July 27, 2005 -- Fueled by skyrocketing home prices and rock-bottom interest rates, "flipping" homes -- buying, sometimes renovating and then quickly reselling -- has become to this decade what dot-com stocks were to the 1990s.
Studies show about 30 percent of homes purchased today are considered an investment. Nationwide, home values have appreciated 20 percent in the last year.
While flipping can bring big financial rewards, it's also very high-risk. New York real estate broker Barbara Corcoran offers some specific dos and don'ts if you plan to speculate in real estate.
Know the neighborhood. It's just plain stupid to invest in a neighborhood you know nothing about. Find out about schools, crime rates, community organizations and area businesses.
Find the worst home on the best block. It will often make the most money.
Surf the Web for research. Visit www.usahud.com and www.foreclosures.com.You can find underpriced homes that banks or the government want to unload.
Join a real estate club. It's easier to come up with the cash, take a risk and share information if you are in it with other people.Visit www.meetup.com.
Budget for surprises. With the small window of time offered in foreclosure sales, you usually can't get in to see the property. You may be left guessing what improvements may be needed, and you might get stuck paying back taxes, mechanic's liens or second mortgages.
Don't quit your day job. Property flipping is not a hobby, but can be a second job. There are a lot of sharks out there that do it full time and they are your competitors.
Don't overdo renovations. Be realistic about potential profits and make renovations accordingly. Putting in too much money on a dump or a house in an "undesirable neighborhood" is like throwing money down the drain.
The Bottom Line
You can make a quick return. In many cases, you can secure a home and a buyer before you actually close. You divert ownership and pocket the difference right away.
The lending party is over. Financing is not as easy anymore -- in fact, the federal government has warned banks to curb their lending. And there's the ever-present risk: If the market takes a dip before you can sell, you lose.