Real estate investing is full of buzzwords that get thrown around like everyone knows what they mean. And lately, "novation" is one of them.

But here's the truth: most people using the term don’t really understand what a novation agreement is, or how it actually works. It’s become a trendy concept in investor circles, often promoted as a “magic trick” to sell retail without owning the property. But like all shortcuts in real estate, there are rules, risks, and a lot of myths that need correcting.

In this article, we’re going to break down the most common misconceptions about novation agreements, what’s actually true, and how to use them responsibly (if at all).

Let’s start with the basics, then get into the myths.

What Is a Novation Agreement?

At its core, a novation is a legal mechanism that replaces one party in a contract with another. It cancels the original agreement and creates a new one, with all parties agreeing to the substitution.

In real estate, this usually means:

• You (the investor or wholesaler) enter into a contract with a seller

• Instead of assigning your rights or double closing, you find a retail buyer

• You get the seller to sign a novation agreement, allowing you to be replaced by the end buyer

• Title transfers directly from seller to buyer (not to you), but you still get paid

So, yes, it’s technically possible to sell a retail deal without buying the property yourself.

But that doesn’t mean novation is a loophole, a workaround, or a “get rich quick” strategy. And there’s a lot that can go wrong if you don’t understand it.

Misconception #1: “It’s just like wholesaling, but better.”

This is the most dangerous myth.

Wholesaling and novation are not the same thing. In wholesaling, you’re assigning your contract. With novation, you’re substituting the buyer.

This has a few big implications:

• Wholesaling doesn’t usually require lender approval (because the end buyer is typically paying cash)

• Novation does, because retail buyers often use conventional, FHA, or VA loans

That means novation deals:

• Need to go through underwriting

• Require clean title, inspections, and appraisals

• Can fall apart due to lender objections or red flags

Wholesaling is fast and simple. Novation is slow and full of friction.

Use the right tool for the right deal. Don’t confuse the two.

Misconception #2: “The seller doesn’t need to know.”

This is flat-out wrong and dangerous.

A novation agreement requires the seller’s consent, in writing. They’re not just selling their house to you anymore. You’re bringing in a third party, and you need to disclose:

• You’re marketing the property for sale

• You may receive a profit

• The buyer might not be you

If you don’t get seller approval, and you list the property, show it to buyers, or get it on the MLS, you could be:

• In breach of contract

• Committing fraud

• Acting as an unlicensed agent

Transparency is non-negotiable. If the seller isn’t 100% clear on what’s happening, don’t do the deal.

Misconception #3: “You don’t need a license to do novations.”

This is a gray area, and it depends heavily on your state laws and your role in the transaction.

Here’s what matters:

• If you are advertising the property publicly

• If you are negotiating on behalf of the seller

• If you are handling paperwork or funds for parties other than yourself

…then some states consider that unlicensed brokerage activity.

Novation can blur the lines, especially if:

• You list the property on the MLS

• You use a Realtor’s marketing tools without being the actual seller

• You’re inserting yourself into negotiations without ownership

To stay compliant:

• Use a licensed agent if you’re listing

• Don’t negotiate for the seller, only for yourself

• Make sure your paperwork spells out your role clearly

Better yet, get legal advice before trying your first novation.

Misconception #4: “Novation always makes you more money.”

Not always.

Yes, novation allows you to tap into retail buyer pricing, which can often be $10K–$50K higher than a wholesale flip price.

But it also comes with:

• Appraisals that can blow the deal

• Lenders who question your fee

• Delays in closing

• Repairs, inspections, and walkthroughs that wholesalers never deal with

Here’s a realistic breakdown:

• You tie up the property at $150K

• Retail ARV is $210K

• You try to sell for $210K and make $60K spread

• The appraisal comes in at $195K

• Buyer asks for concessions

• Seller sees the numbers and wants a cut

By the time it closes (if it closes), you may walk with $20K, not $60K. And it took 3x longer than a wholesale deal.

Novation isn’t always more profitable. Sometimes it’s just slower and messier.

Misconception #5: “You can hide your fee in the HUD.”

A common tactic among investors using novations is to bury their profit in the settlement statement under vague line items like:

• "Marketing fee"

• "Consulting"

• "Transaction coordination"

• "Performance bonus"

But here’s the problem:

• Underwriters review the HUD carefully

• Unusual fees raise red flags

• The seller may back out if they see a big chunk going to you

Also, many title companies won’t allow this if they don’t understand your role or see a signed novation agreement.

Don’t be sneaky. Legitimize your fee with:

• A clean paper trail

• A signed agreement with both buyer and seller

• An explanation the title company can stand behind

If it feels like you’re hiding something, it’s probably not compliant.

Misconception #6: “You don’t need any money to do novation deals.”

Technically, maybe. But practically? That’s a lie.

Here’s what you might need to cover in a novation deal:

• Option deposit or EMD

• Appraisal (sometimes upfront)

• Repairs or concessions to close

• MLS access via a flat-fee broker

• Cleaning or staging

• Transaction coordination fees

• Legal review of your documents

In total, that could be $1,500 to $5,000+ before you ever get paid.

And if the deal falls apart? You eat those costs.

Novation is not a no-money strategy. It’s a low-capital strategy, at best, and one that carries risk.

Misconception #7: “Any title company can handle a novation.”

Nope.

In fact, most won’t know what you’re talking about.

Novation deals are still relatively new in residential real estate. Unless the title company:

• Has worked with investors

• Understands creative deal structures

• Knows how to split the HUD correctly

…they may push back, deny the transaction, or demand additional paperwork.

To avoid deal-killers:

• Vet your title company early

• Send them sample documents

• Ask if they’ve closed a novation before

• Loop them in before going under contract

The wrong title company will blow up your deal, fast.

Misconception #8: “It’s 100% legal and enforceable in all 50 states.”

This one’s tricky.

Novation is a legal concept, yes, but how it’s interpreted in real estate depends on:

• Your state’s contract law

• Your state’s licensing law

• Your specific paperwork and process

In some states, judges have ruled that certain novation deals:

• Look too much like unlicensed agency

• Lack proper disclosures

• Fail to create a true legal substitution

If you don’t paper it properly, it won’t hold up.

That’s why you should always:

• Use novation-specific contract templates

• Spell out your fee structure

• Get signed disclosures from both parties

• Have an attorney review your documents

Don’t assume legality just because someone on YouTube said it worked in their state.

Bonus Misconception: “It’s a beginner-friendly strategy.”

This is maybe the biggest lie of all.

Novation deals require:

• Understanding of contract law

• Comfort with retail buyers and agents

• Experience managing longer escrows

• Access to trusted title and legal professionals

If you’re just starting out and don’t know how to comp a house, talk to sellers, or calculate ARV, you’re not ready to add novation into the mix.

Start with simpler strategies. Build your foundation. Learn wholesaling or JVing first.

Then, when you’re confident in your skills and team, you can layer in novation as a power move.

But not before.

The Bottom Line

Novation is a powerful tool when used correctly. But like all powerful tools, it can hurt you if you don’t know what you’re doing.

Don’t fall for the hype. Don’t chase myths.

If you’re going to do novation deals:

• Learn the real legal structure

• Get proper paperwork

• Disclose everything to everyone

• Work with the right title and legal team

• Know your numbers, your risk, and your limits

It’s not a shortcut. It’s a strategy, and like all strategies, it only works when you work it right.