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TheStreet Open House

Profits? It's Not That Flippin' Easy

NEW YORK ( Zillow ) -- It's tough to resist the entertainment factor in those reality TV shows like "Flip That House." But here's a little secret you may not know: Not everything on TV is as it seems.

In fact, I would guess that based on my experience of watching people try and flip properties for profit, 90% who try it once never attempt it again.

I'm not saying it isn't possible for this to be profitable, and I know people who do it full time and do make money at it. But the odds are highly against the average person succeeding. However, if all those reality TV shows have piqued your interest, here are a few items to consider if you want to attempt this strategy.

Buy Low, Sell High
First, you will have to buy a property at significantly below market value or sell it above market value to make money. If you buy it and sell it at market, you will lose money due to commissions, time, and renovation costs. So your best bet is buying a property below market value. That's not simply below what it sold for four years ago, it's below what is the current market value after taking into account all the distressed property sales in the area. And if it's a decent property, you're probably going to be fighting many other individuals trying to buy the same house. And when lots of people are vying for one piece of real estate, the price gets bid up and you probably are going to pay market value.

Recouping Value
What about adding value with a renovation? While there is no question you can add value by renovating a property, you probably will not add more value than the cost of that value. (Check out the Hanley Wood estimator, especially "cost recouped" column. You might put in a $20,000 kitchen that only adds $15,000 in value. More than likely you will go way over budget on the rehab and spend way more than the value you add.

Transaction Costs
Another tough challenge is the costs on both sides of your flip. There are significant transaction costs on the buy and sell. Probably 3-to-5 percent in costs when you purchase property, and up to 10% when you sell property. So you really need to sell the property -- and this is without regard to any rehab costs or holding costs -- for about 20% greater than you paid. That's just to break even.

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