Sunday, December 21st, 2014

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New Market Rules: Why MAO Can Be a Moving Target

It’s no secret that today’s real estate market is a good bit different than even a couple of years ago, right?  Sure, the fundamentals are all the same.  And the opportunity for making really great profits is still very much alive – arguably even more so.

But still, there are some key, noteworthy shifts we should all be aware of. So I’ve decided to post a few of them in a series I’m calling “New Market Rules”.  I hope they’re helpful to you, and I’d love to hear a comment from you at the end if you don’t mind.

So (ahem) here’s part 1…

Why MAO Can Be a Moving Target

MOVING MAOIf you’ve been around the investing sphere for even a little while, then you know that MAO is most certainly NOT a tasty white sandwich condiment (or French fry dip if you’re from across the pond).

It’s a staple formula investors have used for years for calculating the most you can offer on a residential flip deal.

The classic and widely accepted MAO formula is:

ARV x 70% – Estimated Repairs = MAO
(ARV is “After Repair Value” & MAO = “Max Allowable Offer” )

And of course, if you’re a wholesaler, you’ll want to slice your wholesaler’s fee off that amount too.

But in a squirrely market like today’s, things aren’t so cut and dry anymore, are they?  Some longstanding rules are being bent or broken, and formulas (like MAO) are often being retooled to reflect the realities of a staunchly buyer’s market.

Specifically I’ve noticed more and more of us investors (myself included) are now tweaking the 70% in the MAO formula to be 65%, 60% or even less.  And it’s basically because we’ve gotta be more conservative these days.  To put it simply, you need a better buffer, and if push comes to shove, you gotta be able to liquidate at a lower ARV and still make some coin.

The “moving MAO” became glaringly obvious to me during the REI Deal Evaluation Intensive, as I grilled a bunch of my investor-friends from across the country about how they’re currently analyzing deals in this market.  It was really interesting to see the array of MAO variations they used in their own local arenas.

The Enhanced “Localness” of Real Estate

You’ve probably heard it said before that, just like the weather, all real estate is local.

What this means is, you’ll never hear the weatherman say “The average national temperature is 65 degrees today!” or “Today’s high in California will be 82 degrees!”  True as it may be, that’s just crazy talk.

In the same way, there are unique real estate micro-climates in every city and town across the U.S.  And whatever the national trends may be – whether booming or busting – what should matter most to you is what the market conditions are in your region, town, or neighborhood of choice.  Never ignore the local market place.

This is not something new – real estate has always been a very local and relationship driven business.  But it’s truer now more than ever, my friend.  And because of this, in today’s arena your MAO formula may well need to be tweaked and adjusted based on what your local market (or even the neighborhood/school district) requires of you.

Said another way, you gotta get to know what your market is asking for…which means knowing the numbers in your market really well (recent comps, pendings, average DOM, etc.) and then also knowing what other local investors are successfully accomplishing in your market.

If you know your market numbers well, and what other investors are successfully doing in the arena currently, then it becomes a matter of reverse engineering a killer MAO for yourself.

crystal mao ball

The Bottom Line

Beware, the classic MAO may not be the sure bet it once was for you.

I wish I could gaze upon my crystal MAO ball and tell you exactly what formula your local market is asking of you.  But you, my friend, will need to uncover that for yourself.

Use the classic MAO as a starting point, do the work of asking your market what it truly wants of you, and tweak it from there.

What’s Next?

Well this is my first “New Market Rules” post.  I’ve got a few more in mind, such as…

  • New Market Rule: Slow and Steady Gets His Clock Cleaned
  • New Market Rule: Knowing Your “Fast Sale ARV”

But ultimately I’m not sure how many I’ll end up doing – Honestly it kind of depends on how many “new rules” I can systematically think of when I’m in blog-writing mode.

But hey, I’m wide open for your input!  I’d love to hear your thoughts on this post, and also if there are any other major “New Market Rules” you’ve identified, please feel free to share them with us in the comments below.

My best,
JP Moses

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About 

JP Moses is a roughly-hewn man-child who first got into REI after reading Rich Dad, Poor Dad back in Y2K and went full time in 2002. He's tinkered in everything from landlording to short sales to rehabs to Realtoring to REOs to notes to owner financing, blah, blah, blah...Till he finally stuck his flag deep into wholesaling and has since flipped somewhere north of a couple hundred deals.

JP's not a “guru” but also doesn't think it's a bad word. Among his core values are authenticity, creativity, big honkin' value, general fun-ness and being unshaven. He's super proud to be chief blogger guy at REItips.com and host of the free REIology podcast. He also thoroughly enjoys sharing his 53 best real estate investing forms with anyone who wants them. You should totally check that out. :-)

  • Barry Hart

    Right on the  money JP–no pun intended. I have found that if you are not taking a second or third look at the MAO formula as well as the local and micro market conditions, measuring with precision your marketing campaigns, and qualifying your leads at the time of conversion, your results are going to be less than profitable. Unless by chance you squeak through and close with some profit—I truly believe that in most markets that would be a rare occurrence without tweaking that fundamental formula. It would be like making money in spite of yourself!

    JP–keep these posts coming–we need all types of current proven ammo in a variety of contexts to succeed the way we have our goals set—one of my mentors told me ” Become an expert on the basics” and I can tell you albeit :basic, you need to become an expert on applying this formula, as tweaked for your local or micro market to make some real bucks. That said, those real bucks are out there, no doubt about that.

  • http://REItips.com/ jp moses

    Well said, Barry! And thanks for commenting, man!

  • Shane_umstead

    Dont like MAO. JP. Love controvery, always thought it was a HOAX. It is, if you do what the masses are doing, you get those kind of results.  Numerous problems with MAO.  First off required people to know repairs, (line items) just to hard for many and shortcuts are needed.  Issue 2 the same houses are not the same. They can be side by side. One has more warts than the other, (no driveway,  low clearance, dirty neighbor, strange lot, lots of steps, drainage) you know all of that Quishy stuff that makes your stomach churn. If you had 50 first time buyers walk thru the house, what would they love or hate about the house.   Super important to get the first impression from the street, inside and out the back…. and drive immediately to a nice home (end in mind) and do the same exercise…. MAO is terrible for analytical purposes. It s not fast, nor efficient…….  I love markets like this because ever thing  Jack Miller and Fortunato said would happen is happening.. Bottomline, buyers in my market want a nice home that meets their needs, solid community a 4bed/2 bath, walk your dog, pitch roof………nicely done……As I write this, I know experienced investors who will not  buy in solid subdivision, because they don’t see comps.  Hello! their is very low turn-over if any in a good subdivision with no foreclosures and pride of owners.  Wake up, folks it is the exact reverse of 2003 thru 2006.    Your gonna find out that almost 50% of the potential buyers are bruised up and banged up…that certain people are going to make record profits selling homes both traditionally and non traditionally, (seller financing).  Were at a point in most markets nationwide where rents, now match mortgage payments PITI for quality homes….the inflection point.    I am an engineer BTW  It does not matter if the house can afford themselves.    Its about SAFETY, always has been…..would you rather make a 30K profit in a rock solid community or 50K potential wild card scramble…. Builders understand this, this is why they have changed their home styles, and are delivering to the market what the market needs.   ITS NOT MAO, ITS HOW MUCH SPREAD DO I NEED FOR WHAT I AM DOING?   BTW, coming from a builder repairs are always a range, even if your doing the same exact house. Simple Match and Walla a SF price..   Just is!!!   Know your RETAIL Value for your Product Cold,  Understand the Spread You Need, and  Try to Buy As Low as Possible….Stop wasting time trying to figure out repairs, because I sent in an offer 2 days ago, while you were running around to figure out what was going on…  Builders keep it simple. We need to sell this product, for 120 a SF and build it for 85 per SF.    Same product ect.. if you don’t like the SF method do it like this…. Him the pros are buying this house type for 80K, and selling for 210 so I need 130K of spread…. So what is the MAO some DARN formula someone made up to make people warm and fuzzy they were making a good decision………You have to know your costs, your product and your farm market cold.

  • Shane_umstead

    Lets not even talk about what our mutual friend David does….Folks can barely grasp what I am saying, let alone what he does…. He is 100% right, until you understand financing, loan constants, and all of that stuff Miller, Boddiford, and Fotunato teach about Taxes, Self Directed IRA’s 10310 and planning for the event beyond the event…….Just saying…. 

  • http://www.isound.com/jvm Jay von Mohr

    I’ve found it hard to stick to one formula ever since the foreclosure/short sale debacle started kicking in. Every REO & short sale pulls the comps down the closer to the subject property they are. You def better have a solid grasp on your local market prices (retail & all the other variants).

    If you don’t know this data but need to get started before becoming an expert, team up with an agent or local appraiser (someone who can determine values quickly).

    Anyway, don’t let your weaknesses delay or stop you from jumping in. Just partner up with someone who you are sure can cover your weak area(s) while you’re “learning on the job”. You can offer your skills, or plain old hard work in return & split the profits.

    Thanks for your site & info JP,

     

    Jay von Mohr

    657-777-3540
    Mohr Equity

    Mohr Music

    http://www.IncomePropertyCash.com

  • stan

    wow…you are so smart Shane.  thanks for helping us

  • Shane_umstead

    Not, sure what to say Stan. My friend David who JP knows  and is friends with does seller financing.  While the rest of the world is on on side of the MAO forumula he is operating in the other side of the  bandwidth.   In my market I look for 130K spread, typically like I posted above……if were doing a buy, fix and resell, but the SPREAD could easily shrink to 50K if you doing what my friend David is doing. :) He simply signs up a house, does zero work, resells it and sells on a  wrap….. he has systems to find motivated sellers and buyers……for him its about the financing…. personally, I like assignments, quick turns, fix up and resells and I am doing what David is doing, but I am purchasing with private money, then selling on a wrap as well.  Really nice option in this market.   Wrapping a SPREAD…at one rate actually pushes your YIELD higher….by default because the CASH in the deal is burning hotter…..  Now, my friend David, he’s  at at a point, where he does not put any cash in the deal, very little maybe  1K to buy  and sell a house. Definitely viable in the market…….  Welcome to the World of “Jack Miller”, “Fortunato” and David….and Dyches Boddiford….Brilliant Minds…., just asked a friend one day, 6 years ago  who the best educators in the USA were.    IMO, the guys I just mentioned along with Dave Tilney,  Mike Cantun, along with Vena Jones, another sharp cookie.  The reason the MAO differs so much in the same exact market is honestly based on the skillset of the investor. A seasoned pro, signs up for a little as possible and figures out a way to make the most profit, safely,  while leaving some meat on the bone for the person………..

  • Anonymous

    Great post, JP!  Full of quality information and well written.  Can’t wait for the next one!

  • Reaturree

    This was great info and I so appreciate it,  as a newbie. Most of us newbie’s stick to formula until we get our feet wet or see just what does not seem to be working. Love your site, just happened on you from youtube and the video’s. Great!!! Your site is so full of interesting info, I plan on sticking around a long time.  Oh, that dirty house was something I have never seen before. I am so happy the the young man beat his cancer.  My mom had it, well, and she beat hers also using alternative means. Hey, what ever works. Thanks again for all of your hard work and may GOD continue to bless you and your family.  Rea T.

  • http://REItips.com/ jp moses

    You’re welcome, Rea. Thanks for stopping by and for commenting!