| We probably answer this question for someone | | | | expensive general contractor. The scope of |
| a couple times every week. The problem is | | | | the work should be the same - it is whatever |
| that they don't have a good formula for | | | | is required to make the investment look like |
| determining the most they can pay and still | | | | the comparable houses (unless the plan is to |
| make a profit - so they're scared to make any | | | | sell well under market value). We do not |
| offer. Here's what we use for single family | | | | attempt to obtain all of the various |
| homes: | | | | contractor bids when we are making offers. |
| | | | All the real deals would be sold before we'd |
| The (MAO) Maximum Allowable Offer is | | | | ever have an offer together! Instead we've |
| calculated by first determining what the | | | | developed ranges of rehab dollars based on |
| house will be worth after renovation - the | | | | the overall condition of the home. Is it an |
| ARV (After Repaired Value); less the rehab | | | | exact science? No, but neither are the bids - |
| dollars required; less the Buy/Sell/Hold (B/S | | | | there will always be something missed. So why |
| H) costs; less profit margins. | | | | not work with a guide that is probably 90% |
| | | | accurate and allows for quick offers? |
| MAO = ARV - Rehab - B/S/H - Profit | | | | |
| | | | Buy/Sell/Hold costs include expenses such as |
| So let's break that down a little further. To | | | | appraisals, attorney fees, title search & |
| determine the ARV, study comparable sales | | | | title insurance, loan origination fees, debt |
| data. Comparable sales are those properties | | | | service, utilities, insurance, taxes, real |
| which sold in the last 6 months to 1 year, | | | | estate commissions, and closing fees paid on |
| and within ½ to 1 mile from the subject | | | | behalf of the end buyer. Again, these costs |
| house. But other factors must be considered | | | | vary depending on each investor's individual |
| as well. The more characteristics between the | | | | situation. In the Atlanta area, 15% of the |
| properties that are similar, the more valid | | | | ARV seems to be a good average allocation for |
| the data. Make sure that the house itself is | | | | B/S/H costs. If you are the renovator, |
| similar in square footage, bedrooms and | | | | calculate your specific B/S/H costs, then |
| baths, age, style, and architecture. Don't | | | | utilize that percentage for future offers. |
| worry about condition except as it will | | | | |
| affect the amount of rehab dollars required. | | | | Profit margins are the fun part of the |
| Next, look at the neighborhood and the | | | | equation. How much do you want to make? If |
| individual street. Do they look the same? Or | | | | you're wholesaling the property, you also |
| is the comparable property on a beautiful | | | | want to consider how much you should leave in |
| street while the subject property is on a | | | | the deal for the investor buyer to make the |
| street riddled with empty littered lots and | | | | deal attractive. |
| boarded up houses? The point is to view the | | | | |
| potential investment as your end homeowner | | | | That's it. That's how you calculate the most |
| occupant will. If they could buy your | | | | you'll pay for a property. But that's not |
| completed investment on the bad street, or a | | | | what you SHOULD pay. It is the maximum you'll |
| house on the beautiful street - either for | | | | pay. It is the deal-breaker. You will not pay |
| $150,000 - which would they choose? The other | | | | one penny over the MAO. Your negotiations |
| house of course. Which means your house is | | | | should lead you as far below the MAO as |
| not worth the same - it must sell for less to | | | | possible. The difference in amounts is |
| attract a buyer. | | | | additional profit in your pocket. What you |
| | | | SHOULD pay is the minimum price below the MAO |
| Rehab dollars differ from renovator to | | | | that the seller will accept. |
| renovator depending whether they do the work | | | | |
| themselves, or use cheap subs, or use an | | | | We call this the MIN-O. |