Monday, August 24, 2009

The MAO Formula - It's How We Buy Houses!

No matter if you're in an up market or a down one, you can still use a simple method to buy homes. All the guru's will tell you that profits are made on the purchase price of the home (NOT the sell price). One of the best ways to make sure that you buy at the right price is to use the MAO formula. We buy houses in Knoxville using the MAO formula.

The MAO formula is THE mathematical equation used by investors to help insure buying at the right price. MAO stands for maximum allowable offer. The most widely used version is [(ARV * 70%) - Cost Of Repairs] = MAO. ARV stands for after repair value. This is the value of the home when is has been fully rehabbed and is ready to sell to a retail buyer. That value is then multiplied by 70% (some guru's may use a bit more or less). Next, this value is then subtracted from the cost of repairs. Sounds somewhat complicated doesn't it?

Here is a simple example of how the MAO formula is actually used. Say for example the ARV of a home is $100K. This amount is then multiplied by 70%, which in this case turns out to be $70K. Here's the hard part. You must estimate the repairs of the home as accurately as possible. If your estimate of repairs turns out to be, say $10K then the most you would ideally like to pay for the home is $60K.

Here's a recap of the above example.
*ARV is $100K
*$100K X 70% = $70K
*Repair Estimate is $10K
*[(100K X 70%) - 10K] = 60K = Maximum Allowable Offer

No matter if you buy houses in Knoxville, TN or Billings, Montana you can use the MAO formula as a tool to pay the least amount possible for your investment property. We at Roberts Investment Properties LLC want to see you succeed as a real estate investor. Our success is linked to your success.

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