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
If 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.
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.
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.