Is Wholesaling Real Estate Legal In Illinois?

The real estate market in the United States has seen some significant appreciation in the recent past.

An expanding real estate market (‘Stage 2’ noted in the graphic below) offers investment opportunities not usually viable/profitable when the market is in one of its other cycles. 

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With rapid appreciation, typically identified as a ‘seller’s market,’ the investment technique known as real estate wholesaling has become an increasingly popular investment technique. Real estate wholesaling in Illinois offers these benefits to investors–

• An entry into the real estate market with relatively little needed in the way of capital requirements. Real Estate buyers are required to provide an earnest money deposit (typically a percentage of the purchase price, at contract) that is held in escrow by a third-party to show good faith.
• Several strategies to exit the wholesale deal, including the double close.
• Wholesaling real estate allows a new investor to build a network of lenders, other investors organically, and most importantly, a list of end buyers, typically cash buyers, ready to invest.

Much of the recent uproar is voiced by a group of real estate agent professionals asserting that real estate wholesalers are violating Illinois license law.

Real estate wholesaling combines a) the wholesaling principle (a foundational principle of capitalism) in which business investors buy low and sell high, with b) the Principle of Equitable Conversion – the fundamental rights/beneficial interest awarded when the buyer and the seller execute a legally enforceable purchase agreement.

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These beneficial interests awarded to the buyer in the real estate contract can legally be transferred to a new buyer. This is accomplished by using the legal instrument known as an assignment of contract.

Wholesale investing resembles its cousin investment strategy – flipping houses. Each investment strategy is designed to generate a profit quickly. Although, it is noted that the ‘fix and flip’ often requires significantly more money and time to complete.

Each investor searches for a reduced-priced property, which is being sold by a highly motivated seller (i.e., someone facing foreclosure). Wholesale properties can be a rental or investment property or a primary residence but must be well-priced in comparison to current market values.

• What Do You Need To Know About Wholesaling Houses In Illinois?
• Is Wholesaling Real Estate Legal In Illinois?
• What Are The Wholesaling Laws In Illinois?
• Do You Need A License To Wholesale Real Estate In Illinois?
• Is Virtual Wholesaling In Illinois Legal?
• Is Double Dry Closing In Illinois Legal?
• How We're Wholesaling In Illinois
• Final Thoughts

What Do You Need To Know About Wholesaling Houses In Illinois?

Illinois, known as the Land of Lincoln, was admitted to the Union as a state in 1818. Illinois covers nearly 58,000 square miles, which is about half the size of Italy. Illinois’ total area includes about 4% water.

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The Mississippi River defines Illinois’s borders with Iowa and Missouri. Illinois is located in the Midwest and has the 5^th largest GDP (Gross Domestic Product) of any state. In addition, Illinois’s population is the sixth-largest –

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The five largest cities in Illinois are –

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The capital of Illinois is Springfield, which is centrally located within the state. Springfield ranks as the state’s sixth-largest city, with a population of 115,000. The northeastern area of Illinois is the most densely populated region and home to Chicago, with its main airport – O’Hare recognized to be one of the busiest in the world.

The following includes a list of the largest trade & real estate professional organizations in the state of Illinois that are dedicated to the profession of real estate. Each of these state professional associations is a member organization of the National Association of REALTORS (NAR) –

• The Illinois REALTORS (IR)

The IR is one of the largest trade organizations in the state. It represents approximately 50,000 members across the state. The Illinois REALTORS Association seeks to advance the real estate profession & protect the property rights of owners in the state. The IR offers education, outreach programs, ethics accountability, and advocacy, among others.

• The Mainstreet Organization of REALTORS (MOR)

With roots that reach back to the 1920s, the Mainstreet Organization of REALTORS’s current version was developed in 2007. The MOR’s 18,000+ members serve more than 200 communities across Southern & Western Suburban Cook, Lake, and DuPage Counties.

• The Chicago Association of REALTORS (CAR)

Established in the 1880s, the CAR is metropolitan Chicago’s voice for the real estate community, with more than 17,000 members from many facets of the real estate market. The CAR offers market resources, member services and seeks to influence the city and suburban Chicago locations with outreach programs.

• The North Shore-Barrington Association of REALTORS (NSBAR)

The NSBAR supports the real estate community and professions throughout the Barrington and North Shore communities. The North Shore Barrington Association offers a variety of member benefits to facilitate the growth of the local real estate market.

• The Greater Gateway Association of REALTORS (GGAR)

Established in the 1940s and headquartered in Glen Carbon, the GGAR is among the largest professional organizations serving the Metro East Area. More than 1,400 real estate brokers, agents, and professionals are members of the Greater Gateway Association of REALTORS.

The Illinois Division Of Real Estate

The Illinois Division of Real Estate (DRE) is housed in the IDFPR – the Illinois Department of Financial and Professional Regulation, along with –

• The Division of Financial institutions.
• The Division of Professional Regulation.
• The Division of Banking.

The Division of Real Estate’s mission is to safeguard the public by ensuring the real estate profession requires licensing to practice in the state. IDFPR is now digital, and they, therefore, do not issue paper licenses. 

Those interested in becoming a licensed agent in Illinois (with an appropriate brokerage sponsorship) might consider reviewing the requirements in the Illinois State Real Estate Examination Program’s Candidate Handbook.

According to the Real Estate License Act of 2000, the DRE issues three types of real estate licenses –

A Broker’s License

A Managing Broker’s License

A Residential Leasing Agent

But dual licensure in Illinois is not permitted, noted, as follows –

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Illinois Real Estate License Reciprocity

According to the IDFPR, the following states have a reciprocity agreement with Illinois. The IDFPR offers this reciprocity guidance for these states –

• Colorado
• Connecticut
• Florida
• Georgia
• Indiana
• Iowa
• Nebraska
• Wisconsin

These rules apply to Illinois’s reciprocity licensing arrangements –

• The applicant must be actively licensed when applying.
• The applicant must pass the state portion of the Illinois licensure exam.
• The applicant must have an active broker/managing broker in Illinois.

It is also noted that Illinois is an ‘escrow state,’ which means that a real estate attorney is not required to close retail and wholesale deals or transactions, although an attorney is a prudent idea for those investors new to the market.

Is Wholesaling Real Estate Legal In Illinois?

Yes, under certain conditions, it is legal to wholesale real estate in Illinois.

Note that the Illinois Real Estate License Act of 2000 has been updated with revisions that address real estate wholesalers doing business in Illinois.

These legal updates were signed into a new law in August 2019 by the state Governor Pritzker. The law was effective upon signing. Most modifications to the current law were technical in nature (i.e., rules about referral fees) and unrelated to wholesaling properties; however, the definition of a broker in Illinois has been updated to include wholesaling.

Preliminarily, it is important to note how Illinois law defines the real estate wholesaling business. According to Illinois State law, wholesaling involves the PRACTICE of entering into a contract and then assigning the contract to another buyer quickly – for a profit.

The operative word in that definition is PRACTICE, which, according to the updated legislation includes any individual/entity that transacts more than one wholesale deal per a 12-month period.

So, while the playing field for real estate wholesaling in Illinois narrows significantly with this updated legal provision – it is still perfectly legal to wholesale one property each year and without needing a real estate license under the provisions of RELA 2020.

What Are The Wholesaling Laws In Illinois?

The Illinois Real Estate License Act of 2000 was ‘sunsetting’ at the close of 2019. As such, there have been recent amendments to Illinois license laws (RELA 2020, from Public Act 101-0357) that regulate real estate activities in Illinois. The goal of the RELA is to enhance consumer protections and strengthen regulations for training and professionalism.

A quick summary of these recent updates is offered by the Illinois REALTORS association.

New Wholesaling Law In Illinois

The exact language of a broker has been updated with this new law. The purposes of this definition are to include wholesaling within the services defined as needing a broker’s license, as follows -

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According to this Illinois Act, unprofessional conduct (unethical or dishonorable) is that which is done with an intent to harm or defraud. The specific amended provision includes seventeen potential actions considered unprofessional. The possible consequences for unlicensed individuals are as follows -

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Do You Need A License To Wholesale Real Estate In Illinois?

No, if you stay within the legal boundaries established by Illinois state law.

The law in Illinois allows for non-licensed individuals to wholesale one real estate transaction in a 12-month period. However, if you will be conducting more than one real estate transaction a year you will be required to have a broker’s license (realtor’s license) to move forward with this strategy and continue wholesaling houses in Illinois.

Getting the right license will definitely require a little more homework and you must be sure to comply with the Illinois Real Estate Brokerage Licensing Act’s ethics rules and consult with a real estate attorney when needed.

Is Virtual Wholesaling In Illinois Legal?

As technology continues to develop, these advances have begun to transform the ways in which the real estate industry conducts business. According to the National Association of REALTORS^® (NAR 2020 Home Buyer/Seller Generational Trends P.51), 84% of home buyers used the internet at some point in their home search. 

On average, 93% of buyers used an online website to search for a home to purchase. Although, as one would expect, the percentage of online usage inversely relates to the age of the homebuyer - declining as the homebuyer’s age increases.

Real estate investors now conduct wholesale deals on the internet through a process known as virtual wholesaling – with the entire transaction done electronically.  Virtual wholesaling permits an investor to complete a wholesale deal that taps a market previously out of reach.

Illinois investors, who want to wholesale more than one property per year (which is the maximum allowed by state law), might want to consider virtual wholesaling (i.e., transacting in other states). Illinois wholesalers may operate their businesses remotely in other real estate markets, which do not have restrictions on the number of deals they may conduct, even as they are residing in their home state.

Virtual wholesaling has become a viable alternative to doing business without violating license law.

Is Double Dry Closing In Illinois Legal?

Illinois is a ‘wet funding state (also known as table funding),’ which means that all conditions must be met on the day of closing when funds are distributed, and the title and mortgage paperwork must be finalized.

The closing process is the moment in time when the parties to the contract meet (virtually or in-person) where the property ownership is exchanged for the agreed-upon price.

The dry closing occurs when all the contract’s provisions have all been met, EXCEPT that the funds for the purchase are not available. Technically, this would cause a breach of contract; however, the parties to the agreement can agree to move forward with the closing – agreeing to anticipate the funds arriving after the fact.

In other words, a ‘dry closing’ occurs due to a delay in funding. And while the transaction’s sellers and buyers would likely prefer a ‘wet closing,’ dry closings can happen in these situations –

• The lender has a delay
• Buyers still have outstanding mortgage loan approval conditions
• Sellers have yet to resolve the agreed-upon property condition

A ‘dry closing’ offers a way to prevent the above-noted conditions from killing the transaction. To avoid the breach of contract, the dry closing offers an agreement by both parties that the sale will be finalized with outstanding conditions resolved shortly after. Certain states are dry closing states in which all transactions are conducted this way.

• Alaska
• Arizona
• California
• Hawaii
• Idaho
• Nevada
• New Mexico
• Oregon
• Washington

The double closing – technically two closings occurring back-to-back is a type of strategy that facilitates the closing process for wholesalers. The double closing includes the following –

• Two independent transactions for one property
• The wholesaler is the buyer in the first closing and the seller in the 2^nd closing
• Title legally passes through all through parties
• Two sets of closing fees

Working with an experienced real estate lawyer, although not mandatory, is the most direct way to make sure you, as the investor, are receiving accurate legal advice and full protection under the law.

How We're Wholesaling In Illinois

The founders of Real Estate Skills have been wholesaling and flipping houses across the nation for over a decade, including Illinois! Here's a breakdown of one of our favorite virtual real estate deals from Chicago, IL.

Chicago Wholesaling Case Study

An investor friend of ours who was looking to develop this property brought the deal to us. It was an abandoned triplex on a multifamily zoned, triple-wide lot in an excellent location on the south side of Chicago. Our friend's issue was that the seller was ready to sell, but he needed about 30 days' time to raise around $2,000,000 so he could demolish the existing structure and build 9 luxury condos with an after repair value (ARV) of $3.6 million.

Under certain conditions, we agreed to buy the property from a wholesaler our friend put us in touch with, to then resell it back to our friend as soon as he raised the money to develop the property. He offered to buy it back from us for over $100,000 more than what we'd pay for it since he'd be making over seven figures of profit after the development was complete! (Making a $100k wholesale profit in 30 days is pretty exciting, right?)

We bought the deal from the wholesaler for $385,000 cash and closed in 10 days. The wholesaler pocketed a cool $70,000 assignment fee and the seller kept the rest of the proceeds.

How'd we fund it? We brought in a combination of two different equity partners. The first equity partner funded 85% of the total investment, in exchange for roughly 50% of the net profits.  The second investor agreed to loan us the remaining 15% and we offered to pay them a double-digit interest rate on their money in use. This interest accrued, meaning we had no monthly payment obligations during the hold period! All in all, we bought the property using none of our own money!

Long story short, our investor friend was dragging his feet and couldn't raise the money within 30 days, so we gave him some additional time.

Meanwhile, we hired a law firm to split the large lot into three equally sized parcels, which jumpstarted the development process. Remember, time equals money in the real estate business, so the further you can move a project down the development process, the more valuable it becomes.

After 90 days, we decided to list the property on the MLS since our friend was still unable to raise money for the development. After less than 30 days on market, we received a full-priced cash offer for $592,500. After closing costs and interest paid to our investors, we netted around $182,000! We never saw the property in person, inspected it, or even had to leave the comfort of our own homes. There was no rehab or management of contractors, just working with an attorney's office to split the lots and a ton of desktop analysis on the front end.

This was more of a "wholetailing" strategy since we closed on the property and listed it on the MLS. We love this case study because not only was the annualized ROI in the triple digits, but it's a great example of working smarter, not harder. We made more money in one deal than we used to make in multiple years of high-paying, full-time work. And of course, it's 100% legal.

Final Thoughts

Savvy investors do not try to control the market. New investors learn this valuable lesson the hard way.  Instead, savvy investors follow market trends adjusting investment strategies to match the market conditions. 

They recognize opportunities as market metrics shift. With the digital landscape, the practice of real estate wholesaling (and virtual wholesaling) has begun to explode across many markets.

Real estate wholesaling can be a viable and profitable investment strategy if the wholesaler stays within the state’s legal boundaries and receive proper training. Illinois state law draws a strict limit with regard to wholesaling real estate in the state.

For real estate wholesalers in Illinois – it is one and done unless you want to violate license law or obtain a real estate license.

Real estate investing offers no guarantees, and no single aspect can generate success. This is one of the reasons entrepreneurial types often succeed in the real estate market– they think fast on their feet, act professionally, and operate from a platform of integrity.