What it is
Maximum allowable offer is the price at which a deal still works, computed before any conversation with a seller. It is less a formula than a commitment device: by fixing the walk-away number in advance, an investor removes the moment where competition, sunk time, and the desire to close a deal push the price past the point of profitability. Every experienced buyer has an MAO written down before they negotiate, and the discipline of honoring it is what separates a portfolio that compounds from one that merely accumulates properties.
How it is calculated
The common form runs through the 70% rule: multiply after-repair value by 0.70 and subtract the rehab estimate. A $200,000 ARV needing $30,000 of work gives $140,000 − $30,000 = $110,000. The 30% haircut is a bundled allowance for closing costs on both ends, holding costs, financing, and profit. Investors who want more precision unbundle it — subtracting explicit line items for commissions, points and interest, taxes and insurance during the hold, and a target profit — which produces a sharper number, particularly on higher-priced properties where a flat percentage is a very large sum.
MAO = (ARV × your target percentage) − rehab. At 70% on a $200,000 ARV with $30,000 of work: $140,000 − $30,000 = $110,000.
How investors actually use it
MAO turns analysis into a negotiating position. Because it is derived rather than felt, it can be defended calmly and abandoned without regret when a seller will not meet it. Investors typically open below MAO to leave negotiating room, and they adjust the target percentage by conditions: tighter in slow markets, on long rehabs, or when borrowing at hard money rates, and looser where properties sell in days. Running MAO across many listings also reveals a market’s shape, since a market where almost nothing pencils is telling you something before you have lost money learning it.
The common mistake
Reverse-engineering the inputs to justify a price you have already decided to pay. Nudging ARV up by $15,000 and the rehab down by $10,000 moves MAO by $20,500, and both nudges feel reasonable in the moment. The number is only as honest as the comparable sales and the scope behind it. The second mistake is treating MAO as a target rather than a ceiling — paying exactly your maximum means every estimate has to be right, which over a portfolio is not how it goes.
Put it to work
Related terms
- 70% rule — A flip and BRRRR guideline: pay no more than 70% of the after-repair value minus estimated rehab.
- ARV (after repair value) — The estimated market value of a property once renovations are complete, based on comparable recently sold homes.
- Hard money — Short-term, asset-based financing from private lenders, secured by the property rather than your credit or income.
- BRRRR — Buy, Rehab, Rent, Refinance, Repeat — a strategy for recycling one pool of capital across multiple rentals.