Every fix-and-flip deal has a price above which you shouldn't pay. Calculate it correctly and you have a disciplined anchor for negotiation. Ignore it and you're making emotional offers on properties you haven't actually underwritten.
That number is the Maximum Allowable Offer. Here's how to calculate it, when to adjust it, and why one scenario is never enough.
The MAO Formula
The standard MAO formula derives from the 70% rule:
MAO = (ARV × 70%) − Estimated Rehab Costs
ARV $350,000, rehab estimate $75,000:
MAO = ($350,000 × 0.70) − $75,000 = $245,000 − $75,000 = $170,000
The 70% multiplier leaves enough margin for closing costs, holding costs, financing, and profit — targeting a 15–20% gross margin on total project cost. At or below the MAO, the deal has a reasonable chance of generating that margin. Above the MAO, the math starts working against you.
What the 70% Factor Actually Covers
The 30% gap between purchase price and ARV needs to absorb:
- Acquisition closing costs: 2–3% of purchase price (title, recording, attorney, transfer tax)
- Financing costs: Hard money at 10–12% annualized on the financed amount over your hold period. A 6-month hold at 10% on $200,000 financed is $10,000 in interest
- Holding costs: Property taxes, insurance, utilities during renovation — typically $500–$1,200/month on a typical investment property
- Selling costs: Agent commissions (5–6%), seller concessions, closing credits — typically 6–8% of ARV
- Profit margin: The target 15–20% gross margin on total cost
On a $350,000 ARV deal purchased at $170,000 with $75,000 in rehab:
- Total invested: $170,000 + $75,000 + $10,000 (financing) + $6,000 (holding) + $5,000 (acquisition closing) = $266,000
- Gross sale proceeds after 6.5% selling costs: $350,000 × 0.935 = $327,250
- Net profit: $327,250 − $266,000 = $61,250
- Gross margin on invested capital: 23% — a solid return on a well-executed deal
When to Adjust the 70% Multiplier
The 70% rule is a starting point. Experienced investors adjust the multiplier based on market conditions, deal characteristics, and their specific cost structure.
Use 65%–68% when:
- The property has significant structural or mechanical unknowns
- Days on market for renovated comps exceeds 90 days (slow exit)
- You're using expensive short-term financing (12%+ annualized)
- The project timeline is likely to exceed 9 months
- The market is softening and ARV comps are stale
Use 72%–75% when:
- The scope is cosmetic-only with no mechanical or structural risk
- You're using low-cost financing (conventional or portfolio at 6–7%)
- Days on market for renovated comps is under 30 days (fast exit)
- You have current contractor bids in hand with fixed-price contracts
- The market is appreciating and ARV comps are trending upward
Three-Scenario MAO: Conservative, Standard, Aggressive
A single MAO number creates false precision. Every input to the formula — ARV, rehab cost, multiplier — carries uncertainty. The professional approach is to run three scenarios.
Conservative MAO (worst-case inputs)
Formula: (Low ARV × 65%) − High Rehab Estimate
This is the minimum the deal needs to work. If you can still make a sensible offer at conservative inputs, the deal has a margin of safety. If the conservative MAO is negative, the deal has no room for error.
Standard MAO (base-case inputs)
Formula: (Mid ARV × 70%) − Mid Rehab Estimate
Your anchor for initial offer conversations. Reflects the most likely scenario based on available information.
Aggressive MAO (best-case inputs)
Formula: (High ARV × 75%) − Low Rehab Estimate
The ceiling for competitive situations. Paying the aggressive MAO means everything needs to go right. ARV lands where you estimated, rehab comes in on budget, timeline holds. Price this scenario with clear eyes: you're buying at the edge of the deal working.
Use the conservative MAO as your walk-away price. Use the standard MAO as your negotiation anchor. Reserve the aggressive MAO for competitive situations where you have specific reasons to believe best-case inputs are achievable.
The MAO Formula with Total Project Cost
A more precise version uses total project cost rather than the simplified 70% rule:
MAO = ARV − Rehab − Holding Costs − Financing Costs − Selling Costs − Target Profit
Example: ARV $350,000, rehab $75,000, holding $8,000, financing $12,000, selling costs $22,750 (6.5%), target profit $52,500 (15% of ARV):
MAO = $350,000 − $75,000 − $8,000 − $12,000 − $22,750 − $52,500 = $179,750
This version gives you more control over each variable and forces you to be explicit about your target margin. The 70% rule gets you to a similar answer faster — useful for screening deals quickly — but the full formula is more accurate for deals you're serious about.
Common MAO Errors
Using list price as an input. The MAO is determined by ARV and rehab cost, not by what the seller is asking. If you anchor to the list price when thinking about your offer, you're negotiating from the wrong starting point.
Forgetting the contingency. Your rehab input to the MAO formula should include your contingency. If your base scope is $60,000 and your contingency is 20%, use $72,000 in the MAO formula. Using $60,000 assumes every repair goes perfectly.
Using a single ARV estimate. Stress-test your ARV with a conservative estimate. If conservatively adjusted comps support $320,000 instead of $350,000, run that number through your MAO formula and see if the deal still works.
Adjusting the multiplier to make a deal work. The most dangerous MAO error is reverse-engineering the calculation from the purchase price you want to pay. If a property is listed at $190,000 and your standard MAO says $170,000, the answer is to negotiate harder or pass — not to increase the multiplier to 77%.
MAO and Wholesale Deals
Wholesalers use the MAO to calculate their assignment fee. If the retail investor's MAO is $170,000 and the wholesaler wants a $15,000 assignment fee, they need to put the property under contract at or below $155,000. Retail investor MAO minus assignment fee equals the maximum the wholesaler can pay the seller.
Investors who buy from wholesalers should calculate their own MAO independently. Your MAO is determined by your cost structure, your market knowledge, and your target margin. Another person's analysis of those inputs is not a substitute for your own.
Using Scopebase for MAO Calculation
Scopebase automates the MAO calculation as part of the estimate output. When you run an estimate, the system returns three MAO scenarios — conservative, standard, and aggressive — calculated from the rehab estimate it generates, your input ARV (or its own market-adjusted estimate), and configurable margin targets. You get the three-scenario output without building the spreadsheet manually for each deal.