Legal N Illinois

Real estate wholesaling in Illinois: An investment strategy under scrutiny

Real estate wholesaling in Illinois: An investment strategy under scrutiny,ph1

An investor negotiates a contract to buy a piece of real property, finds another buyer willing to pay more for it, and then assigns his or her interest in the parcel to that buyer for a fee. That, in a nutshell, is what is known as “wholesaling,” a real estate investment vehicle most commonly associated with distressed properties. When it works, the risk is low and money is easy, but many investors are asking: is it legal in Illinois?

Technically, it is, but wholesaling is now—more than ever—closely scrutinized and heavily regulated following the recent amendment to the Illinois Real Estate License Act of 2000 (RELA). Cutting to the chase, only licensed real estate brokers in Illinois can now wholesale more than one property in the state within any given 12-month period.

It is no surprise that, for years, fledgling real estate investors have latched onto the wholesaling strategy. This is so because it allows for market participation with little to no up-front investment. That being said, the low barrier to entry has resulted in a large number of wholesalers with minimal (if any) training or education in real estate, thus creating an environment that can permit—or even nurture—questionable ethical tactics.

This wholesaling landscape had Illinois legislators wondering if certain investors—the vast majority of whom were inexperienced and not licensed real estate agents—were actually brokering deals in an unregulated environment at the expense of non-investor property owners and prospective purchasers. Given the recent amendment to the RELA, the Illinois legislature seems to have answered in the affirmative.

The key language of the RELA, as amended, generally defines a broker as an individual or entity—other than a residential leasing agent—who, on behalf of another and for compensation (or with the intention or expectation of receiving compensation):

“…engages in a pattern of business of buying, selling, offering to buy or sell, marketing for sale, exchanging, or otherwise dealing in contracts, including assignable contracts for the purchase or sale of, or options on real estate or improvements thereon.”

The RELA goes on to state:

“For purposes of this definition, an individual or entity will be found to have engaged in a pattern of business if the individual or entity by itself or with any combination of other individual or entities…has engaged in one or more of these practices on two or more occasions in any 12-month period.”

This legal-speak can be translated as follows: an Illinois real estate investor is now acting as a broker—and therefore must have an active real estate license—if he or she wholesales more than one property a year. As otherwise stated, anyone brokering multiple properties within any 12-month period without proper licensing is breaking the law. And that comes at a price: pursuant to the RELA, such illegal wholesaling subjects the offending investor to fines of up to $25,000 for each transaction beyond the one permitted annually by statute. Of note, the RELA does not explicitly use the word wholesaling, but the limitations are otherwise clear.

The upshot of the recent amendment is that wholesaling is not illegal per se in Illinois, which is what some misinformed investors have believed since the legislation became law. Nonetheless, the practice has been greatly restricted. For those interested in leveraging this investment strategy, remember that you must be a licensed real estate agent under the oversight of the Illinois Department of Financial and Professional Regulation to do so.

About the author

Bryan Johnson is a partner at Michelman & Robinson, LLP, a national law firm with offices in Los Angeles, Orange County (California), San Francisco, Chicago and New York City. He’s a powerhouse litigator who also routinely represents real estate developers and investors in all aspects of their businesses. Bryan can be contacted at bjohnson@mrllp.com or by phone at (312) 706-7762.