DC Fawcett Real estate wholesaling is one of the ways to make good money. As a beginner, you might get the questions like how to create an offer on a property that guarantees a profit. The answer to this question is you need to give a small tweak into a real estate formula using Minimum Allowance Offer which in short is called MAO FORMULA. With the help of this formula, you can make a small adjustment.
MAO formula for wholesaling what you should understand
MAO is a rule of thumb network that enables the beginner real estate investor with a formula to determine a ceiling while making an offer to the sellers owning distressed property.
DC Fawcett has made a formula as follows
MAO = (ARV * Investor Discount) – Est. Repairs – Est. Closing Costs – Your Expected Profits as A Real Estate Wholesaler and tells you what all you need to understand.
Where ARV = After Repair Value
RE=Repair Estimate
WP=Wholesale Point
If you are not a wholesaler, there is no need for you to deduct the wholesale profit. In MAO, the landlords and rehabbers do the property analysis with an intention to purchase distressed properties at 70% of the actual value, which means 30% for a house if it is in a perfect condition. This discount gives a rehabber a margin of fixing and flipping and gives the rental property investor has a chance to get a positive cash flow.
Possible complications with MAO formula
The purpose of MAO formula is to keep you from paying more than what is required for the property. The same advantage becomes a disadvantage if you over-estimate the property value. You need to have an accurate knowledge about the property value and apply the local economic and financial conditions to fix the value of local properties.
The other mistake which people make is under-estimating the repairs which can prove fatal to the real estate investors. For this, you need to know the approximate time that it takes to estimate repairs.
One more difficulty of MAO while using the formula arises when the market conditions change. If the changes take place, the private lenders also revise the lending criteria downwards. You need to keep yourself updated about the developments taking place in the market. And stay on top of the things. Otherwise, you will be calling for trouble by ending up closing the deals at higher prices than the investors in your locality.
This formula can be used quickly to make an attractive offer to the seller in which you can unfailingly earn profits, as a real estate wholesaler. You need to study and research the market conditions before making an offer.
Conclusion
If you find a foreclosed house that is higher than MAO, you may end up overpaying for the property, which can affect your target profit. On the other hand, if you end up paying a lesser price than MAO, that becomes ideal for the investors.DC Fawcett says You can predict the market independently when you do market research.