NEW LEGISLATION ALERT FOR REAL ESTATE INVESTORS: Wholesale Real Estate
NEW LEGISLATION ALERT FOR REAL ESTATE INVESTORS:
Wholesale Real Estate
By Tom Haught
In the last several years, a niche real estate strategy, known as wholesaling, or wholesale real estate, became very popular. Basically, Buyer A signs a contract to purchase a property. But instead of closing on that property, Buyer A sells and assigns the purchase contract to Buyer B. Buyer B ends up being the actual purchaser of the property. Generally, Buyer A would receive a payment from Buyer B for the assignment of the contract. Alternatively, if the purchase price increased, Buyer A would receive the difference between the original purchase price agreed to by the seller, and the increased price paid by Buyer B.
Was this strategy legal? That was always a bit of a gray area, but if done correctly, and with the full knowledge and consent of all parties, the transaction could be structured to be within the law.
As you might guess, realtors were not very happy with the practice of whole real estate with individuals like Buyer A. Realtors argued that Buyer A was actually acting as a realtor, without the requisite education, training, and licensing. Realtors feared that this wholesaling strategy was pushing them out of the market and taking deals away from them. They argued that many wholesalers were not informing the seller of the truth, which was that Buyer A had no interest in purchasing a property and there would only be a closing if Buyer A could assign the contract to a ready, willing, and able purchaser, at a premium. The Illinois legislature and Governor Pritzer agreed that what is commonly referred to as wholesaling, while not outrightly barred should be strictly limited.
The new law allows someone to only do a wholesale deal once in a twelve-month period, If you want to do any more than that, you would have to become a licensed realtor. And the penalties for a violation of the new restrictions can be harsh.
Of course, realtors have applauded the new restrictions (they pushed for them), while novice home flippers are dismayed that they can no longer participate in what was a very low risk strategy of real estate investment. There are arguments on both sides, and certainly less restrictive regulations could have been put in place (for example, requiring informed, written consent from a seller entering into a contract with a wholesale “buyer”). We think the law is here to stay and wholesale real estate, at least as it was previously practiced, will be no more.