The Standard MAO Formula (70% Rule)
The MAO formula calculates the maximum price you should pay for an investment property. The standard version is based on the 70% rule, which states that your purchase price should not exceed 70% of the After Repair Value (ARV) minus all estimated repair costs.
The 30% margin built into the formula accounts for your profit (typically 10-15%), closing costs on the buy and sell side (8-12%), and holding costs during renovation (2-5%). This formula has stood the test of time because it provides a sufficient buffer for most deal scenarios.
MAO = ARV x 70% - Repair CostsStandard MAO Calculation
When to Adjust the 70% Rule
The 70% rule is a guideline, not a law. Experienced investors adjust the percentage based on market conditions, deal size, and their specific cost structure.
- Tight market / strong demand: Some investors use 75-80%, accepting thinner margins to win deals in competitive markets
- High-value properties (ARV above $500K): The 70% rule may be too aggressive because the dollar profit is already large even at 75-80%
- Low-value properties (ARV below $150K): Stick to 65-70% because the dollar profit margin is thin and there is less room for error
- Wholesale deals: Wholesalers typically use 65-70% minus repairs minus their assignment fee ($5,000-15,000)
- Rental/BRRRR deals: Use 70-75% of ARV because you are holding the property long-term rather than reselling
Advanced MAO Formula with Detailed Costs
For more precise analysis, many investors break out costs individually rather than relying on the 30% blanket margin:
MAO = ARV - Repair Costs - Closing Costs - Holding Costs - Target ProfitDetailed MAO Calculation
MAO for Wholesalers
Wholesalers need to account for their assignment fee when calculating MAO. The formula becomes: MAO = ARV x 70% - Repair Costs - Assignment Fee. A typical wholesale assignment fee ranges from $5,000 to $15,000, though larger deals can command higher fees.
Since the end buyer (typically a flipper) will apply their own 70% rule, the wholesaler effectively needs to buy at a deeper discount. This is why wholesalers often need to acquire properties at 50-65% of ARV minus repairs to make the numbers work for both themselves and their buyers.
Common MAO Mistakes
The most dangerous mistake is using an inflated ARV, which makes the MAO artificially high. Always use conservative comps. The second most common mistake is underestimating repair costs, which eats directly into your profit margin.
Another frequent error is forgetting to include all costs. Many new investors account for purchase price and repairs but forget closing costs (both buy and sell side), holding costs (loan payments, taxes, insurance, utilities), and the cost of capital (hard money interest rates of 10-14% annually).
Key Takeaways
- The standard MAO formula is: ARV x 70% - Repair Costs
- The 70% margin covers profit, closing costs, and holding costs
- Adjust the percentage based on market conditions and deal size
- Wholesalers need a deeper discount to account for their assignment fee
- Always use conservative ARV and thorough repair estimates in your MAO calculation
Frequently Asked Questions
What does MAO stand for in real estate?
MAO stands for Maximum Allowable Offer. It is the highest price a real estate investor should pay for a property while still maintaining their target profit margin. The most common formula is ARV (After Repair Value) times 70% minus estimated repair costs.
Why is the 70% rule used instead of 80% or 60%?
The 70% rule provides approximately 30% of ARV as a margin for profit (10-15%), selling costs (6-10% including agent commissions), buying costs (2-3%), and holding costs (2-5%). This margin has proven sufficient for most markets over time. In very competitive markets, some investors use 75-80%, while in riskier deals, 60-65% provides more protection.
How do I calculate MAO for a wholesale deal?
For wholesale deals, use: MAO = ARV x 70% - Repair Costs - Your Assignment Fee. For example, if ARV is $250,000, repairs are $30,000, and you want a $10,000 assignment fee: $250,000 x 70% - $30,000 - $10,000 = $135,000. This ensures your end buyer can still make the numbers work at the 70% rule.