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Class is in Session! Flipping Houses—Can You? Should You?

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[Illustration by Eric Lebofsky]

The market is soft and mortgage rates are down. Is now a good time to start your house flipping career? Flipping is the process of buying a property for a low price and then selling for a profit in a short time period. Often, but not always, the flipper renovates a distressed property. During the property boom, it seemed like any idiot could make sweet profits this way, but those days are over. What does the process look like now?

Would-be house flippers need to keep a number of things in mind. First, know the area in which you are buying and then selling very well. Figure out who is going to buy your flipped house. In the Hamptons, will that be a Wall Streeter flush with cash? A local family who wants a decent year round place to live? An upper middle class family from the tri-state area? Research who buys the houses in your area.

Next, make a budget. How much financing can you line up? The more cash you can access, the better. You can also find financing through bank loans, mortgages, or real estate investment groups or clubs.

Now, find your property. A great way to buy is via auction, because you can sometimes find rock-bottom deals this way. Foreclosures or short sales can also offer bargains. Be careful when dealing with real estate agents, as their commissions may eat into your profits, but of course you can find good properties via agents as well.

Once you've targeted your property, determine what price you want to pay for it. What repairs and renovations need to happen? How much will they cost? Once the house is renovated, how much will buyers pay for it? Once you have determined this price, aim to pay no more than 70-80 percent of this number for the house. Stick to your price. This is a business deal. It is not your home. Keep emotions out of it.

Next, build your team of contractors. The more hands-on you can get, the greater your profit. If you have to pay a general contractor to coordinate the electricians, painters, plumbers, and so on, you will have less profit. But, of course, know your limits. Shoddy workmanship isn't worth doing as your property will languish on the market.

Don't overimprove the property. Keep in mind what your potential buyer will want to pay for and what they won't. Remember: business deal--not your home! Nice kitchens and bathrooms sell houses, but don't put a $100,000 kitchen in a $500,000 house. Also keep curb appeal in mind.

Finally, it's time to sell. Again, real estate agents' fees may eat into your profit, but agents can also often get a better price for a property than an amateur. Good luck and happy flipping!