Take a look at the simple yet critical formula connecting the ARV to the MAO.
- Hey, welcome back to the course. We've looked at the ARV and the MAO, and we talked about some of the factors that you need to consider in order to go from the ARV to the MAO. Now we can take a look at the formula and how we go from ARV to the MAO. All right, let's start with the ARV. Right, so this simple formula, we're going to follow this, now just remember as we're going through this, this is not the complete formula that we're going through in this lecture. We're going to look at a more detailed version in the next lecture. Okay, but here's the gist of it. We start with the ARV and then we subtract out the Investor Buyer's Desired Profit. So if you get an investor buyer that's going to be doing rehab there's a minimum desired profit level that they want to make in that market, fixing a property like the one that you're trying to offer. So when we start with the ARV we want to subtract that out so that we factor in how much they want to make, 'cause if your investor buyer can't see how much they can make from it, or they don't trust that they can make that amount from the deal, then you're not going to have a deal. Right, so once you subtract that out then you need to factor in the cost of rehab. Right, this is how much they got to spend in order to get the property to the level where the property can be marketed and sold. That is the total cost of rehab, and this is why it's really important for you to get an accurate estimate because if you underestimate it then you're going to be overvaluing the property, right, and end up paying, potentially over-paying for it. You want to get an accurate rehab cost. The third is, you need to factor in your desired profit, right. You got to bake it in there, if you can't make what you want to make from the work that you're doing then this is not worth it, right. So once you subtract out all three of those things then you have your maximum allowable offer, okay. From a conceptual point of view this is pretty straightforward, right. You have your ARV on the left side and then you subtract out those three main things, and then you have your maximum allowable offer. So let's see what it would look like with an example. Let's say that there's an ARV for a property and based on the comps you think that it can sell for 100,000 in the market after repairs, and your investor buyer, or the investor buyers in the market, they want to make $15,000 in profits for the flips that they do in that market, but you know that this subject property needs about 20,000 in rehab work, okay, and you want to make $5,000 from your wholesaling deal, so what it look like then? Right, so this one following the formula would look something like this, we would have the ARV minus the investor profit margin, minus the total rehab costs, minus your profit margin, and then that would equal to your MAO. Now this formula isn't super difficult, it's pretty straightforward math. With a little practice, it's not the math that's difficult, what's difficult is actually coming up with accurate inputs or assumptions, that go into this. In the later out lectures we're going to look at some of the steps you can take to generate more accurate numbers, and thus generate more accurate MAO calculations that you can rely on. But the formula we just looked at isn't quite complete. We need to make an adjustment because there's something called the 70% rule. Why? Because this formula is missing one thing, holding costs. The flip investor has other costs besides their rehab costs that they need to pay for, so the 70% rule is one of the ways, or one of the more popular ways, to account for that additional holding costs. In the next lecture let's see how the 70% rule works out.
- Name the formula used to calculate the MAO from the AVR.
- Summarize the 70% rule.
- Differentiate between the rehab estimator, ARV, and MAO calculator worksheets.
- Describe the factors in an AVR estimate.
- Cite the formulas that are helpful when pitching to a flip investor buyer.
- Explain the difference between recently sold comps and rental comps.