Toys R Us

Jim Sheppard combed store shelves last week to find the hottest toy of the season: the Disney Frozen Castle & Ice Palace Playset. But it wasn't for a Christmas gift for the children in his life.

Instead, Sheppard, who lives in Hebron, Ky., bought the $119 playset to list in his online store at Amazon.com, where the plastic, 2-in-1 palace replica was going for more than $250, at least double the original price. The toy sold in less than a day.

Hitting brick-and-mortar stores for deals and then selling the items online -- a practice called retail arbitrage -- is one way Sheppard regularly runs his online store.

He knows he's not the only one. While searching for the play set at the brick-and-mortar outlet, Sheppard saw two other people grabbing deals for their Web stores. The telltale sign was their shopping carts.

"When you see somebody has three carts full of the same item -- OK, they are not getting it for their kids," he said.

Likely unknown to many Amazon shoppers, the world's largest online retail site isn't selling items just from its warehouses. There are also more than 2 million independent sellers from whom you can buy products. Their job: help Amazon.com maintain its wide selection of goods. About 40 percent of the products consumers purchase on Amazon come from these small-timers, some of whom buy their products straight off the shelves of retail stores.

Those who do often find big profits when items are in high demand or simply out of production. Or during the holiday shopping season.

Sometimes, products are so coveted that a seller can buy an item for $2 or $5 and sell it for $100, said Paul Cole, marketing director at SellerEngine, a company that provides software tools for resellers. One of SellerEngine's most popular tools is called "Profit Bandit," a smartphone app that scans an item in a retail store and tells you what riches await on Amazon. The app has been downloaded more than 30,000 times.

"It's hard to believe that you can walk into Walmart and find something cheap there that then you can turn around and sell on Amazon and make a profit, but it's quite achievable," he said.

Shoppers are more likely to notice price-gouging during the Christmas holiday shopping season, when hard-to-find toys are marked up well beyond their original prices. Remember Tickle Me Elmo? The $28.99 talking plush toy went for as much as $1,500 by the end of year in 1997, according to a People magazine story at the time. But arbitrage happens all year round. Some sellers do it as a part-time hobby, while others have built a full-time business out of the practice.

The items you buy may be straight from the clearance rack of a Walgreens or Target. Some sellers squirrel away their stash until they can get the best price.

"They buy the Legos and then sit on the Legos for a year or two, and then sell them for 10 times what they paid," Cole said, adding that some users wait until a product is offered with a coupon. "There are stay-at-home moms who are at the grocery store: They're not making a million dollars a year, but they can make a few thousand dollars." And they do it simply by scanning with the app.

Retail arbitrage is not a new concept, but sellers say they've noticed more people getting involved. So many have started selling that Katie Patton, an independent Amazon seller from Dayton, Ohio, has posted arbitrage tutorials to a YouTube Channel filled with online-retail tips. She's even co-founded a group with YouTube celebrities to help others follow in her footsteps. Combined, the Resellers Society, as they call themselves, have more than 61,000 subscribers on YouTube.

On Patton's channel, she teaches would-be arbitragers everything from what items are the easiest to profit from to the best way to price items. In one video, she explains how it's best to avoid items Amazon sells on its own, since the online store is an aggressive competitor.

She once bought moon shoes from a local store for $25 a pair and was able to sell them for $85. She sold six pairs within one week. She was enjoying her profit until Amazon started selling its supplies for less.

Navigating what works and what doesn't is part of the draw for the 25-year-old, who started selling on eBay four years ago because she was looking for ways to make money online. She set up shop on Amazon a few years ago to take advantage of Fulfillment by Amazon, the company's storage and shipping service for sellers. Patton works out of her apartment and likes being her own boss.

"I work on my own and at my pace," she said, "and that's what I'm interested in."

That was the draw for Sheppard as well. He was a music professor until he found he could sell nearly anything online.

"I started selling random DVDs and video games I had laying around the house," he said. "When I ran out of stuff, I started sneaking and selling my wife's stuff that she never used, and then I decided, 'Wow, this is really neat.'"

Eventually, Sheppard moved on to other sources -- shopping at thrift stores, buying from distributors and, of course, buying stuff off the shelves at retailers' stores. He's now housing 8,000 items as he seeks online buyers.

He's been at it for just under two years and switched to doing it full time last summer. His wife also quit her job to work with him.

Still, arbitrage is not his ideal way to source his goods. He can get only a limited number of products by scouring stores. Sheppard instead dreams of a warehouse and of relationships with manufacturers. Eventually, he wants to start a music education nonprofit and he thinks his Amazon store will help him get there.

"It was in the beginning just a fun thing, and then we were making good money on it," he said. "A year and a half after, I decided I'm going to do this full time."