MAO on Cheap Houses

Bird Dogs, Wholesaling
1

What is the MAO formula for cheap houses?

I have a house worth 35k fixed up, needs paint and carpet… got it under contract at 13,900.

I know the mao is usually 65 - 70% ARV - repairs…

Haven 't really dealt with cheap houses like this in the past but I remember being at a RG seminar a while back and he specifically mentioned a different formula for cheap houses…

Was it ARV - 5k (closing, holding costs) - repairs? I can’t recall…

Someone please help me out.

2

Buy and hold investors will often pay 90%, or less, of ARV (less repairs).

Rehabbers will often pay 80%, or less, of ARV (less repairs).

Wholesalers will usually pay 70%, or less, of ARV (less repairs).

Rehabbers are not the same as wholesalers, and neither are like buy and hold investors.

Staying with the 70% of ARV formula, keeps the doors open for more opportunities to sell. However, if you maintain a broader pool of buyers, you can make money on projects that can’t be purchased at that level of a discount.

Keep in mind, it costs the same amount to rehab a 1500 sqft house that is worth $35,000, as it does to rehab a 1500 sqft house worth $135,000.

Some houses aren’t worth messing with.

3

Thanks for your reply.

That’s not quite the formula I was referring to but it was helpful and appreciated.

This particular place is roughly 1,000 sq ft, mostly tile and needing carpeting and a coat of paint on it. It’s actually a condo that rents great for $675 - $725.

In my opinion this will make a great rental as during the height of the market which doesn’t mean squit today… this unit was $185k!

4

For condos, don’t forget about monthly maintnance fees and assessments that can come up. Sometimes even that cheap price isn’t that great of a deal because of the fees.

5

I guess I should have read your question more closely…

  1. You determine the ARV.
  2. You back out the discount.
  3. You back out the repairs.
  4. You back out your fee.
  5. You now have the MAO.

Is that a better answer?

6

Thanks for the replies.

Javipa, that was a closer reply.

RG, has a MAO specifically for lower priced houses.

Thanks for your help. I’ve been running around with a few different things but when I locate the info I will post her to share.

7

Found it!

In the case of properties below $50k, he says to modify the formula: MAO = ARV times .9 (to account for closing costs, holding costs, etc.), minus $10k (absolute minimum for profit), minus cost of repairs.

8

I was discussing offers with an investor that buys low-end deals, like you’re talking about (~$35K), and he said his bids usually hover between 30 and 40 percent of ARV.

He says that no professional buyers pay more than about 50% of ARV (less repairs) at this price point.

The two things that can effect the quality of a given deal, regardless of the price point, is the motivation of the seller, and who knows about the deal in the first place.

That’s why it’s really profitable to develop and maintain a lead-generation network of unadvertised deals. This can be the result of direct mail, word of mouth, bird dogs, paid/free classified ads, creating tickler lists of rejected offers and any number of marketing methods.

9

I love that.It is definitely the best answer.