Module 6: Advanced Strategies

Novation Agreements

Learn how to replace contracts and create advanced deal structures when assignments won't work

What is a Novation?

A novation is a legal mechanism that replaces an existing contract with a new one, releasing the original party from their obligations.

Unlike an assignment (where you transfer your rights but remain on the original contract), a novation completely removes you and creates a brand-new contract between the seller and your buyer.

Novation vs Assignment: Key Differences

Assignment

  • You transfer your rights to the buyer
  • Your name stays on original contract
  • You remain liable if buyer doesn't close
  • Assignment fee shown at closing
  • Most common wholesaling method

Novation

  • Original contract is replaced
  • Your name is removed entirely
  • You're released from liability
  • Your fee paid outside of closing (or via separate agreement)
  • Cleaner for certain situations

When to Use Novation

Anti-Assignment Clauses in Contract

Some sellers refuse to allow assignments. A novation completely replaces the contract, so no "assignment" technically occurs.

You Want to Remove Your Liability

If you're concerned about buyer backing out or not closing, novation removes you from the hook entirely once seller agrees to the new contract.

Cleaner Presentation to Seller or Buyer

Some sellers don't like seeing a wholesaler in the middle. Novation makes it look like the buyer is contracting directly with the seller.

Lender or Title Company Concerns

Some lenders or title companies hesitate with assignments. Novation removes complications since it's a "new" contract from their perspective.

How Novation Works: Step-by-Step

1

You Contract with Seller

Sign a purchase agreement with the motivated seller at your agreed price (e.g., $150K).

2

You Find a Buyer

Market the property and secure a buyer willing to pay $165K (your $15K spread).

3

Present Novation to Seller

Approach the seller with a novation agreement: "I found a qualified buyer. Let's create a new contract between you and them. This releases me, and you get the same terms."

4

Seller, Buyer, and You Sign Novation Agreement

All three parties agree to cancel the original contract and create a new one directly between seller and buyer (at $165K).

5

You Get Paid Outside of Closing

Your $15K fee is typically paid by the buyer before closing, or via a separate agreement. You're no longer part of the title chain.

Novation Agreement Essentials

What Your Novation Agreement Should Include:

  • Statement that the original contract is terminated and replaced
  • Release of all parties from original contract obligations
  • New contract terms between seller and end buyer
  • All parties' signatures (seller, original buyer/wholesaler, new buyer)
  • Date of novation and effective date
  • Property address and legal description

Important Considerations

  • • All parties must consent: Seller, you, and new buyer all need to agree to the novation
  • • Earnest money handling: Clarify what happens to original earnest money deposit
  • • Your fee structure: How and when you'll be paid (separate from closing)
  • • Timeline: Set clear deadlines for buyer to close under new contract

Legal Advice Required

Novation agreements involve contract law and can have significant legal implications. Always consult with a real estate attorney in your state before attempting a novation.

Every state has different rules, and improper novation structure can create liability or compliance issues.