When the Maximum is Not Enough
Most investors have their own version of the Maximum Allowable Offer [MAO] calculation. It is usually a simple formula that you can use to determine the highest price you are willing to pay.
The calculation helps to ensure that you have a profit at the end of the rehab (or cashflow if you decide to rent).
So the function of the formula is to prevent you from overpaying.
And it does a good job of that…
As long as the numbers entered are accurate.
One common problem is an under-estimate of the cost of repairs. This can be easily remedied by planning on the front end with your favorite contractors and real estate professional. Build this into your inspection period if you are pressed for time to make the offer.
The biggest problem lately…
Your Maximum Allowable Offer [MAO] calculations are lower than the recent sales prices.
Which means one of two things: Either your numbers are wrong or your competitor’s numbers our wrong.
Here is what I recommend.
Go back and look at your numbers again. Drill Down. Ask these questions.
-If you are in a rising market, are you making adjustments for appreciation?
-Do you have too much cushion in your repair estimate?
-Is your profit expectation realistic in today’s competitive market?
-If you plan to buy and hold, are you looking at ROI and Cap Rates?
These are questions that savvy investors are asking themselves.
Don’t let a lack of answers break your next deal.
What are your concerns about Investing in Nashville Real Estate?
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