Sell your house with a novation agreement

What novation means in contract law

In general contract law, a novation replaces an existing contract, or one of the parties to it, with a new one. The key ingredient is consent: everyone involved agrees that the new arrangement takes the place of the old one, and the original obligation is released rather than simply handed off.

That is different from an assignment, where one party transfers its rights under a contract to someone else and the original terms usually stay in place. In an assignment the person who assigned the contract may remain on the hook; in a true novation, the parties agree to substitute a new obligation for the old.

The real estate industry borrowed the word, and in practice the documents called "novation agreements" vary a great deal. What matters is not the label at the top of the page but what the agreement actually says about price, control, costs, deadlines and who can do what.

How novation agreements are used in residential real estate

In a typical residential novation arrangement, an investor signs an agreement with the homeowner. The investor may pay for or arrange repairs and cosmetic updates, then the property is marketed to retail buyers, often ones using conventional, FHA or VA financing. When a retail buyer is found, a new purchase contract is signed and the sale closes.

The owner receives the amount agreed in the novation agreement. The investor's compensation is usually the difference between the retail sale price and the owner's agreed amount, after costs, or a fee spelled out in the agreement. Those terms should be in writing before any work begins.

Because the house is sold to a retail buyer rather than to an investor paying cash, the process can take longer: repairs, listing preparation, showings, buyer financing, appraisal and inspection all have to happen before the owner is paid.

• The owner and investor sign the novation agreement and agree on the owner's amount and timeline.
• Repairs or preparation happen as agreed, if any.
• The property is marketed to retail buyers, through properly licensed channels where the law requires.
• A retail buyer signs a purchase contract, arranges financing and closes.
• At closing the owner is paid the agreed amount and the investor receives its agreed compensation.

Who holds title, and who is responsible for what

In most novation arrangements, the homeowner keeps title until the retail closing. That means the owner usually still pays the mortgage, property taxes, insurance and utilities during the marketing period, unless the agreement says otherwise. If something happens to the house, it is still the owner's house.

Repairs and preparation are the area most worth reading closely. The agreement should say who chooses the contractors, who pays them, whether the owner must approve the scope, whether repair costs come out of the owner's amount, and what happens to money already spent if the deal never closes.

Because work may be done on a property the investor does not own, it is also worth asking how contractors will be paid and whether anyone could file a mechanic's lien against the house if a bill goes unpaid.

• Who pays the mortgage, taxes, insurance and utilities until closing
• Who approves, pays for and supervises repairs
• Whether repair costs are reimbursed if the sale falls through
• Who controls the list price and accepts or rejects offers
• How long the agreement lasts and how either side can end it

Licensing: the question every seller should ask

Marketing someone else's property for sale, for compensation, may require a real estate license in many states. A novation agreement does not by itself authorize an unlicensed person to advertise, list or broker your property. In many arrangements, the home is listed by a licensed agent so that marketing is done lawfully, but the rules differ from state to state.

Some states have written specific rules for people who deal in purchase contracts rather than property. Texas law, for example, allows a person to sell or assign an interest in a contract to purchase real property without a license only if the person does not use it to engage in real estate brokerage and discloses the nature of that interest in writing to the seller or potential buyer (Texas Occupations Code §1101.0045). Illinois includes in its definition of "broker" a person who engages in a pattern of business of marketing or dealing in contracts, including assignable contracts, for the purchase or sale of real estate (225 ILCS 454/1-10).

If you are considering a novation, ask who will market the property, whether that person or company holds the license your state requires, and how they will be paid. If the answers are vague, treat that as a warning sign and consider talking to a real estate attorney or your state's real estate commission.

Novation vs wholesaling and assignment

In wholesaling, an investor signs a contract to buy your house and then assigns that purchase contract to another buyer, usually another investor, for an assignment fee. You sell to whoever ends up holding the contract, typically for cash and typically as-is. The wholesaler is selling its contract position, not marketing your house to the public.

A novation arrangement aims at a different buyer: a retail purchaser, often with a mortgage, after the house has been prepared. That is why it aims for a retail price rather than an as-is price, and also why it takes longer, depends on a buyer's loan, and raises the licensing questions above.

Neither label guarantees anything. Read whether you are signing a purchase contract, an agreement that lets someone else market your house, or both, and ask whether the contract can be assigned without your consent.

Novation vs a traditional listing

With a traditional listing, you hire a licensed agent, you control the price and the decisions, you pay for any repairs you choose to make, and you typically pay commissions and closing costs out of the sale. You keep whatever is left after the mortgage and costs.

With a novation, an investor may cover upfront repair costs and handle the project, but you usually agree to a fixed amount and the investor keeps the difference. If the retail price comes in high, the investor benefits; if it comes in low or costs run over, the agreement decides who absorbs that.

If your house needs little work and you can handle the process, a listing with a reputable agent may net you more. A novation tends to appeal to owners who cannot fund repairs themselves, do not want to manage a renovation, and can wait for a retail sale.

Novation vs a cash offer

A cash sale is simpler: a buyer purchases the house as-is, there is no buyer loan to fall through, and you can often pick a closing date that fits your plans. The trade-off is that a cash buyer pricing in repairs and risk will usually offer less than a fully updated house might sell for on the retail market.

A novation tries to capture some of that retail value, but you carry the house while it is prepared and marketed, and the final result depends on repairs, the market and a retail buyer's financing. There is no guarantee that a novation will put more money in your pocket than a cash sale once time, holding costs and risk are counted.

A reasonable approach is to compare a written cash offer against a realistic novation estimate, including how long you will keep paying the mortgage, taxes and insurance, and decide which trade-off suits you.

Advantages and risks to weigh

For the right property and seller, a novation can mean no upfront repair costs, a professionally prepared house, and access to retail buyers. For others, the downside is a longer timeline and more moving parts, any of which can delay or derail the sale.

The most common problems are practical: the property is tied up for months, a retail buyer's financing or appraisal falls through, repair costs exceed the estimate and someone disputes who pays, or it becomes unclear who has authority to set the price, accept offers or sign documents. A clear written agreement reviewed by your own attorney reduces, but does not remove, those risks.

• Possible upside: no repair outlay, a prepared house, retail buyers
• Longer timeline than a cash sale, with ongoing holding costs
• Dependence on a retail buyer's financing and appraisal
• Disputes over repair costs or reimbursement if the deal fails
• Unclear authority over pricing, offers and signing
• Licensing and disclosure rules that vary by state