Top Cities For Real Estate Flipping

Wasn't flipping houses a fad that ended when the real estate bubble burst? Actually, even in a depressed housing market, there are opportunities to make money in flipping. Investors are profiting by purchasing foreclosed homes, often at auction, fixing them up quickly and inexpensively, and reselling them.

But while just about anyone could buy and hold a property and quickly resell it for a profit during the bubble, in today's market it takes real skill to locate and purchase the right properties at the right price.

In Pictures: 5 Simple Ways To Invest In Real Estate

What Is Flipping?
Flipping refers to making a profit by buying and selling a property within a short time frame. That time frame can range from a week to a few months. The profit comes from buying the property at a significant discount and/or from a rapid appreciation in housing market values (the former is obviously more common in today's market). Flippers commonly need to make cosmetic changes to the home to increase its value, and experienced flippers may even undertake structural repairs or improvements. (For background reading, see Top 5 Must-Haves For Flipping Houses.)

Flipping is often glorified as a quick and easy way to generate income, but there are plenty of opportunities to lose money in the process as well. The home may not sell. It may not sell for as much as you'd hoped. The renovations may take longer or be more expensive than you anticipated. You may discover a hidden defect that makes the property expensive to repair or difficult to sell. Unforeseen factors, like a major nearby company closing its doors, can cause an unexpected tumble in area real estate values. In other words, it's not a sure thing. (To learn more, read 5 Mistakes That Make House Flipping A Flop.)

Real Estate Markets Ripe For Flipping
Home values declined in numerous metropolitan areas in the first quarter of 2010, according to the National Association of Realtors, and there have been reports that a large shadow of inventory is poised to enter the market in the coming months. However, there are some bright spots in the housing data that real estate investors shouldn't miss. These three cities have seen home prices increase every month for almost a year now, but still offer potential bargains in the foreclosure market.

1. San Diego
According to the Case-Shiller Index, San Diego has seen 11 consecutive months of home price increases. But RealtyTrac data for April 2010 shows that in the 92122 and 92104 zip codes, which include neighborhoods like University City, La Jolla Colony, and the area northwest of the San Diego Zoo and Balboa Park, foreclosures offer a savings of up to 46%.

The greatest difference between the average overall sale price and that of a foreclosed property was $95,750 in the 92115 zip code, the area surrounding San Diego State University. The area has a blend of condos and single family homes with an average list price of $329,500. Redfin data shows that the median sold price in this area was up 40.5% as of February.

Real estate investors should keep an eye on two troublesome indicators, however: San Diego's unemployment rate, which at 10.9% is 1.2% above the national average, and new single-family housing permits, which had significantly increased since last year as of April. New homes mean more inventory, which can lower prices.

2. San Francisco
The city by the bay has also experienced 11 consecutive months of rising home prices. Buying a foreclosure here can result in savings of up to 29%, with the biggest discounts in the 94107 zip code. This includes the Central Waterfront, Inner Mission, Mission Bay, Potrero Hill, South Beach and South of Market areas, which consist largely of condos.

The biggest difference between the average foreclosure price and the average sales price is in the 94112 zip code, where the difference is $59,673. The average sale price is $567,548, while $507,875 is the average foreclosure sale price. The 94112 zip code includes Bernal Heights, Crocker Amazon, Excelsior, Ingleside, Ingleside Heights, Mission Terrace, Oceanview, the Outer Mission, and a smattering of other areas. Most of the properties for sale in this area are single-family homes.

Like San Diego, San Francisco experienced 10.8% unemployment in recent months. It has also seen a significant increase in new single-family housing permits, with 830 issued as of April, a 51% increase since last year.

3. Los Angeles
Home prices in Los Angeles have been steadily increasing since May 2009 with only a small dip in March 2010, the most recent month for which data is available. The Los Angeles Times reported in April that house flipping is back in South Los Angeles (not one of the city's more desirable areas).

Numerous zip codes show high foreclosure rates. L.A.'s foreclosure rate of 0.38% is below California's average of 0.52% but above the national rate of 0.26%. The 90027 zip code, which includes parts of Hollywood and Los Feliz, shows the highest discount potential of up to 57%, while the nearby 90026 zip code, which includes parts of Silverlake, Echo Park and downtown, shows the greatest difference between the average foreclosure price, $407,500, and the average sales price, $506,714, a difference of $99,214.

The Los Angeles metro area is experiencing high unemployment (11.8% as of March) and has seen a 38% increase in new single-family housing permits since last year.

A Word Of Caution
Anyone interested in flipping still needs to have plenty of cash to buy the house, remodel it, and pay carrying costs like taxes, insurance, mortgage interest and utilities. Flippers should also be prepared to compete with investors looking for rental properties and sometimes with owner-occupants who are willing to put in some elbow grease or live in a less-than-ideal house to get a deal.

The end of tax incentives to buy a home and continued foreclosures could reverse housing market recoveries in some areas, and investors should consider the impact of a declining market on the purchase price they can pay if they hope to earn a profit. But for the adventurous and the industrious, it's still possible to make money in flipping.

Catch up on the latest financial news in Water Cooler Finance: Buffett Speaks Up, AIG Deal Collapses.