Is it illegal to do this on eBay?

[Ryu]

The problem is right here:
"If the plan fails and they end up winning the bid, they can pay to make it look legit, and then you just give them their money back in person. Nobody loses out and you just relist the item and do it over again. "

Because eBay charges fees for selling items

So if you fail to sell items., you end up paying eBay in fees.

I sold my iPhone 4S and some other items and ended up selling $300 worth of stuff in one month.

At the end of the month, I had to pay $50 in eBay selling fees.

So, yeah. It's not a foolproof plan, because you won't make your money back if your item fails to sell and your friend ends up buying it, because you'll continuously lose money.