Novation Agreements in Real Estate

Savvy real estate investors are always looking for ways to structure deals with minimal upfront capital while maximizing profitability. One such tool that has gained traction in recent years is the novation agreement. Unlike assignment contracts, which simply transfer the rights to a contract, a novation agreement completely replaces one contract with another, relieving the investor of any future liability.

Understanding how novation agreements work in real estate transactions, when they are beneficial, and what investors need to know before using them can help your next deal go more smoothly.

What Is a Novation Agreement in Real Estate?

A novation agreement provides new terms that override the existing terms in a contract, and it replaces and nullifies the original contract. There is also a new purchase contract signed that replaces the buyer in an existing agreement with a new buyer, transferring both the rights and obligations of the original contract. In real estate, this means that an investor who enters into a purchase contract can legally transfer their position to another buyer while being released from all responsibilities under the contract.

Key Features of a Novation Agreement

• Full Substitution: The original party is completely removed from the contract and replaced by a new party.
• Requires Consent: All parties involved must agree to the novation.
• Releases Liability: The original investor is no longer responsible for fulfilling the contract.
• Legally Binding: Once signed, the original contract is entirely replaced by the new agreement.

Novation differs from an assignment contract, where the original party remains liable even after assigning their rights to another buyer.

How Do Novation Agreements Work in Real Estate?

Here’s how the novation process typically unfolds:

Step 1: The Investor Enters into a Purchase Agreement

An investor identifies a property and signs a purchase contract with the property owner, securing the right to purchase the property.

Step 2: The Investor Finds a New Buyer

Before closing, the investor secures an end buyer who is willing to take over as the buyer on the transaction. This is often another investor, a homeowner looking to purchase the property as their primary residence (e.g., retail buyer), or a real estate developer. The new buyer and the seller sign a purchase agreement. Some investors will use an attorney-in-fact (a/k/a AIF or “power of attorney”) to sign the purchase contract on behalf of the seller.

Step 3: The Investor and Seller Sign a Novation Agreement

Often done around the same time as Step 2 above, the investor and the seller execute a novation agreement, which officially removes the original investor from the contract and replaces them with the new buyer. How the novation fee will be calculated for the closing should be addressed in this novation agreement.

Step 4: The New Buyer Closes on the Property

The transaction proceeds between the seller and new buyer, and the new buyer fulfills all obligations under the contract. The investor collects a novation fee (or marketing and maintenance fee) at closing. The seller’s closings fees and commissions will often be deducted from the seller’s novation fee. 

Novation vs. Assignment: What’s the Difference?

Novation and assignment are two common strategies in real estate wholesaling, but they have key differences:

Feature	Novation Agreement	Assignment Contract
Liability Transfer	Releases the original party from all obligations.	The assignor often remains liable if the assignee fails to perform.
Requires Seller’s Consent	Yes.	No, so long as the original contract has terms stating that is assignable.
Creates a New Contract?	Yes.	No, only transfers rights.
Common Uses	Selling properties to retail buyers (buyers looking to purchase the property as a primary residence); selling properties via the Multiple Listing Service (MLS).	Wholesaling, lease options, off-market property sales.

A novation agreement is often preferable for investors because it allows for ways to market the property to a broader audience, whereas an assignment agreement is usually used for off-market transactions and often still leaves the original investor responsible if the assignee fails to close.

When to Use a Novation Agreement in Real Estate

Novation agreements provide flexibility and risk mitigation for investors. Here are the most common scenarios where a novation is beneficial:

1. Real Estate Wholesaling Without Assignments

Some sellers are reluctant to work with wholesalers who assign contracts. A novation agreement allows the investor to transfer their interest to another buyer without the stigma of an assignment contract.

2. Marketing to Retail Buyers

Investors who secure a property and seek to market on the Multiple Listing Service (MLS) will often use novations to attract a larger buyer pool, including “retail buyers”. Retail buyers are buyers who purchase the property as their primary residence (or possibly a second home) and buy at or close to market value. They may use cash, but they often obtain a loan either via FHA, conventional or VA financing.

3. The Property Needs Some Repairs 

Novation agreements are useful for properties that need some minor repairs or clean-up in order to get full market value (or close to it). The investor will often take care of these repairs prior to closing, providing a benefit to both the seller and end buyer.

Advantages and Risks of Using Novation Agreements

Advantages for Investors

1. Eliminates Liability: The original investor is completely removed from the contract, reducing risk.
2. More Appealing to Sellers: Sellers like the fact that they won’t have to pay any commissions or perform any repairs but can still attract more buyers.
3. Increases Profit Potential: By securing deals and closing on them at a higher price, investors can generate revenue without actually taking title to the property.

Potential Risks and Challenges

1. Requires Seller Approval: Unlike an assignment, all parties must agree to the novation, which can make deals harder to structure.
2. Legal Complexity: Novation agreements must be properly drafted to ensure all obligations are transferred, requiring legal expertise. 
3. Possible Delays: Because the end buyer is often getting a loan, closing timelines may be longer compared to standard wholesaling.

Legal Considerations for Novation Agreements in Florida

Since a novation agreement completely replaces an existing contract, it must be structured correctly to ensure a smooth transaction. Key legal factors include:

• Clear Agreement Terms: The contract must explicitly state that the original party is released from liability and outline the rights and obligations of the new party.
• Seller’s Written Consent: All parties involved should sign off on the novation for it to be legally binding.
• Title and Due Diligence: A title search should be conducted to ensure no undisclosed liens or encumbrances exist on the property.
• Compliance with Lender Requirements: If a property is subject to an existing mortgage, lender approval may be necessary before executing a novation.

Because of these complexities, investors should work with an experienced attorney-owned and operated title company to ensure compliance with Florida law and protect their interests.

How Marina Title Can Help with Novation Agreements

Novation agreements offer real estate investors a powerful tool for structuring creative real estate deals, but they must be executed properly to avoid legal pitfalls. Marina Title is an investor-friendly title company specializing in real estate transactions and title services to ensure that your novation agreements are legally sound and enforceable.

If you’re an investor looking to leverage novation agreements to expand your real estate portfolio, we can help streamline the process and protect your interests. We also handle creative financing transactions as well as assignment and double closings.

Contact Marina Title today to learn more about how we can assist with your next transaction. Call us at 1-855-513-5880 or send us a message via our Secure Contact Form to learn more about our real estate and title services for investors. We provide title, escrow, and closing services throughout the State of Florida.