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Four New Rules for Flipping Homes

If flipping a house in today's real estate market seems riskier than trekking with a ragtag band of hobbits to Mordor, take heart: Home flippers can still find plenty of opportunities, though they're not entirely without risk.

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CNBC.com

It may seem counterintuitive to invest in real estate when the housing market is in its darkest hour. But in fact, it may prove to be the most optimal time for such a venture. According to RealtyTrac, a seller of mortgage default data, the foreclosure rate reached its highest level in 50 years in 2007, and has since risen to record numbers in the third quarter of 2008. Real estate investors are finding bargains everywhere, particularly in formerly hot housing markets such as Florida, Nevada and California.

Angie Hicks, founder of Angieslist.com, a compendium of consumer-service reviews, says a recent informal poll of list members found that of those who had purchased a home in foreclosure, 29 percent of respondents had done so within the last six months. Of those, 95 percent said their purchases were profitable.

"The key ... is doing your research and knowing what you're getting into," says Hicks. "Know the area you're buying, the market, how the price compares to the neighborhood."

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The horizon is flush with opportunity for those with the money and know-how to snap up a bargain and flip it, but to make it pay you first must understand how the rules of the game have changed.

1. Stick with familiar territory
Charlotte, N.C., resident Emma Allen, CEO of Emma Allen Enterprises and an experienced flipper, says there's lots of inventory on the market.

"The prices that were recently so outrageous are down again, so those with capital or access to credit will find it's a very good time to pick up bargains in the marketplace," Allen says.

Allen finds those bargains mostly in neighborhoods where she would like to live. "Properties I've added lately are near our downtown area, with an urban feel to them," Allen says.

Areas undergoing urban renewal present good investment opportunities. Allen, who owns a home on a large, popular lake, also thinks waterfront is a win-win on a flip, but she echoes Hicks' caution. "If you're not terribly experienced, stick with what you know -- just like buying stocks," says Allen.

The dreary economy has resulted in increased inventory, but it has also affected financing. Allen and other veteran home flippers say the days of flipping on a thin wallet have officially ended.

2. Check your capital
It seems elementary, but in the recent past many flippers found themselves in trouble because they had not correctly calculated the amount of money it takes to finish a flip and market it. Allen says investors should figure out how much money they'll need right upfront, and not just the purchase price. It translates to being realistic about renovation costs and the hidden expense that gets so many in trouble: carrying costs.

"You may have carrying costs on the books longer than you think. The days of the 60-day flip are gone," Allen says.

Carrying costs, or house payments you must make until you sell the property, can subtract thousands from the bottom line. And even though you are technically chipping away at the debt incurred when you purchased the property, the interest you're paying at the top of the flip probably won't be earned back in the sale. Those payments come right out of your potential profit.

What about financing in general? While it's certainly more difficult to obtain a bank loan, it still can be done. But having a stash of cash is still important. Veteran Southern California flipper and interior designer Nicole Sassaman advises would-be flippers looking for a loan to "be sure to have 25 percent down and 18 months of reserves in the bank."

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