Most real estate investors are familiar with assignments. You lock up a property with a motivated seller and assign that contract to an end buyer for a fee. It’s fast, simple, and works until it doesn’t.

Because in today’s market, sellers are savvier. Title companies are warier. And some deals simply don’t fit the standard assignment model.

That’s where novation comes in.

A novation agreement isn’t just legal lingo. It’s a tool that allows you to replace one contract with another. In wholesaling and investing, it can mean keeping more deals alive, avoiding headaches with lenders, and protecting your reputation with sellers.

Let’s break down what novation really is, how it works in a real estate context, and why it’s becoming more popular with smart wholesalers and investors who want options when assignments fall short.

Novation vs. Assignment: What’s the Difference?

Before diving deep, let’s clarify a common confusion.

Assignment is when you transfer your position in a contract to another party. You never actually close on the property. You’re just selling your rights to buy it.

Novation, on the other hand, is when the original contract is replaced entirely. All parties, the seller, the original buyer (you), and the new buyer, agree to substitute the old agreement for a new one.

Here’s how that plays out in real estate:

So why does this matter?

Because in some cases, especially when the buyer is using conventional or FHA financing, lenders don’t allow assignments. They want to close with the person whose name is on the original contract. That’s a dead end for assignments, but a perfect scenario for novation.

The 3 Key Components of a Novation Agreement

If you’re considering using a novation strategy, here’s what needs to happen for it to be legitimate and enforceable:

1. Mutual Agreement by All Parties

A novation must be agreed to by all three parties:

• The seller

• You (the original buyer)

• The new buyer

The contract must clearly show that the original agreement is being extinguished and replaced with a new one.

2. Clear Release of Obligation

The seller must release you from your original obligations under the first purchase agreement. You’re stepping out of the deal entirely, legally and financially.

This is key, you are no longer on the hook once the new agreement is signed.

3. New Terms with the New Buyer

The end buyer signs a brand new contract directly with the seller, usually under your supervision or via your title company or attorney.

The terms might be the same (or better for the seller), and you’re compensated by a separate agreement, not via assignment fee.

Why Would a Wholesaler Use Novation?

There are several reasons investors are adding novation to their toolbox:

1. Financing-Friendly

Most lenders won’t fund a deal with an assignment contract. Novation solves this by creating a direct seller-to-end-buyer agreement, so financing is possible.

If you’re marketing to retail buyers or investors who use loans, novation opens the door to more exits.

2. FHA/Conventional Buyer Compatibility

If your end buyer is using FHA or VA financing, the title company will likely reject any deal involving assignment. Novation bypasses that roadblock.

This makes novation especially useful for:

Wholetailing
Prehabs
Retail flips
Sellers who insist on full retail price

3. Larger Spreads

Since you can now market to retail buyers, especially ones who aren’t looking for a deep discount, you can command higher prices and often make more than a typical $10–15K wholesale assignment.

It’s not uncommon to see $30K+ fees on novation deals, especially when the house is cleaned up or lightly rehabbed before listing.

4. Title Company Compliance

Many title companies are cracking down on blind assignments. Novation, when structured correctly, is completely above board.

Because all parties agree in writing and the end buyer is clearly involved, there’s no confusion about who’s doing what.

Novation Use Case: The Wholetail Flip

Let’s say you lock up a distressed property for $120,000.

Instead of assigning it to an investor for $130,000, you clean it out, slap on some paint, and list it on the MLS for $160,000. You get an offer for $155,000 from a retail buyer using FHA financing.

Here’s where a novation deal shines:

• The seller agrees to terminate the original contract and sign a new one with the retail buyer

• You handle everything, cleanout, showing, paperwork

• You get paid via a separate agreement or service fee, not an assignment

Result?

You pocket $30K+ instead of $10K.

And the deal flies under the radar with lenders and title companies, because it’s structured just like a standard retail transaction.

How to Set Up a Novation Deal (Step by Step)

1. Use the right original contract
   Your purchase agreement should mention the possibility of novation or at least allow you to market the property and assign or replace the agreement.
   
   
   

2. Talk to your title company early
   Not every title company is novation-friendly. Make sure yours understands the process and has done these deals before.
   
   
   

3. Secure seller agreement in writing
   Once you have a buyer lined up, you’ll need a novation agreement signed by all parties. This legal document replaces the original contract.
   
   
   

4. Create a new purchase agreement
   The seller signs a brand-new agreement with your buyer. This may be through the MLS or off-market, but it’s a standard real estate contract.
   
   
   

5. Collect your fee through a separate agreement
   You’re not assigning, so you get paid through a separate fee arrangement. This can be structured as a consulting fee, service fee, or commission, depending on your license status and local laws.
   
   
   

6. Disclose everything
   Everyone, seller, buyer, title, lender, should be crystal clear on what’s happening. Full transparency keeps you safe and legal.
   
   
   

What to Watch Out For: Novation Pitfalls

While novation offers flexibility, it’s not without risks.

Here’s what to avoid:

Lack of seller understanding

If the seller doesn’t understand what’s happening, they may panic or back out. Always explain clearly (and consider getting legal review).

Buyer hesitation

Retail buyers may get nervous if the paperwork feels unusual. Use standard contracts and title companies to ease their concerns.

Improper documentation

This is a legal process. You need a valid novation agreement, signed and dated, and it must explicitly replace the original contract.

Licensing and fee structures

Depending on your state, receiving a fee for arranging a sale without a license could be problematic. Use attorneys and clear legal agreements to stay compliant.

When Novation Doesn’t Work

While novation is powerful, it’s not a magic bullet. You may want to stick to assignments or double closes in these cases:

• Seller is not flexible or doesn't understand novation

• You’re dealing with a fast, experienced investor buyer

• You want the cleanest, fastest close possible

• Your title company isn’t comfortable with it

In short, use the right tool for the right deal.

Novation FAQs (Real Questions from Investors)

Q: Is a novation agreement legal in all 50 states?
Yes, but local real estate laws vary. Always consult a real estate attorney in your state.

Q: Do I need a license to do a novation deal?
Not necessarily, but how you collect your fee matters. Charging a service or marketing fee is often okay. Taking a commission without a license can get you in trouble.

Q: Can I list the property on the MLS if I don’t own it yet?
Only with the seller’s written permission. Some investors partner with licensed agents to do this legally and ethically.

Q: Can I make repairs before closing in a novation deal?
If the seller agrees, yes. That’s one of novation’s biggest advantages. You can invest in improvements without owning the property yet.

Add Novation to Your Toolbox

In today’s tighter, more competitive market, savvy investors need more than just assignment contracts.

Novation gives you:

• More deal options

• Access to retail buyers

• Larger potential spreads

• Greater compatibility with lenders

• Legal protection with the right paperwork

It’s not for every deal, but when used correctly, novation can help you close more transactions, protect your relationships, and grow your business faster.

If you’re serious about real estate investing in 2025 and beyond, learn novation now, before your competition does.