Flipping new cars can be a risky business – can you make money?

Flipping cars has been a side hustle for years as a way to earn a little extra cash. But in an era of rising used car prices and online vehicle ordering, the game has changed—and the margins are much higher.

Here’s how car flipping works: A person orders a car that is in short supply from the factory for a fixed price. When it arrives in a few months, the value of the vehicle will go up; because of the current car market, it can be sold profitably.

Yes, there are associated costs – sales tax and registration – which can be risky as you can’t guarantee the price will go up after you own the car. But it has become so popular that it has caught the attention of automakers, who are trying to outlaw the practice.

For example, Ford F,
+0.78%
According to Automotive News, the F-150 Lightning was a truck that sold out before production began and came with an agreement that the buyer would not resell the truck for at least a year (this add-on agreement was provided by the dealership) at your own discretion) Website Carscoops. Also, General Motors General Motors,
+1.84%
Resale in less than a year will void the warranty on the popular Chevrolet Corvette Z06, according to automotive website Jalopnik.

Look: Ford Raises All-Electric F-150 Lightning Prices Due to Shortages and Inflation – Here’s What a Pickup Truck Costs

The modern way to buy a new car

The trend these days is that highly anticipated models can be ordered online and built to buyers’ specifications. Buyers will have to pay a deposit, usually just a few hundred dollars, and they can turn down the car later if they change their minds.

Electric cars and hot new models, like the Corvette Z06 or the Cadillac Escalade-V, are prime targets for flippers because of slow rollouts and limited inventory.

more: Is a used car more expensive than a new car?this is what happened

success story

While some people buy cars for resale, not all car buyers do. Sometimes car owners get the idea of ​​flipping their vehicle because they see the price of the car going up and think, why not?

Contractor Kirk Dunn of Long Beach, Calif., took advantage of both flips. He saw the value of his Chevrolet Silverado pickup skyrocket, so he sold it to Carvana CVNA,
+15.46%
$3,500 profit. Over the next few months, the market has been hot, allowing him to buy two new trucks, then sell them for profit and enjoy driving newer and better models.

“I can’t even tell you how much time I spent negotiating and researching,” he said. “But it’s a game and it’s fun.”

Likewise, I drive a 2014 Volkswagen VWAGY,
+8.47%
The Jetta SportWagen cost me $13,000. I had no intention of selling it – until I realized that Carvana would give me $16,800, even if I put 30,000 miles on the odometer.

read: Used car prices climb again, but there’s some good news

risky business

While the current auto market is still hot, with electric car prices rising five times faster than gasoline cars, the fun may be coming to an end, according to a study by iSeeCars. In fact, used car prices have started to soften recently.

The average transaction price for a three-year-old car in July was $31,302, down 4.6 percent, or $1,526, from a peak of $32,828 in January, according to car research site Edmunds.

“Between you buy it and flip it, it’s a gamble that the price might settle down,” said Richard Arca, Edmunds’ head of vehicle assessment and analysis.

“It’s not going to last forever,” said Karl Brauer, executive analyst at iSeeCars. “The timing is bad and you’re going to get stuck with that new car or have to sell it at a loss.”

Then there are sales taxes and registration fees, which cut into your profits. For example, in California, these costs are $5,745 for a $50,000 vehicle. This is a big problem.

before you flip

Successfully flipping a car starts with having good insight into the market so you can buy low — and hopefully — sell high.

Start by looking up the value of the car you want to flip in pricing guides like Kelley Blue Book and Edmunds. Here are some extra tips from experts to help you decide if flipping is worth the risk.

  • Get estimates from online auto retailers such as Carvana, Shift, Vroom VRM,
    +4.49%
    and CarMax KMX,
    +0.09%.

  • Estimate the cost of all expenses and any work that must be done to the car.

  • If you’re looking to flip a used car, look for models that are well-maintained, have low mileage, and have few owners.

  • Make sure there are no fines or restrictions on selling the car you are considering buying.

  • Consider whether the money you expect to earn is worth your time and effort.

Finally, pick a car you don’t mind owning to flip in case the music suddenly stops and the market eventually cools down.

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Philip Reed writes for NerdWallet. Email: [email protected] Twitter: @AutoReed.

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