. Happy investing!

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