GUIDE · UPDATED
The 70% rule and MAO: how to calculate your maximum allowable offer
The 70% rule says an investor should pay no more than 70% of a property’s after-repair value, minus the cost of repairs. For a wholesaler, the maximum allowable offer, or MAO, is that figure minus your own fee.
It is a rule of thumb, not a law of nature. This guide gives the formula, walks one example through it, and shows where the inputs go wrong, because a formula is only as good as the two estimates you feed it.
THE SHORT VERSION
- MAO = (ARV × 70%) − repairs − your fee.
- ARV comes from recent sales of similar renovated homes nearby, never from asking prices.
- The percentage moves with the market and the buyer. Ask your buyers what they pay.
- Most bad deals come from a high ARV or a low repair estimate, not from the formula.
The formula.
MAXIMUM ALLOWABLE OFFER
MAO = (ARV × 70%) − repairs − your fee
ARV is the after-repair value: what the house would sell for once renovated.
- ARV: the expected sale price after renovation, based on recent comparable sales.
- 70%: the share of ARV an investor will pay before repairs. The other 30% covers their profit, closing costs on both ends, holding costs and risk.
- Repairs: what it costs to bring the house to the condition of those comparable sales.
- Your fee: the assignment fee you want from the deal.
A worked example.
| LINE | AMOUNT |
|---|---|
| After-repair value (ARV) | $300,000 |
| ARV × 70% | $210,000 |
| Less repairs | $40,000 |
| What an investor will pay | $170,000 |
| Less your fee | $15,000 |
| Maximum allowable offer (MAO) | $155,000 |
Offer at or below $155,000. If the seller will not accept that, the deal does not work at these numbers, and raising your offer means cutting your fee or asking your buyer to accept a thinner margin.
Where the 70% comes from.
The 30% an investor keeps back is not all profit. Out of it come the costs of buying and later selling the house, the cost of holding it during the renovation (loan interest, taxes, insurance, utilities), and a cushion for surprises. What is left is the profit that makes the project worth the risk.
When 70% is the wrong number.
- Competitive markets. Where many investors chase few deals, buyers pay a higher share of ARV. Many markets run between about 65% and 75%, and some run higher.
- Low-priced houses. Fixed costs take a bigger share of a small deal, so buyers need a lower percentage to earn a worthwhile profit.
- Rental buyers. A landlord buys on rent and cash flow, not on resale value, and may pay more than a flipper for the same house.
- Heavy renovations. The bigger the project, the more cushion a buyer wants for surprises.
Ask the buyers
The percentage that matters is the one your buyers actually use. Ask the investors you sell to how they price a deal, and use their number.
Getting ARV right.
ARV is an estimate built from comparable sales, or comps. A good comp is a house like yours, in the condition yours will be in after the work, that sold recently and close by.
- Sold, not listed. An asking price is a wish. Use closed sales.
- Renovated. Compare against homes in finished condition, since ARV is the finished value.
- Close and recent. The same neighbourhood and the last few months come first; widen the search only when you must.
- Similar. Match size, bedrooms, bathrooms, age and lot, and adjust for the differences.
- More than one. Use several comps and lean toward the middle, not the highest sale.
In some states sale prices are not part of the public record, so recent sold prices are harder to find. In those markets an agent with access to the local listing service, or your buyers, can confirm what homes sell for.
Estimating repairs.
- Walk the house, or have someone walk it, before you commit to a number.
- Price it item by item: roof, heating and cooling, plumbing, electrical, kitchen, bathrooms, flooring, paint, exterior.
- Look hardest at the expensive, hidden items: roof, foundation, plumbing, electrical and the heating and cooling system.
- Add a contingency for what you cannot see.
- When you are unsure, estimate high. A buyer will forgive a repair budget that turns out generous, not one that turns out short.
Common mistakes.
- Using asking prices as comps.
- Choosing the single highest sale as the ARV.
- Comparing against homes in better condition than yours will be after the work.
- Forgetting to subtract your own fee.
- Shaving the repair estimate to make an offer the seller will accept.
FROM THE PUBLISHER
Where ARIA fits.
ARIA’s Deal Analyzer runs this formula on every lead and shows each line of the math, so you can see how the offer was reached and change any input. On the Max plan the Comps Engine pulls comparable sales and builds the ARV with the reasoning shown. ARIA’s numbers are estimates to check, not appraisals.
FAQ
Questions, answered.
What does MAO stand for in real estate?
Maximum allowable offer. It is the most a wholesaler can offer a seller and still leave room for the buyer’s margin and the wholesaler’s fee. The usual formula is ARV times 70%, minus repairs, minus your fee.
Is the 70% rule accurate?
It is a starting point, not a promise. The right percentage depends on the market, the price of the house and the buyer’s plan. Many markets run between about 65% and 75%. The accuracy of your ARV and your repair estimate matters more than the exact percentage.
What is ARV in real estate?
After-repair value: the price a property is expected to sell for once it has been renovated. It is estimated from recent sales of similar, renovated homes nearby.
How do you calculate ARV?
Find several recent closed sales of similar homes nearby that are in renovated condition. Adjust for differences in size, bedrooms, bathrooms and lot, then take a value near the middle of those sales. Do not use asking prices, and do not pick the highest sale.
Does the 70% rule include the wholesaler’s fee?
No. The 70% rule gives the price an investor will pay. A wholesaler subtracts the assignment fee from that price to reach the offer to the seller. In the example on this page, $170,000 less a $15,000 fee gives a maximum allowable offer of $155,000.
What if the seller wants more than my MAO?
Then the deal does not work at those numbers. You can reduce your fee, look for a buyer who pays a higher share of ARV, or walk away and stay in touch. Do not close the gap by lowering your repair estimate.
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