Max Allowable Offer

What it is

Max allowable offer — MAO — is what you can pay for a property and still clear a target profit after rehab, holding costs, financing, and closing costs. The formula everybody learns first is the 70 percent rule:

ARV x 70% - Rehab = MAO

Quick example: $300,000 ARV, $60,000 rehab. 70% of $300,000 is $210,000. Minus $60,000 rehab equals $150,000. That’s your target purchase price. You don’t care what the Zestimate says. $150,000 is what that house is worth to you today.

But here’s the thing I actually use. The 70% rule is a starting point. My real standard is a minimum lump sum of $30K or 10% of total project cost — whichever is higher. The reason is that percentages break down on small projects. If I’m all in at $51,000 on a cosmetic deal, a 20% return is only $10,000. That doesn’t cut it. On a $600,000 project, 10% is $60,000 — that’s actually meaningful. So minimum $30K, minimum 10%, take whichever number is bigger.

Why it matters

The profit floor changes based on two more factors: risk and lending.

Risk: a cosmetic renovation on a livable house has way less risk than ripping a roof off and building a second story. If it’s a lighter deal, I might tighten my standards because I feel safer. If I’m doing major structural work — way above the livability threshold on the scale of livability — I need more cushion for what I might find.

Lending: this is the one that trips people up. If you’re using hard money at 12%, you’re paying around $2,500/month in interest on a $250,000 loan. Six-month hold, that’s $15,000. Some people count that $15,000 as part of their profit when they fund cash. I don’t. I think of that as two separate businesses — the real estate investor and the lender. The $30K or 10% should be the real estate investor’s return, and the interest savings is the lender’s return. If you blur those lines, you’re lying to yourself about the deal.

How it shows up

Walk a property, run the numbers, and your MAO comes out of the Flippin’ Calculator before you even start negotiating. I pull up the calculator on the walkthrough, agree on the ARV with the seller, walk the scope, and the offer comes directly from the math. I say $73,345 — not “around $70,000.” Specific numbers are less negotiable because they look real. “Around $180K” invites countering. “$73,345” says the math did this, not me.

The discipline is setting your MAO before you walk the property and refusing to go above it. Every dollar above MAO comes straight out of profit — costs downstream don’t compress to match. Rehab still costs what it costs. Hold time still runs. Selling costs still trigger. You cannot save a bad acquisition with a great renovation. You can only cap the damage.

The connected concept is equity on arrival. MAO ensures that at close, there’s already a margin between what you paid and what the finished house is worth. No equity on arrival, no cushion. No cushion, and one bad contractor or one slow market kills the deal.

Related

70 percent rule, equity on arrival, buy box, arv, deal analysis, fliporithm, livability threshold