March 6, 2008

Real Estate Investing: The MARLA Formula

The ability to quickly separate the motivated sellers from the time-wasters is a valuable skill that will save you time and frustration. That's exactly what the MARLA formula is designed to do. M is for Motivation. A is for ARV (after repair value), R is for Repairs, L is for Loan balance, and A is for Asking price. The 5 magic questions are:

1. Why do you want to sell your house?

2. How much is the house worth?

3. Does the property need and fixing up?

4. What is/are the principal amount(s) of your mortgage(s)?

5. What's your asking price for the home? Follow-up: Would you accept a lower offer?

Let me explain why we're asking these questions.

The first question reveals the seller's MOTIVATION. The best case would be if the answer indicates a high level of motivation to sell the house quickly. Most sellers will not be motivated and if that's the case with the seller you're speaking to, then it's your decision whether to ask more questions. You've got them on the phone so you might as well ask and make an offer. Sometimes sellers will hide pertinent facts until you warm them up. Then they'll reveal their motivation so don't give up too quickly but don't try to squeeze water out of a rock either.

You'll get a ballpark idea of the home's market value from the answer to the second question. In most cases, sellers have a pretty good idea of what the house is worth. Do some due diligence to confirm the sellers word but initially you can just use it as a ballpark figure. When you find a seller how doesn't know the market value of their house, you might be about to get a good deal. Find out how much they want.

You'll need to know what repairs the home needs to put it in good sellable condition. That's the point of the third question. Make a list of the repairs that need to be done, if any. Ask the seller for a repair estimate. It's common for seller to provide a high estimate which will work in your favor.

You'll need to know the current loan balance in order to formulate an intelligent offer so ask the fourth question. Motivated sellers will not hesitate to provide the information and a current mortgage statement too. Unmotivated sellers will resist. That's why this is such a great pre-screening question. You'll find out quickly who's motivated and who's not.

The last piece of information is the seller's asking price. I always follow-up with something like "Is that your bottom line?" You'll be amazed at how often the seller will drop several thousand dollars off the asking price just like that.

It's possible you'll have enough information to make any offer at this point. At the very least you'll know if you're dealing with a motivated seller or not. The next could be a few strategic follow-up questions or formulating an offer which is the subject of another article.