Chances are, you’ve already heard of house flipping. You might even spend your weekend binge-watching one of the seemingly endless TV shows dedicated to the practice. But what about car flipping? Like house flipping, car flipping can be a profitable side hustle. Because of declining inventories and rising prices, it may be safer, less labor-intensive, and more profitable than house flipping.
Flipping a New Car Versus a Used One
If you’re considering learning how to flip cars, one of the first and most important decisions you’ll need to make is whether your first flip should be a new or used car. Though the basic goal is the same — to buy a car and quickly resell it again at a profit — the processes of flipping a new versus a used car can be quite different.
Flipping a New Car
When flipping a new car, you’ll have to find an in-demand and undervalued vehicle at a car dealership. It’s pretty unlikely that you will make a profit off a new car straight from the dealer.
After all, it’s estimated that new cars depreciate by as much as 30% the instant you drive them off the lot. Also, dealers can offer various payment options, including leasing and lower-interest auto loans. Few buyers can afford to purchase a new car outright, so if you’re looking for more money, trying to flip a new car purchased from a car dealer is rarely the way to go.
That doesn’t mean that it’s impossible to flip cars for profit. The most common strategy is to pre-order a vehicle from a factory in anticipation that the car’s market value will increase by the time it’s delivered. This can allow you to turn around and resell the car. If the car is worth more when you receive it than what you paid when you ordered it, you’ll get to pocket the difference.
Voila, there’s your profit — with little or no effort to prep the car for resale.
This sounds simple enough. But you’re taking a big risk because there’s no guarantee that new car prices will rise. Recent price spikes have been attributed to various causes, from the ongoing supply chain crisis to shrinking inventories and surging inflation and interest rates.
However, as inventories and the supply chain recover and/or if inflation and interest rates decline, you may well find that new car prices are shrinking as well. And that means that the car may be less valuable than your original purchase price once it has been delivered.
Flipping a Used Car
The unpredictability of the market is one of the most significant reasons why most experienced car flippers prefer used rather than new cars. When you flip a used car, you’re typically going to source it locally — either at a car auction or through a private seller. That means you won’t need to wait months to get your hands on the vehicle, so you don’t have to worry about significant declines in the vehicle’s market value.
In addition, with a used car, you’ll typically need to make a much smaller financial investment. Above all, your profits will depend not on gambling that car values will increase but rather on finding the right car and, in many cases, on making the appropriate improvements to add value.
The trade-off, of course, is that you will likely need to make at least some repairs or improvements to turn a decent profit. Thus, you’ll need to do your homework to ensure that any necessary repairs will be worth the time and expense invested.
Of course, you will also be taking the risk that you’re not investing in a money pit. Inspecting the interior and exterior of the car and taking a thorough look under the hood is essential if you want to avoid buying a lemon.
Understanding the Risks
As suggested above, a car flipping business is by no means risk-free. Much like house flipping, there’s no guarantee that you will even recoup what you invest, let alone turn a profit. However, like house flipping, if you do your homework, have a strategy, and learn the ropes slowly, you can cultivate a nice little side hustle.
The Risk of Not Recouping or Exceeding Your Investment
The key to car flipping success is understanding the risks and being proactive in mitigating them. The greatest risk is that your car won’t sell, or you’ll end up losing money on the flip rather than making it.
There are several reasons why this might happen. You might, for example, choose the wrong car for your market. Trying to flip a gas-guzzling SUV in an area where buyers only want a quality used electric vehicle is a pretty sure way to lose money fast.
On the other hand, you may be great at finding the perfect undervalued vehicle for your market but not so great at making judicious improvements. You might be so jazzed by the whole process that you end up tricking out the rig too much.
Too many “improvements” can end up shrinking your target customer base. You might even customize yourself right out of the market entirely. So be restrained, deliberate, and safe when it comes to adding features or changing the cosmetics of the rig. Know your market and aim for the average buyer in that target space.
Legal Risks of Title Floating and Beyond
Unfortunately, the risk of not selling cars at a profit is far from the only issue you want to be prepared for when flipping your first car.
If you’re not informed and cautious, you could lose a lot more than the cost of the car and its improvements. You could face significant legal fees and fines unless you ensure you have all your paperwork.
Variations in State and Local Law
However, the exact nature of the legal processes involved in flipping a car will vary from state to state. For instance, in some states, you will need to obtain a dealer license if you want to make a side hustle of flipping cars.
This often depends on how many cars you intend to flip in a year. In some states, you can flip as many as 12 cars a year without needing an auto dealer’s license. While others, even a single sale will require a license, particularly if stipulations limit or prohibit selling cars within a year of its purchase.
In addition to determining whether your state requires a car flipper to obtain a dealer’s license, you will also need to follow the proper protocols, as defined by the laws in your state, for obtaining that license. Some states require you to take a course. Others require you to have a designated physical space to store, display, and sell the vehicle(s).
Municipalities also often have laws regarding both the selling and the storing of cars. Local laws, for instance, may restrict the number of vehicles a person can have on residential property.
Failing to comply with state and local laws can subject you to legal fines, tax penalties, and other punitive fees. This is why it’s critical to research and ensure you adhere to all applicable statutes.
The Risks of Title Floating
One of the most significant legal risks you can take when flipping a car is title floating. This happens when a seller and/or buyer fails to complete — and file — a legal title of ownership on the vehicle.
Title floating is sometimes done when a prospective buyer needs additional time to pay the purchase price in full. Sellers may hold the title until the purchase is complete as collateral in case the buyer reneges.
However, buyers and/or sellers may also avoid filing a fully-executed title to avoid taxes and filing fees. No matter the reason, title floating is illegal in all states and is even a felony in some.
That’s why you must research the title before buying a car if you want to avoid putting yourself in legal jeopardy. Before transferring ownership, you fully execute that title in the new buyer’s name.
Finding the Right Car and Setting a Budget
Once you’ve understood the risks and are clear on the relevant state and local laws, it’s time to start flipping! Of course, it’s important to go about it correctly.
Research Your Market and Set a Budget
The key is to first profile your market. Presumably, you will want to sell cars locally, so you must understand what consumers in your area are looking for.
Consider, for example, how much the average used car buyers spend in your area and the average age and mileage of a used car sold in your target market. You should also research what kinds of vehicles and amenities are most desired in your area.
After you’ve learned as much as possible about your target market, it’s time to determine your budget for the car purchase and any necessary repairs or improvements. Base your calculations on buying and selling prices in your market and your personal finances.
Look For Likely Candidates
Once you’ve thoroughly researched the market and set a budget, you can begin casting for a worthy candidate. Your best bet for used cars is to research local car auctions and classified ads. You might also do a localized search on sites like Craigslist or eBay Motors. Don’t forget to go low-tech as well: take a drive around your neighborhood and look for “For Sale” signs!
When you’ve found some likely candidates, go home and crack the books. Research the authorities such as Edmunds and Kelley Blue Book to determine how to accurately value the car. Remember to factor in things like age, mileage, general condition, and even color.
Bear in mind, as well, that valuations will vary according to region, so try to determine what the actual value of the vehicle would be in your area. When you find a vehicle that is both within your budget and undervalued, it’s time to zero in.
Examine the Car Before Negotiating or Bidding
If you’re thinking of buying a vehicle at auto auctions, make sure to inspect it thoroughly before purchasing. You’ll want to consider the vehicle’s interior, exterior, and internal parts.
Notice any excessive wear and tear on the interior, such as significant stains or tearing of the vehicle’s upholstery. Check for any lingering odors that can be an immediate deal-breaker for a prospective buyer.
Likewise, significant dings, scratches, dents, or rust on the exterior may be difficult and costly to repair and deter buyers before they even get past the ad photos.
In addition to assessing the vehicle’s interior and exterior, you must also evaluate conditions under the hood. Does the engine seem clean and well-maintained? Do all hoses appear to be in good condition? Are oil levels on point?
Even if you cannot give the vehicle a test drive, which is likely the case at an auction, this small checklist can provide insight into how well the vehicle has been maintained. On the other hand, if you’re buying the car from a private seller, it’s a good idea to insist you take it for a short spin. The seller’s reaction to this request alone can give you a good hint as to whether they’re being forthcoming about the car’s overall condition.
If, after these assessments, the car still looks promising, there’s one final thing to check: the vehicle identification number (VIN). This can help you determine if the car has any recalls or whether there are any essential updates. This will help prevent any nasty surprises (and unexpected costs) when you’re prepping the car for resale.
Getting the Ready for the Flip
After you’ve found the perfect car, settled on a price within both your buying and improvements budget, and gotten the title free and clear, the real work can begin. This is the time to make the judicious improvements that buyers in your market will be looking for.
Remember to stay within budget, though, to maximize your profit potential. Be sure to prioritize the repairs and improvements that will mean the most to your target market while also giving you the greatest possible return on your investment. If your vehicle is especially well-suited for a niche market, then capitalize on that in your targeted advertising strategy. For instance, if you’re selling a big SUV that’s perfect for large dog owners, why not add a few inexpensive safety features for pet parents looking for a vehicle to transport Fido in?
After the car is ready to meet its new owner, it’s time to brush up on your sales skills, including drafting multiple ads tailored to a different but viable buyer demographic. For instance, the features you emphasize in an ad directed at a young single mother will differ from those drafted for a retiree or a college student. Be truthful but be targeted and specific in your ad.
No matter who your ad is meant for, it’s imperative that you provide numerous high-quality photos to attract prospective buyers. Make sure that you provide clear, comprehensive views of all four sides of the exterior and interior views in front and back, with clear shots of the upholstery, floorboards, and dashboard.
It’s also a good idea to take a few pics under the hood to show buyers the engine’s condition. To sweeten the pot, you might also provide closeups of any distinctive features, such as chrome wheels.
Closing the Deal
Once you’ve posted your ads and begun engaging prospective buyers, due diligence is a must. Before you make any deals, make sure you learn as much as you can about your prospective buyer. Ideally, cash, money orders, or a certified check will be your safest bet.
As you close the deal, ensure that all the requisite fees and taxes are paid, the transfer of ownership is filed, and the title is legalized, free, and clear in the new owners’ name.
The Takeaway
Car flipping is an increasingly popular way to earn a little cash. Indeed, it can be a profitable side hustle for those who know what they’re doing and who are willing to invest a little time, effort, and money into doing it the right (and legal) way!
