“Flipping” is the buzzword of the year in real estate: flipping books, flipping articles in the newspaper and even flipping shows on TV. What is flipping, how does it work and how can you make a profit?

Flipping simply means buying a property and reselling it quickly, rather than holding a property for the long term as a rental. Flipping comes in several varieties, most of which are legal and profitable, some of which are not.

Flip Strategy #1: Buy, Fix, and Flip

Let’s start with the most common way: the good old “fix and flip”. This process involves buying a property that needs work, fixing it up, and then selling it on the “retail” market, that is, to a person who will live in the property. This method is tried and true, and it works very well. You can easily make $15 – $50k on a deal depending on your market and how good you are at finding bargains.

The danger of fixing and flipping is paying too much or underestimating the repairs. Be very conservative in repair costs and in the time it may take to resale. Also, be sure to include in your analysis the cost of paying a real estate agent to sell the property.

Flip Strategy #2: Buy, Refinance and Lease/Option

Instead of selling the repaired property for all cash, sell it on terms. Once you have completed the rehab, refinance the property to its new appraised value. If you did the math correctly, you should have little to no money in the deal. Selling the property on a lease with an option to buy. Your tenant’s/buyer’s rent payment should cover your mortgage payment (if not, consider an adjustable rate or single interest loan that is locked in for 3 years). When your tenant exercises their purchase option, they make a bigger profit, since they don’t have to pay a broker’s fee. If the tenant exercises their option after 12 months, they benefit from a lower capital gains tax rate.

Flip Strategy #3: Buy and Flip “as is”

Don’t like to do repair work? Consider selling the property “as is” such as a top to fix light fixture. If the local housing market is active, you should be able to sell the property in poor condition for just a little below market. This is especially the case for homes in “transition” neighborhoods. Of course, make sure you buy the property cheap enough that you can sell it below market price quickly and still make a profit.

Flip Strategy #4: Wholesale

Strategy #1, fix and switch, is very popular, which means there are a lot of investors looking for rehabs. You can buy the property cheap and sell it for a few thousand dollars more to another investor without doing any work. You won’t earn as much as the rehabber, but you will realize your gains quickly.

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Flip Strategy #5: Pre-Construction

In very hot real estate markets, prices appreciate up to 2% per month. If you do things right, you can put a contract on a preconstruction home or condo, then pass it on to someone else when development is complete. If the development takes 12 months to complete and the price of the condo is $500,000, you could earn $100,000 or more in one year! Of course, the reverse is also true: you could end up losing money if the local economy stagnates and you end up with a worthless condo that you can’t sell for more than you paid for. Use this approach very carefully…

Flip Strategy #6: Exploration

The Scout is an information collector, so it’s not technically a proprietary flipper. It is the “bird dog” that finds potential deals and sells the information to other investors. Many people start out as scouts for other investors because you don’t need cash or prior knowledge to search for distressed properties. The Scout finds a property for sale, collects the necessary information, and then provides this information to investors for a fee. The fee will vary based on the price of the property and the earning potential. The Scout can expect to earn between $500 and $1,000 each time he provides information that leads to a purchase by another investor.

Flipping Strategy #7: Illegal Flipping

OK, I’m not advocating this approach, because it’s illegal. Illegal property sales schemes work like this: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. They do shoddy renovations on properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser, and mortgage broker conspire by submitting fraudulent loan documents and a false appraisal. The end result is a buyer who has paid too much for a home and is unable to repay the loan. Since many of these loans are insured by the federal government, government authorities investigated this practice and arrested many of the parties involved. As a result, the public perceives that flipping is illegal.

The fact is that “flips”, as I described at the beginning of this article, is NOT illegal. Loan fraud in the investment process is what is illegal, so don’t confuse the two. The other six ways to flip are very legal, very ethical, and very profitable!