Real Estate Terms Explained: MAO & ARV|
by Al Susoeff
This is another excerpt from an upcoming book and set of training tools I am working on. Feel free to comment all you want; that's what will help me make this product better for all my students!
MAO and ARV These are the two terms I am going to mostly deal with in this text. MAO stands for Maximum Allowable Offer and ARV is After Repaired Value. It is imperative to your survival that you understand EXACTLY what these are and how they work, because this is the way we analyze deals on the front end, and how we construct deals on the back end when we are dealing with wholesale flips or rehabbers; what many guru’s including my personal mentor, Ron Legrand refer to as the Ugly House business.
MAO is the maximum we would be willing got pay for the house and it is a function of two things, first off it is a function of the after repaired value. You are going to get the after repaired value from the CMA you are going to have your realtor do for you. Do not use Zillow.com; but you can use it to back up the realtors work. Do not use Google; but you can use it to back up the CMA. Do not use any of 100 different sources online; or at least do not use them exclusively. Remember when we talked about due diligence? This is where you are going to have to be PAINFULLY honest with yourself, or you are going to find yourself screwed to the wall. And, don’t come whining to me when you do it, because the first thing I am going to ask is “where did your numbers come from” and “did you do it the way I showed you”.
You MUST impress upon your agent, the importance of good comps and you better learn how to read them yourself without him/her. My agents know that not only do I want the CMA, I want their BPO based on a 30 day turn around. In other words, I want to know what it is going to sell for…not what we are going to list it for, not what we are going to negotiate about, not any pie in the sky bullshit…WHAT IT WILL SELL FOR IN THRITY DAYS OR LESS. This my friends is your after repaired value.
Here is the formula I want you to use:
MAO = (70%)*(ARV) – repairs
Your Maximum Allowable offer can be no more than 60% of the After Repaired Value based on a strong CMA and other evidence minus any repairs that are needed.
Now, that being said, there are some variations to this rule. For example, if you are going to just wholesale the house, which is to get in under contract and then flip the contract to another investor, you need to use a percentage LESS than 60% in order to leave room for the next investor to make money. If you do this it will not be long before you have a large list of investors eager to by the homes you have under contract. Trust me on this, most investors out there have no idea how to do what I am teaching you and can only find homes through the MLS. When you are able to provide them homes cheaper than they can get them with an agent and do it regularly, word will get around and you could feasibly make a living just from wholesaling alone. How do you think I know this?
Also, if you plan to keep it as a rental , then you can go a little higher, say 70%, but be careful with this. I have seen more than one person cut his own throat by getting too aggressive. Think of it this way, You be even more conservative than a bank would be if you asked then for a loan to buy one of these junkers. I can all but guarantee that unless you have a credit score of 780 and look like solid gold on and off paper, you are NOT getting a loan for more than 80% LTV. And banks are going belly up all over the country right now…do you want to be like them? If you are going to err, err on the side of conservatism. Trust me, in this market there is a “deal of a century” just about every day!
Oh, I also wanted to point out that I will go into great detail about repairs later so for those of you who just said, “I don’t know a freakin thing about construction”, no worries guys, all will be revealed!
Finally, if you turn to Appendix A, at the back of this text, I have included a glossary of terms for your future education. The more you sound like you know what you are talking about with professionals in the business like bankers and title folks, the easier it is going to be to get things done. Besides, you did say you wanted to do this for a career right? Why WOULDN’T you want to know all that stuff
Al Susoeff, Jr. is a Real Estate Investor, Trainer, Coach, Author and Civil Engineer from Central Arkansas. You can read more of his articles at www.ASusoeff.com