A novation is the substitution of a new contract — or a new party — for an existing one, with the consent of all parties, extinguishing the original obligation. In real estate it appears in creative transactions where, instead of assigning a purchase contract, the parties cancel the original agreement and the seller signs a fresh contract directly with the end buyer, often with the original investor compensated by a separate fee agreement. Because the seller knowingly contracts with the real buyer, novation can sidestep assignment restrictions and disclosure problems — but it depends entirely on the seller's informed consent and clean paperwork, and lender, title, and state-law requirements control whether a given structure works. Get legal review before using it.
The formula / structureNo formula — a legal substitution: original contract cancelled by agreement; new contract signed between seller and end buyer; the intermediary's compensation handled by a disclosed fee agreement.
Novation: a worked example
Worked example. An investor has a house under contract at $90,000 and a retail buyer at $128,000 whose lender will not fund an assignment structure. With full disclosure, the seller cancels the original contract and signs directly with the end buyer at $128,000; the investor is paid under a separate novation fee agreement shown to the title company. Same economics as an assignment, different legal path — chosen because the financing required it.
What affects Novation
- Seller's informed consent (the structure collapses without it)
- End buyer's financing rules on assignments and contract substitutions
- Title company and attorney requirements
- State law on wholesaling and fee arrangements
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