Novation Agreements in Real Estate: The Wholesaler's Secret Weapon

What Is a Novation?

A novation is a legal agreement where a new contract replaces an existing one, substituting one party for another. In real estate wholesaling, a novation replaces the original Purchase and Sale Agreement between you and the seller with a new agreement between the seller and your end buyer. Unlike assignment where you transfer your contract rights, novation creates an entirely new contract. You step out, the buyer steps in, and the original contract is canceled.

Novation vs. Assignment

Assignment keeps the original contract intact and transfers your rights. Novation cancels the original contract entirely. With assignment, your fee is visible on the HUD statement. With novation, your fee can be structured as a separate payment. Assignment is simpler. Novation offers more flexibility and larger potential fees.

When to Use Novation

Large Wholesale Fees

When your fee exceeds $15,000-20,000, sellers sometimes object when they see the assignment fee on the closing statement. Novation allows you to structure your fee differently so it's not displayed on the seller's closing documents.

Properties You Want to List on MLS

With a novation, you can market the property on the MLS before your buyer steps in. This gives you access to the full retail buyer pool, not just your investor buyer list.

Seller Restrictions on Assignment

Some contracts prohibit assignment. A novation isn't an assignment — it's a new contract entirely.

How to Structure a Novation Deal

1. Contract with the seller using a standard PSA with novation language
2. Find your buyer through your buyer list or MLS marketing
3. Execute the novation — three-party agreement canceling the original contract
4. Create a new PSA between seller and the new buyer at the higher price
5. Your fee agreement secures your compensation
6. Close — buyer purchases directly from seller, you collect your fee

Example

• Contract with seller: $120,000
• Property ARV: $185,000
• List on MLS at: $175,000
• Retail buyer offers: $170,000
• Your fee: $170,000 - $120,000 = $50,000

With standard assignment to an investor, your fee would be $10,000-15,000. Novation to a retail buyer produces dramatically larger fees.

The Bottom Line

Novation is a powerful alternative to assignment that produces larger fees by accessing the full buyer market. It's more complex but the profit potential justifies the extra steps. Add novation to your toolbox alongside assignment and double closing for maximum flexibility.