Novation

Novation is the legal act of replacing one contract (or one party to a contract) with a new one, with the agreement of everyone involved. The key word is replace: the original obligation is extinguished and a fresh one takes its place. That is what separates it from a simple assignment, where the original contract stays alive and you just pass your position to someone else.

In creative real estate, a novation agreement lets an investor take a seller’s property under a new agreement — often to fix it up and resell it at retail — with the seller’s full consent, replacing the original purchase contract rather than assigning it. Because the seller signs off on the new arrangement, novation can sidestep some of the disclosure and licensing gray areas that dog assignment-based wholesaling, while letting the investor capture more of the upside than a flat assignment fee.

For how to structure one and where it fits, see novation agreements.