On the first of January, 2020, the State of Illinois passed SB1872, and effectively outlawed real estate wholesaling in Illinois. Undoubtedly, many investors are scrambling to find a business model that fits the new law. So, today we will answer three questions: First, what is Real Estate Wholesaling? Second, why did Illinois make wholesaling houses illegal? Third, how can a wholesaler change his or her business to keep operating? Finally, we’ll discuss how to get started wholesaling real estate for beginners. This article should equip you with the understanding you need to meet the laws in Illinois.
Updated on September 9, 2021
What is Real Estate Wholesaling?
A wholesaler purchases a property from its owner and then sells the purchase agreement to another investor at a higher price. In doing so, wholesalers earn money on both ends of this transaction. They get paid from the seller who is typically in desperate need of cash or is escaping foreclosure. At the same time, wholesalers make a profit on their markup of the property.
Another definition is from Investopedia. It defines wholesaling houses as buying distressed property from a seller and then selling it again without improving its value. Often, wholesalers do both sides of the transaction on the same day, at the same time! Wholesalers will buy property in probate or foreclosure and then profit on their good deal by finding a new buyer. To be sure, wholesaling is an extremely short-term strategy carrying the high-risk and high-reward of other short-term investments.
Why did Illinois Make Wholesaling Houses illegal?
The idea behind wholesaling is to purchase a property from the owner, and then sell it quickly. In doing so, wholesalers can make large profits with little money down. This activity was especially popular during the housing crisis of 2008 when many homeowners were forced into foreclosure after they became unemployed or suffered hardship. The wholesalers work with the homeowners and buy their homes at a discount to market value. Then, wholesalers quickly resell these properties for profit by finding investors who want to rehab them or rent them out. The problem is that wholesaling encourages people to take advantage of people in a bad spot. If we avoid that, nobody gets hurt and you shouldn’t get sued.
In short, wholesaling houses is an asset-stripping strategy. Primarily, this is why both the Illinois Legislature and the National Association of Realtors have a problem with it. To put it differently, wholesaling lets the investor take the excess value out of the asset for themselves. Even more, this means that the wholesaler takes equity from the family going through tough times that must sell the property. But, this alone was not enough to get wholesaling outlawed.
How Wholesaling Houses got People into Trouble
Illinois prohibited wholesaling for a few reasons. First, wholesalers often buy properties from homeowners without doing any type of due diligence to determine the condition or value of that property. In many cases, wholesalers see an opportunity and jump on it. Often, with little regard as to whether that home will be habitable after they purchase it! Second, wholesalers are often not licensed real estate professionals. This means wholesalers do not follow the same rules as honest, hard-working Realtors who play by the rules. Those brokers sometimes spend years on their education before they can call themselves a full-fledged Realtor! Third, wholesalers frequently defraud homeowners and there are many complaints of that.
So, Illinois, earlier in 2020, passed the first laws in the country that truly restrict wholesaling. Illinois’s existing law states that anyone facilitating a real estate transaction for compensation must be licensed. But, new rules state that compensation can mean finder’s fees, referral fees, or even the profits from the transaction itself. While there is one free legal transaction per year, the question is how do we keep up this business model?
How do I Invest as a Wholesaler?
On one hand, you might think to become a licensed Real Estate Broker, but you would be dead wrong! Real Estate Brokers in Illinois have a duty to advise their clients of the highest and best value of the property. So, while you can sell the property like this, you aren’t allowed to bid for less than it is worth. Obviously, this sunk the entire business model.
There are a few ways wholesalers can keep up their business model, but it will require some homework. First, make sure that the wholesaler has the right license as an Illinois real estate broker! This means making sure you have your broker’s license needed for wholesaling houses in Illinois. Next, wholesalers must comply with all Illinois laws that govern real estate agents. That includes the income disclosure law, and a wholesaler must ensure they follow all of these restrictions! Next, only work with people who have the same legal requirements as you do so you can be compliant together. And finally, make sure your investor’s contracts comply. Otherwise, you can be sued by the Illinois Attorney General’s Office.
No matter what, wholesalers must make sure that they are complying with all laws and regulations in the State of Illinois! Otherwise, you could be liable for monetary damages or even criminal charges if caught by authorities! So take your time to ensure you’re doing everything right before getting started in wholesaling houses.
Wholesaling Real Estate for Beginners under SB1872
In 2020, Illinois decided to crackdown on wholesaling businesses. In fact, they passed the first laws in the country that truly restrict wholesaling under SB1872! This means that wholesalers cannot operate without a license and must comply with all of Illinois’s state rules for brokers.
As I said earlier, to be compliant as a business model going forward, you will need to have your broker’s license so you can continue wholesaling houses in Illinois. Without a broker’s license, you can only do one per year. You must also follow all other licensing requirements including income disclosure law and following investor contracts. Yes, even if you’re not licensed.
I wanted to make sure that those who got here by trying to learn wholesaling real estate for beginners saw real knowledge of what to do to avoid risk. If you did get here by searching “wholesaling real estate for beginners” then I want you to know you need the A to B contract, a B to C contract, an assignment agreement, title insurance, and at least two separate attorneys to handle the whole transaction. You can expect to spend between $500 and $5000 on each deal of your own money and you should look to make 10% of the value of the home on the flip. That’s the best advice I have on wholesaling real estate for beginners.
Wholesaling Real Estate for Beginners Bullet Points
- One free transaction per year is legal
- Make sure you get your broker’s license if wholesaling houses in Illinois.
- Comply with the Illinois Real Estate Brokerage Licensing Act’s ethics rules.
- Make sure your investor’s contract follows new requirements.
- Only do business with those who have the same legal requirements as you.
- Don’t break any tax laws.
Wholesaling real estate for beginners is very profitable. When you are wholesaling houses you will find many challenges in the three-party transaction. Wholesalers will need to be extremely careful because if they do not follow the law in Illinois, they may get into trouble with authorities! Your best bet, as always, is to have a great lawyer on your team to help you navigate the waters.