Your Maximum Purchase Price (MPP) is the most you can pay for a property and still hit your profit goal. Unlike the 70% Rule, it subtracts every cost individually: Maximum Purchase Price = After Repair Value minus Repair Costs, Buying Costs, Holding Costs, Selling Costs, Financing Costs, and your Desired Profit.
Key Takeaways
Your Maximum Purchase Price is the most you can pay for a property and still make your target profit. It is also called your Maximum Allowable Offer, or MAO.
The formula is: MPP = ARV - Repair Costs - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Desired Profit
It is more accurate than the 70% Rule because it prices every cost on the deal instead of assuming a flat 30 percent covers everything.
Use the 70% Rule to screen deals fast, then run the full MPP before you actually make an offer.
Your MPP is only as reliable as your two biggest estimates: your After Repair Value and your repair costs.
On the same deal, the two formulas usually land close. In the example below, the 70% Rule gives $75,000 and the MPP gives $75,750.
FAQ
What is the Maximum Purchase Price Formula?
The Maximum Purchase Price formula is used to calculate the maximum price you should offer for a property. The formula uses a detailed analysis of all of the project costs including your Repair Costs, Buying Costs, Holding Costs, Selling Costs, and Financing Costs.
The Maximum Purchase Price formula is the most accurate calculation, because it requires you to think about, consider, and calculate every single project cost on the project.
Maximum Purchase Price = After Repair Value - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Repair Costs - Profit
You will also hear this number called your Maximum Allowable Offer, or MAO. It means the same thing: the ceiling on what you can pay and still walk away with the profit you planned for.
The Six Inputs You Need to Calculate the Maximum Purchase Price
The formula is simple arithmetic. The work is in getting each input right. Here is what goes into each one:
1. After Repair Value (ARV)
What the house will sell for once it is fully renovated. Pull three to five recent sold comps nearby that match your finished product in size, age, and finish. This is the number everything else keys off, so be conservative. How to calculate the After Repair Value
2. Repair Costs
Your full rehab budget, built from a detailed scope of work rather than a guess. Include your adders (dumpsters, permits, temporary utilities, cleanup) and a contingency for what you find behind the walls. How to estimate rehab costs
3. Buying Costs
What it costs to acquire the property: title work, attorney fees, inspections, and lender fees at closing. Typically 1 to 3 percent of the purchase price. How to calculate buying costs
4. Holding Costs
What you pay to own the property while you rehab and sell it: property taxes, insurance, utilities, and maintenance. Often $500 to $1,000 per month, so your timeline directly affects this number. How to calculate holding costs
5. Selling Costs
What it costs to get the house sold: agent commissions, closing costs, and staging. Usually 6 to 8 percent of your resale price. How to calculate selling costs
6. Financing Costs
The points and interest on your loan if you are funding the deal with hard money or a private lender. How to calculate financing costs
Plus your Desired Profit, which is the whole reason you are doing the deal. More on how to set that below.
Maximum Purchase Price Example
Example
A flipper finds a distressed property that the seller is asking $85,000 in a neighborhood with $200,000 resale values. After performing a detailed analysis of all of the project costs the flipper calculates the following costs:
Repair Costs = $65,000
Buying Costs = $2,000
Holding Costs = $3,750
Selling Costs = $16,000
Financing Costs = $7,500
Desired Profit = $30,000
How much should the flipper offer using the MPP Formula?
Answer
Maximum Purchase Price = After Repair Value - Repair Costs - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Profit
In this scenario, the seller is asking $85,000, which is $9,250 more than the maximum purchase price the formula supports. Either you negotiate the price down, or you walk.
How to Set Your Desired Profit
The formula will not work until you decide what you are trying to make. Most flippers set their target one of two ways:
As a percentage of ARV. A common target is 10 to 20 percent of the After Repair Value. On a $200,000 ARV, that is $20,000 to $40,000.
As a flat minimum. Many active flippers simply refuse to take on a project under a set number, often $25,000 to $50,000, because the work and risk are not worth less than that.
Whichever you use, set it before you run the numbers, not after. Deciding your profit target while staring at a deal you want is how flippers talk themselves into thin margins.
Learn how to Analyze a House Flip and Create a Professional Investment Report in less than 5 minutes!
In this Case Study, Dave will walk you through the analysis of an example house flipping deal and provide insight on how you can quickly analyze prospective deals in a matter of minutes.
FAQ
When should I use the Max Purchase Price Formula vs the 70% Rule Formula?
The 70% Rule Formula should be used to initially quickly analyze the validity of a deal to see if you should spend more time to fully evaluate the property using the Maximum Purchase Price formula.
If the deal meets your 70% Rule criteria, you can perform a full Maximum Purchase Price analysis to determine the actual purchase price you should offer for the property.
Run our example both ways and you can see how they compare:
70% Rule: ($200,000 x 70%) - $65,000 = $75,000
Maximum Purchase Price: $200,000 - $94,250 - $30,000 = $75,750
A $750 difference on a $200,000 deal. That is exactly why the 70% Rule works as a screening tool: it gets you close enough, fast enough, to know whether a property is worth a real analysis. But the $750 is real money, and on deals where your costs are not average, the gap gets much wider. Screen with the rule, offer on the MPP.
When the Seller Won't Accept Your Maximum Purchase Price
It happens constantly. Your number says $75,750 and the seller wants $85,000. You have four options, and only one of them is a mistake:
Negotiate. Show your work. Sellers often do not realize what the repairs actually cost, and a detailed estimate is a persuasive thing to put in front of someone.
Find savings in the deal. Can you shorten the timeline to cut holding costs, sell it yourself to save the commission, or get better lender terms? Every cost you lower raises your MPP.
Walk away and stay in touch. Overpriced listings come back. Follow up in 30 or 60 days when the seller has had less interest than they expected.
Talk yourself into it. This is the mistake. Paying over your MPP does not reduce your profit a little, it eats the cushion that was covering your risk. The deals that lose money are almost always the ones where someone decided the numbers were close enough.
Take Action
Now that you know how to analyze a flip deal, start finding and analyzing deals in your marketplace. The more you practice, the better you'll get at quickly valuing potential deals.
Tools to Analyze House Flipping Deals
Notepads/Dirty Used Napkins
If you are the old fashioned pen-and-paper type, a pen and notepad or a used napkin will work just fine...
Good 'ole Trusty Calculator
Listen, there's no crazy calculus involved in calculating your purchase price, so you don't need a fancy 'Scientific Calculator'....you should be able to use any ordinary calculator or phone app to calculate the MPP.
Spreadsheets
If you are skilled with Microsoft Excel, building your own analysis spreadsheet can help you get a better understanding of the numbers & costs that go into analyzing a deal. Or there are free downloadable House Flipping Spreadsheet templates you can download to help you get started.
Or of course you can use our Flipper Force house flipping software which is pre-built with a step-by-step house flipping calculator for analyzing all of the project costs you need to determine the MPP.
Frequently Asked Questions
What does MPP stand for?
MPP stands for Maximum Purchase Price, the most you should pay for a property and still hit your profit goal. You will also see it called the Maximum Allowable Offer, or MAO. Both refer to the same number.
What is the Maximum Purchase Price formula?
Maximum Purchase Price = After Repair Value minus Repair Costs, Buying Costs, Holding Costs, Selling Costs, Financing Costs, and your Desired Profit. It works backward from your resale price to tell you the most you can pay today.
Is the MPP formula better than the 70% Rule?
It is more accurate, because it prices every cost individually instead of assuming a flat 30 percent discount covers them. But it takes longer to run. Most flippers screen deals with the 70% Rule and then run the full MPP on the ones worth pursuing.
How much profit should I build into my MPP?
Most flippers target 10 to 20 percent of the After Repair Value, or set a flat minimum of $25,000 to $50,000 per deal. Set that number before you analyze the property, not while you are looking at one you want.
What if my Maximum Purchase Price comes out too low to win the deal?
That is the formula doing its job. Try to negotiate, look for costs you can genuinely reduce, or walk away and follow up later. Paying above your MPP does not shrink your profit slightly, it spends the cushion that was covering your risk.
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