What "rule" do you use for your MAO? | Buying & Selling | Hawaii Real Estate Message Boards

I was discussing this with one of my mentors today. Many investors are taught about the "70% rule" when it comes to figuring out your MAO – Maximum Allowable Offer. The basic rule is to take 70% of the ARV (After Repaired Value), subtract the rehab and you now have your MAO. But I find there are plenty of situations where the rule can be broken or just flat out ignored.

For example, a $800,000 ARV house in Diamond Head that needs $30,000 in rehab to look "showcase good". The 'rule' says that you shouldn't offer more than $530,000 for it (.70 * 800,000 – 30,000). But really, if you could get that property for $600,000 wouldn't you take it? I sure would – there's a nice profit in that house.

So I think that rule works well for many markets on the mainland which have significantly lower price points. But here in Hawaii and in other high-end markets (lots of places in California), then the rule becomes more a guideline. I believe in looking at hard dollars and cents at the end of the day when calculating my MAO.

Do you agree?

craigevans said:

Hi Mike. The first time I purchased a home, I went at it your way and stuck to the 70% rule. However, I found that because I wasn't backed by a realtor, they didn't take me seriously. What I discovered is that when I went into the deal with a realtor's backing, the 70% rule worked! I think they figured I was a potential buyer when I had a realtor with me. For now, though, I'm just looking for some houses to rent in the Hawaii area until the prices come down. Know of any? I figure when the time is right, I'll jump on it. I have some properties in mind already.

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Hey Craig. Sorry for just seeing this now. Some people just don't get it that there's no law stating a realtor must be involved to complete a sale. Now don't get me wrong – a good realtor can bring tremendous value, no doubt. You won't get me to say the opposite. However, strictly from a numbers perspective, it can be advantageous to the seller if they don't have to pay 3% or even 6% which comes out of their net. But there are also some folks who are a bit more 'old school' and will only work with buyers using realtor representation. If that's the case, then no worries – make sure you have a good agent and get the deal done.

I don't really work in the rental market, but drop me a line when you're ready to buy and I'll see if I can get you into a good under-market deal that I lock up.