There are many things that go into a decision to buy an investment
property. Your need to consider the market that you’re in, availability of
financing and many other factors. One of the most important things to think
about before buying a property to flip is what is your Maximum Allowable
Offer on the property.
Basically the maximum allowable offer or MAO is how much you can buy
the property for while still being able to renovate it and make the profit that
you want. Although figuring out your max allowable offer isn’t that difficult,
it’s a very important number when figuring out if a property will be a good
overall investment or not. With all this being said, here is How To
Calculate Your Maximum Allowable Offer:
Part 1: The Formula
The formula for figuring out your Maximum Allowable Offer is fairly simple,
even though it plays a huge role in whether or not you will buy the
investment property in question. The formula is:
Max Allowable Offer = ARV – Fixed Costs – Rehab Costs – Profit
However, it’s important to note that if you are planning on flipping the
property, you must use the profit which you want to make after you sell the
property. So to figure out your max allowable offer, you would subtract fixed
costs, rehab costs and the profit that you want from the after repair value.
Part 2: Figuring Out The After Repaired Value Or ARV
The second step in finding your max allowable offer is to estimate or figure
out what the ARV of the property is. The ARV of a property is simply:
Property purchase price + value of renovations
The ARV of a property will reflect the value of the home after the
renovations are done, and is often assessed by reviewing the comps in the
Part 3: Figure Out Your Fixed Costs
The next step in finding your max allowable offer is to find out your fixed
costs. Fixed costs when flipping a property are costs that don’t change and
are expected no matter what if you buy the property. Fixed costs exclude
rehab or renovation costs and include expenses like:
● Inspection Costs
● Lender Fees
● Utility Costs
● Closing Costs
● Selling Fees like advertising, staging, and MLS fees
When you figure out your total fixed costs by adding each one together,
you can move on to the next step of calculating your Maximum Allowable
Part 4: Estimate Rehab Costs
The key to this is having a scope of work of all the things that need to be
done to the property to get it ready to sell, and bring it up to snuff with the
other homes in the neighborhood. If you are a new investor, it may be best
to get a more accurate estimate from a contractor, and as you become
more experienced and familiar with the cost of things, you can easily
estimate costs yourself.
Remember to include contingency money in case any unexpected work pops up.
Part 5: Set Your Desired Amount Of Profit
This will be expressed in a dollar amount and is the amount of money you’d
like to make from buying, fixing and flipping the property to make it worth
Some investors are happy to make 25,000 on each property while others have a
much higher threshold. At the end of the day, it comes down to what’s right for you.
Now that you have all of your numbers, it’s
time to calculate your Maximum Allowable Offer, and see if the property in
question is a good investment.
Here’s an example:
Fixed Cost: $24,000
Rehab Cost: $24,000
Expected Profit: $45,000
$210,000 – $24,000 – $24,000 – $45,000 = Maximum Allowable Offer Of $117,000
As a new investor, there are many things to consider before buying an
investment property. Calculating your maximum allowable offer is a crucial
step in figuring out whether a property is a good deal for you or not.
Hopefully this has clarified any confusion you may have had, and will help
you make more educated choices when investing.