What is MAO?

For real estate newbies MAO is the Maximum Allowable Offer you can make on a property and still remain within your margin of safety.

And I bet you thought MAO was a condiment! :)

So how do we arrive at the MAO?

Well first of all you should know that MAO is not a fixed in stone formula that is the same for everybody. This is simply because not everyone requires the same margin of safety. However, having said that, a common formula for MAO is as follows:

Start with the ARV or After Repaired Value of the property. The ARV must be based on recent comps in the area. DO NOT base your ARV on Zillow! The better your comps the more accurate your Maximum Allowable Offer will be.

Estimate the costs of repairs you will need to do to make the property ready for resale. This includes major repairs needed, any updating required, and don't forget paint and carpet, etc.

Take 70% of the ARV and subtract from that the costs of repairs. That's your Maximum Allowable Offer, your MAO. You need to back a little bit more off this value before you begin your negotiations with the seller. It also doesn't hurt to add a bit more to your repair costs to allow for a little wiggle room. But not too much or you might not be able to purchase the house!

While MAO doesn't guarantee success it certainly gets you in the ballpark. As a beginning investor you will still need to be able to put proper financing on the property, manage it well during your holding period, and do a good job when it comes time to sell.