Category Archives: Analysis
Maximum Allowable Offer
When you are a real estate investor, the concept of maximum allowable offer (MAO) becomes quite important to you. Basically, the maximum allowable offer refers to the highest price that you offer or are ready to pay for any property in the market. You arrive at this price with some consideration and calculation. This is the brink for you; if you were to pay any more than the MAO, you will likely stand to make a loss in the property transaction. If you pay very close to the MAO, you will probably just break even. The ideal case is when you get a property by paying less than the MAO.
Assiduous real estate investors are quite particular about the maximum allowable offer. But, even though someone has good experience in calculating MAOs, it is not necessary that they will be able to be accurate all the time. When buying properties that you intend to sell for a profit, there are several costs to be factored in. There are the costs of transfer, the repair costs, the legal costs and so on.
It is because of this reason that there is no truly accurate formula for calculating the maximum allowable offer. However, expert real estate investors often use something that is close to the following formula:-
MAO = CF x ARV – RE
The abbreviations mean the following:
1. MAO = Maximum Allowable Offer that we want to calculate.
2. CF = Cost Factor. This is calculated by taking into account all the different closing costs that might need to be borne when acquiring the property. The cost factor is usually 10% less of the total value of the property, which means 90% or 0.9. In simple words, it means that you will spend near 10% of the property cost in paying the various fees that go into acquiring the property.
3. ARV = After Repair Value. This is the cost of the property after the repair has been done. When you do all the necessary repairs on the property, then its ARV is definitely going to increase. The ARV is multiplied to the cost factor.
4. RE = Repair Estimate. This is the estimated cost you will pay in repairing the property. Here it is advisable to take quotes from various contractors and get the true picture. Remember that local repair costs always vary. Hence, if you are dealing with a property that is not in your local area, then you need to find out what costs repair locally.
So, taking into account all these factors, the maximum allowable offer can be calculated as:
MAO = 0.9 x ARV – RE
There are many factors that might affect this formula though. It is possible that your cost factor is higher, i.e. you have to pay more than 10% for the fees and other property closing costs. However, the highest amount of fees that you might pay wouldn’t be more than 30% of the total cost. If that is the case, then the CF would rise to 70%, i.e. 0.7. In that case, a modified version of the formula would be:-
MAO = 0.7 x ARV – RE
Who Will Sell The Property? FSBO vs. Realtor
Because of the work that is involved in the conveyance of property, many homeowners seek to rely upon a realtor to handle the entire process and so contracting a realtor to do all the work is an attractive option.
All the property owner has to do is sit back, pay the realtor their commission and then enjoy the fruits of the transaction with the capital sum directly deposited into their bank account.
However, a relator is so much more than a convenient middle man who is proficient at the paper pushing component of the conveyance of property. The realtor will have a significant amount of experience and contacts at their disposal and so they will be able to make calculated decisions that will directly influence the profitability and the potential risk of the transaction.
People can be rather fickle and fussy about the property they buy and so even a slight blemish or hiccup in the process can be enough to scare them off. A realtor will be able to smooth over such rough patches quickly, professionally and with a minimum of disruption overall.
Another benefit of using a relator is that the seller will be guaranteed to get the best possible price for their property. Why? Because the realtor will receive a commission directly determined by, and proportionate to, the final sales value of the property.
Therefore, it is in the best interests of the realtor in order to ensure that they squeeze every last dollar that they can comfortably manage from the purchaser as they can.
Many people balk at the idea of using a realtor primarily because of the cost involved, and if we are to be brutally honest, the fees levied by the average realtor can be very expensive and steep indeed.
This leads us rather neatly to the meat of the issue. Is it better for a realtor or the seller to be responsible for the handling of the entire transaction? To be totally honest, this is a question that only a seller can answer for themselves. They need to decide whether they are prepared to rely upon the services of such a professional, and whether they are comfortable paying the commission they charge.
If you are not very confident with the legal side of things, struggle to negotiate or are not very proficient with dealing with people on a personal basis, then you should use a realtor. One of the best things about using these professionals is that you are not only guaranteed a sale, but you are guaranteed to get the best deal possible.
