The words sound similar. The strategy feels similar. But mix them up, and you could lose the deal, confuse your seller, scare off a title company, or worse, break a law you didn’t know existed.

Let’s be clear: novation and assignment are not the same thing. They’re two different ways to wholesale a real estate deal, and if you’re in the business of flipping contracts, you need to know when to use each, how they work, and what red flags to watch for.

This guide will walk you through:

• The legal and practical difference between novation and assignment

• The risk profile of each

• When to use a novation vs. when to stick with an assignment

• What title companies and attorneys care about

• How to explain both options to a seller (without sounding shady)

Let’s break it down.

The Standard Play: What an Assignment Really Is

In most wholesaling deals, you get a property under contract using a standard purchase agreement. You’re listed as the buyer, and you have the right, via an “assignment clause”, to assign your rights in that agreement to someone else.

That’s it. You’re not buying the property. You’re selling your contract.

Your buyer is the one who shows up at closing and brings the money. You collect an assignment fee, usually shown on the HUD, or hidden via double closing, depending on the circumstances.

An assignment works when:

• You have an assignable contract

• Your buyer is OK with being assigned the deal

• Your seller is OK with someone else stepping in

• The title company doesn’t care about assignments

But here’s where it gets tricky…

The Problem: Assignments Have Limits

Assignments are simple, but they come with baggage:

• Sellers get spooked. Many don’t understand that someone else is stepping in.

• Buyers get picky. They may not want their name on a contract they didn’t sign.

• Title companies resist. Some won’t process assigned contracts at all.

• Lenders say no. You can’t assign a deal to a buyer using conventional financing.

• Transparency causes problems. Sellers can see your fee and back out or renegotiate.

That’s where novation comes in.

What Is a Novation?

A novation agreement is a legal document that replaces one party in a contract with another, with the consent of all parties.

Instead of assigning the contract to a new buyer, you’re replaced in the agreement entirely.

That means:

• You’re no longer a party to the contract

• The new buyer steps into your place

• The seller and new buyer proceed to close as if the wholesaler were never involved

Your fee is paid separately, typically outside of closing, via an invoice or side agreement.

In other words, novation is a substitution.

And because of that, it opens some doors that assignments can’t.

When You Might Want to Use a Novation Instead

Novation isn’t just some fancy legal trick. It can solve real wholesaler headaches:

1. You’re Working With a Retail Buyer

You found a distressed seller, but your buyer is using financing, maybe FHA or conventional. Lenders won’t fund deals with assignment clauses. But if the buyer is substituted via novation, the loan underwriter sees a clean contract.

2. You Need to Hide the Spread

If you’re wholesaling a deal with a $50K spread, showing that number on a HUD via assignment can kill the deal. Sellers might feel taken advantage of. Buyers may question the value. Novation keeps your fee off the closing docs.

3. The Title Company Doesn’t Allow Assignments

Not all title companies are assignment-friendly. Some refuse to touch those deals. Novation provides a workaround, as long as the seller agrees.

4. You Want to Appear Cleaner Legally

Assignments can raise legal questions in some states, especially if you’re marketing the property (not just your equitable interest). Novation, by contrast, removes you from the equation, reducing potential liability in some jurisdictions.

The Catch: Novation Isn’t Always Easy

With great power comes great paperwork.

A proper novation deal requires:

• A signed novation agreement

• Consent from all parties, seller and end buyer

• A clear paper trail of the substitution

• A cooperative title company or attorney

• Careful explanation so nobody feels tricked

Also, your profit is typically paid outside of escrow. That means:

• You need an invoice

• You need a buyer who honors it

• You might not get paid if someone bails

Assignments protect your fee with the contract. Novations don’t.

Assignment vs. Novation: Side-by-Side

What Title Companies Want to See

Title companies don’t love surprises. If you spring a novation deal on them late, you may lose the deal. To keep them on your side:

• Disclose early. Tell them your plan on Day 1.

• Get the right forms. Some title companies have a preferred novation agreement.

• Confirm payout methods. Many won’t cut your fee check unless it’s clearly authorized.

Always ask: “Are you OK with a novation?” at the start of the deal. Not all states or companies handle it the same way.

How to Explain This to a Seller

Most sellers don’t care what strategy you’re using, until it affects them.

Here’s how to explain both options without sounding shady:

Assignment:

“I work with a network of investors. When I find a good fit, I pass the deal to them and they handle the purchase directly. You’ll still get the same amount, and the process stays the same. The only difference is who closes.”

Novation:

“Instead of me buying directly, we’ll substitute the buyer before closing. This makes things smoother on the financing side and keeps everything compliant. Your terms and timeline won’t change.”

Make it about efficiency, simplicity, and clarity, not deception.

How to Collect Your Fee with a Novation

With novation, you’re no longer on the purchase contract. So how do you get paid?

Here are a few options:

• Side agreement with the buyer. You invoice them directly for your fee.

• Consulting or marketing invoice. Paid via check, wire, or payment platform.

• Separate assignment of your option. In some cases, you can assign your original purchase option for a fee.

You need trust. And ideally, a signed novation and fee agreement upfront.

If you’re worried about enforcement, use a performance clause, or choose buyers you’ve vetted and trust.

When to Avoid Novation

Novation isn’t always the best choice. Avoid it when:

• The seller is nervous or confused. If they don’t fully understand the substitution, they might accuse you of fraud or misrepresentation.

• You can use a clean assignment. Don’t overcomplicate a simple deal.

• You’re worried about not getting paid. Without a formal escrow disbursement, there’s always some risk.

• You’re new to wholesaling. Novation requires more legal understanding and coordination. If you’re just getting started, master assignments first.

A Word on Marketing: Stay Legal

Whether you’re using assignments or novations, you must understand your state laws around:

• Brokerage activity (especially marketing properties you don’t own)

• Licensing (in some states, wholesaling is regulated)

• Disclosure (sellers must know what you’re doing if it changes their contract)

Novation doesn’t magically make wholesaling legal. But it can clean up the optics and structure a deal in a more traditional format, especially for financed buyers.

Talk to a real estate attorney in your state before doing this at scale.

Real-Life Example: When Novation Saved the Deal

You get a great contract: $130K on a house that needs a light rehab. ARV is $190K. You blast it out. Your best buyer is a conventional buyer using 10% down financing.

With an assignment, their lender says no. The contract isn't acceptable.

Your seller starts panicking because they thought it was a “cash offer.”

You pivot. You talk to your title company. You draft a novation agreement.

Now, the buyer signs a new contract directly with the seller for $150K. You get paid $20K outside of closing via a consulting agreement. Everyone walks away happy.

That deal would have died without novation.

Don’t Be the Clueless Wholesaler

If you’re still thinking:

“Why does this matter? I’ll just assign everything like usual.”

Here’s the reality: ignorance won’t protect you.

Buyers are getting smarter. Sellers are more informed. Title companies are stricter. Regulators are watching. And if you wholesale more than a few deals a month, you’ll eventually need to:

• Work with retail or financed buyers

• Protect large spreads from HUD scrutiny

• Avoid spooking sellers

• Play clean with title companies

• Collect fees without assignments

Knowing how to structure a novation properly is a competitive edge. It makes you more flexible. It helps you close more deals. And it keeps you out of legal hot water.

So learn both, and use the one that fits the deal.