CALCULATING THE MAXIMUM ALLOWABLE OFFER
Calculating the maximum allowable offer (MAO) on a rehab project can be the beginning of a great return or the beginning of the end. Knowing what your maximum allowable offer is will probably be the most important thing you do prior to your purchase. That being said, you have to know that all of the components going into the maximum allowable offer calculation are independently as important. If you don’t get all of the parts right then you obviously don’t get the big picture right.
There is a quick and dirty calculation that many flippers use to calculate their maximum allowable offer. That calculation starts by determining the after repair value (ARV) and multiply that by 70 percent. It is often advisable to use a 65 percent calculation rather than 70 percent. How you do it depends on how conservative you want to be and what is happening to the real estate prices in your area. After doing the multiplication you then take that answer and subtract the rehab expenses. The resulting amount becomes your maximum allowable offer. This figure basically becomes your top-end offer, not your starting offer.
I have always used a spreadsheet instead of this type of calculation. If your spreadsheet is set up correctly you can do a fairly quick calculation without losing much time before you make your offer. With a spreadsheet, you are able to see both the raw dollar amount of your projected profit as well as the amount as a percentage. The spreadsheet allows you to put in specific amounts for buying expenses, rehab cost, holding cost and selling expenses. You get a more precise picture of where the money is and you are able to make a more educated and confident offer. Without a doubt, a spreadsheet is the best way to go.