If you're flipping houses or buying distressed properties, two numbers will make or break every deal you touch: the After Repair Value (ARV) and the Maximum Allowable Offer (MAO). Get these right, and you protect your profit margin from day one. Get them wrong, and no amount of hustle or cost-cutting will save you on the back end.
This guide breaks down exactly how to calculate both: clearly, practically, and without the fluff. Whether you're bringing a deal to a hard money lender or running numbers on your own, understanding these fundamentals is non-negotiable.
What Is After Repair Value (ARV)?
After Repair Value is what a property will be worth after all renovations are complete. It's not the current value. It's not what the seller is asking. It's the projected market value of the fully renovated home, based on comparable sales in the area.
ARV is the foundation of every fix-and-flip calculation. Hard money lenders use it to determine how much they'll lend. Investors use it to determine how much they can spend. If your ARV is inflated, every number downstream is wrong.
How to determine ARV:
- Pull comparable sales (comps): Find 3 to 5 recently sold properties within 0.5 to 1 mile of your subject property. They should be similar in size (within 10 to 15% square footage), bed/bath count, age, and style.
- Use recent sales: Stick to sales within the last 90 days. In a fast-moving market, go even tighter: 60 days or less.
- Compare apples to apples: Your comps should reflect the condition your property will be in after renovations, updated kitchens, new flooring, fresh paint, modern finishes. Don't comp a fully renovated property against dated interiors.
- Calculate price per square foot: Divide each comp's sale price by its square footage. Average those figures, then apply that number to your subject property's square footage as a gut-check.
Be conservative. Overestimating ARV is one of the most common, and most expensive, mistakes new investors make. A realistic ARV is the honest one, not the optimistic one.
What Is the Maximum Allowable Offer (MAO)?
The Maximum Allowable Offer is the most you should pay for a property and still walk away with an acceptable profit. It accounts for your renovation costs, holding costs, closing costs, and the profit margin you need to make the deal worth doing.
The MAO tells you when to walk away. If a seller won't come down to your MAO, the deal doesn't pencil: period. No emotional attachment, no "but the neighborhood is great." Numbers first, always.
The 70% Rule: A Quick Starting Point
The most widely used shorthand for calculating MAO in fix-and-flip investing is the 70% Rule:
MAO = (ARV × 70%) minus Estimated Repair Costs
The 70% threshold is designed to leave room for acquisition costs, holding costs, financing costs (like hard money interest), selling costs, and a profit margin: all lumped into that 30% buffer.
Example:
- ARV: $300,000
- Estimated Repairs: $45,000
- MAO = ($300,000 × 0.70) minus $45,000
- MAO = $210,000 minus $45,000 = $165,000
That means you shouldn't pay more than $165,000 for this property if you want to stay within safe profit margins.
The 70% rule is a starting point, not a law. In highly competitive markets, investors sometimes stretch to 75%. In riskier markets or on larger rehabs, you may need to tighten to 65%. Know your market and your risk tolerance.
Building a More Precise MAO Formula
The 70% rule is fast, but it's a blunt instrument. When you're writing offers, you want precision. Here's a more detailed MAO formula that accounts for your actual cost stack:
MAO = ARV minus Repair Costs minus Holding Costs minus Closing Costs (buy + sell) minus Desired Profit
Let's break down each variable:
- Repair Costs: Get a contractor walkthrough before you close if at all possible. Rough estimates get people burned. Budget for surprises: 10 to 15% contingency on top of your bid is standard practice.
- Holding Costs: Every month you own the property costs money. This includes hard money loan interest, property taxes, insurance, and utilities. For a 4 to 6 month flip, these add up fast, often $2,000 to $5,000+ per month depending on your loan amount.
- Buying Closing Costs: Typically 1 to 3% of the purchase price. Includes title, escrow, lender fees, and any points on your hard money loan.
- Selling Closing Costs: Budget 6 to 8% of ARV. This covers agent commissions (typically 5 to 6%), seller concessions, and closing costs.
- Desired Profit: What do you need to make this deal worth your time and risk? Most investors target a minimum of $25,000 to $40,000 net on a standard flip, or at least 15 to 20% of ARV.
Detailed Example:
- ARV: $300,000
- Repair Costs: $45,000
- Holding Costs (5 months): $12,000
- Buying Closing Costs: $5,000
- Selling Closing Costs (7%): $21,000
- Desired Profit: $30,000
- MAO = $300,000 minus $45,000 minus $12,000 minus $5,000 minus $21,000 minus $30,000 = $187,000
Notice this is higher than the 70% rule calculation. That's because the 70% rule is conservative by design: it's built to absorb unknowns. The detailed formula is more accurate when you have solid numbers, but it leaves less cushion for surprises.
Common Mistakes That Blow Up the Numbers
Even experienced investors misfire on ARV and MAO. Here's what to watch for:
- Using the wrong comps: Comparing your finished property to homes that are bigger, in a different neighborhood, or never renovated will throw off your ARV.
- Relying on old sales: Comps that sold too long ago may not reflect today's market. Stick to recent sales.
- Underestimating repairs: A rough guess with no contractor walkthrough and no contingency is how rehab budgets get blown.
- Forgetting holding and selling costs: Interest, taxes, insurance, utilities and agent commissions all come out of your profit, even when the 70% rule makes a deal look fine.
- Letting emotion set the price: If the seller won't meet your MAO, walk away. Paying more than your MAO means handing your profit to the seller.
Get the ARV right first, build your MAO from real costs, and stick to it. That discipline protects your profit before you ever close.
