Understanding Novation Agreements

In residential real estate, a lot of motivated sellers land in the middle between an investor's cash offer and the retail market price. They want a simple, hands-off sale, but they also want a price that is closer to retail. The challenge is that a standard investor cash offer is usually discounted to account for repairs, holding costs, risk, and profit. That creates a gap between what the seller wants and what a typical cash buyer will pay. A novation agreement is one strategy investors use to bridge that gap. It can allow a seller to ultimately sell to a retail buyer (often using financing) while keeping a smoother, investor-led process.

What Is a Novation Agreement?

A novation is a legal replacement of an existing contract. In residential real estate, it generally means:

• You sign an initial purchase agreement with the seller.
• You market the opportunity to find an end buyer (often retail).
• All parties agree to cancel the original contract and replace it with a new contract between the seller and the end buyer.
• You are released from the original agreement, and your compensation is handled separately.

Why Novations Exist: The Price Gap

Most sellers compare two paths:

• Cash investor offer: Faster and easier, but discounted.
• Retail listing: Often higher price, but involves showings, inspections, repairs, and longer timelines.

Novations often show up when a seller says something like: "I want a simpler process, but I do not want to take a low cash offer."

Where the MLS Fits In

In many novation-style deals, the end buyer is a retail buyer. That means the property may be marketed similarly to a traditional sale, which can include:

• Marketing directly to retail buyers (online platforms, local outreach, agent networks)
• Partnering with a licensed agent
• In some cases, listing the property on the MLS with the seller’s permission and the proper disclosures

Novation vs Assignment (High-Level)

Investors sometimes confuse novations with wholesale assignments. The difference is whether the original contract stays in place.

• Assignment: You transfer your contract position to a new buyer. The original contract remains active.
• Novation: The original contract is replaced. The seller signs a new contract directly with the end buyer.

Novations are often more compatible with financed retail buyers because many lenders and title companies prefer a direct seller-to-buyer contract.

When Novation Is Commonly Used

• The seller wants a price closer to retail, but still wants a guided process.
• The home is livable and mortgageable (not a heavy rehab).
• The likely end buyer will use financing (conventional, FHA, VA).
• The investor is open to a longer timeline than a standard wholesale deal.

How Investors Typically Get Paid

With assignments, the investor often gets paid through an assignment fee. With novations, compensation is typically handled through a separate, disclosed agreement.

• Consulting fee
• Marketing or facilitation fee
• Other disclosed compensation structure (varies by state and licensing rules)

Common Pitfalls to Avoid

• Seller confusion: The seller should understand why the structure exists and how the end buyer is selected.
• Weak documentation: The novation should clearly state that the original contract is replaced.
• Title company mismatch: Not all title companies handle novations.
• Retail buyer hesitation: Keep documents clean and use standard contracts whenever possible.

Key Takeaways

• Novations are often used when there is a gap between a typical cash investor offer and a seller’s desired near-retail price.
• They can support a sale to a retail buyer, often using financing, with clearer lender and title workflows.
• The property may be marketed broadly and can sometimes end up listed on the MLS with the right permissions and licensing.
• Because rules vary, investors should work with a knowledgeable title company and legal counsel.