How do you structure novation deals in California?

Question

Novation deals are when you renovate a house for a homeowner/seller, and then sell it, and then split the profits with the owner.

Are investors doing a lot of these in California?

How do you structure them?

Do you record a lien on the home for the renovation budget?

And then another lien as a shared appreciation mortgage to split the profits?

How would you offer a novation to a homeowner who already has their home listed on the MLS?I'm in Los Angeles, CA.

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Robert Ellis · Answer

The phrase that stood out to me was "record a lien on the home for the renovation budget."

Whenever I've looked at creative structures like this, the first thing I try to solve isn't how the profits get split—it's how the renovation dollars get protected.

A project can look great on paper, but if the scope expands, the listing sits longer than expected, or the seller changes course halfway through, the conversation quickly shifts from profit sharing to capital recovery.

That's why I'd want to know exactly where your renovation funds sit in the capital stack before worrying about the upside.

The profit split matters if everything goes right. The protection structure matters when it doesn't.

Carson Nordmann · Answer

The lien structure question is the real complexity here. Recording a construction lien and a shared appreciation instrument on the same property creates a priority stack that most title companies in California will want a real estate attorney to sign off on before they'll insure it. That's the first call worth making before you get into deal structure.

Pouyan Broukhim · Answer

While I appreciate the interest in creative real estate strategies like novation deals, it is critical to recognize that this approach involves complex legal and financial risks, particularly in a jurisdiction like California. Because these arrangements involve investing capital into a property you do not own and relying on the cooperation of a third party, the structure of your contracts, lien filings, and escrow instructions must be airtight to protect your interests. You should consult with a qualified real estate attorney who specifically specializes in creative deal structuring and has a proven track record of handling novation or joint venture agreements in your specific county. They can provide essential guidance on the following:Key Areas for Legal Review:*   **Asset Protection:** Determining whether a recorded lien or deed of trust is enforceable and appropriate for your specific project without violating local regulations or creating clouds on the seller's title.*   **Risk Mitigation:** Drafting clauses that address "what-if" scenarios, such as the seller’s death, divorce, bankruptcy, or a sudden refusal to sell, to ensure your capital is not lost.*   **Contractual Control:** Establishing clear, legally binding terms regarding the property’s asking price, repair scope, and the timeline for the eventual sale to prevent the seller from sabotaging the profit-sharing arrangement.*   **Regulatory Compliance:** Ensuring that your project management activities and profit-sharing model comply with California’s strict real estate and contractor licensing laws.*   **Dispute Resolution:** Defining the mechanism for recovery if the project goes over budget or if the property fails to sell at the anticipated price point.

Bill B. · Answer

1) Can you force the owner to sell if they change their mind?

2) Do you have ANY control over the asking price? 2a) can the owner ask an unreasonably high price and refuse to do any repairs or contributions to keep using the newly renovated property?

2b) can the owner accept an offer that has zero profit, or negative profit and either cut you out or ask you to split the loss?

3—>100) Is there any time limit could they stay for years? Or at least long enough to wear out the improvements. What if YOU go over budget, is the owner forced to accept any increase you ask for? Is there a judge anywhere in the USA that would force an owner to sell so you’d get paid? I mean obviously not in CA, or really anywhere on the west coast, but anywhere? (I’m assuming anyone willing to accept this doesn’t have the money to pay you. So it’s either they get forced to sell or you don’t get paid.

But mainly 1&2.  It’s certainly one way to lose whatever you spend on the renovation. If most renovations have a 120-200% value increase and you give half that increase away. You should get 60-100% of your money back. I guess you could take your 100% back first, then you might make 10-50%, if you made the best possible improvements and the buyers agree.  I sure hope the cash strapped owners don’t get foreclosed on, or sued, or a lien on their property so they had to bring money to closing or keep living there and not being any money.

You MIGHT convince me. In a state that doesn’t hate landlords, on a property that wasn’t owner occupied, if I had the right to buy at a very low price if nobody else made an accepted offer in 2 months. Maybe. Good luck.

Garrett Crosby · Answer

Hey Manuel, fellow LA person here. I'm an agent and investor in the LA market and I've looked into novation deals here pretty closely.

Honest answer: they're not very common in California, and the reason is that CA makes them more complicated than other states. The legal exposure is real. If something goes sideways - seller backs out, divorce, title issues, liens - you're in a tough spot having put renovation money into property you don't own.

That said, here's how most people structure them if they go forward: 1) A detailed written agreement with the homeowner outlining the project scope, budget, profit split, and timeline. 2) A mechanics lien or deed of trust recorded against the property for the renovation funds to protect your capital. 3) An escrow arrangement where the net proceeds at closing flow through a neutral third party so your share comes out before the seller gets paid.

The problem in LA is the recording of a lien on someone else's property creates complications - sellers get nervous, it can affect their ability to refi or sell to someone else if your deal falls through, and it's a potential legal gray area depending on how it's structured. You definitely need a real estate attorney who has actually done these before, not just one who says they're familiar with the concept.

On MLS listings - yes, those stale listings are often the best candidates. Sellers who have been sitting 60+ days with low offers are typically much more open to creative solutions. You approach it as: "What if I funded the updates and we split the upside when it sells at a higher price?" That conversation goes better than you'd think with the right sellers.

The real risk is always the seller. Have your attorney be very thorough on that agreement.

Patrick O'Sullivan · Answer

One thing I'd add is that there are really two separate issues here. One is how the profits get split, and the other is how the investor's renovation money is protected if the deal does not go as planned.For properties already listed on the MLS, I could see a novation appealing to sellers whose homes have gone stale because they need cosmetic updates but don't have the cash to make them.

Vijay Friedman · Answer

@Manuel AngelesNovation deals can definitely work, but the structure often depends on your agreement with the homeowner, local legal requirements, and your exit strategy. In my experience, it's important to have both a real estate attorney and title company familiar with novations involved early. Are you planning to fund the renovations yourself or looking for outside capital?

Ewa Reza · Answer

@Manuel Angeles

I'm a Realtor, property manager, and investor in Los Angeles, so I've come across these a bit, but I haven't personally pulled the trigger on one.

A friend of mine in Phoenix has done two of them, and honestly the first time he explained the structure to me my reaction was basically, "Wait... you're spending money on someone else's house and hoping everyone behaves?" 😅

One of the properties had already been sitting on the MLS for months. The house wasn't terrible, it was just tired and showing its age. The seller didn't have the cash or motivation to update it, and buyers kept throwing out lowball offers.

My friend offered to fund some cosmetic improvements, paint, flooring, landscaping, staging, that sort of thing. He wasn't a licensed contractor and wasn't swinging a hammer himself. He just coordinated the vendors and managed the project. The understanding was that when the property sold, they'd split the upside created by the improvements.

What surprised me most was that he didn't record a lien. Everything was handled through a written agreement, escrow instructions, and a lot of trust between the parties. It worked out well both times, but I have to admit that would make me nervous.

Maybe it's because I'm in CA, but if I were putting tens of thousands of dollars into a house I don't own, I'd want a very good attorney involved before writing the first check. CA seems to have a special talent for turning simple deals into complicated lawsuits.

Interestingly, both of his deals started with properties that were already listed on the MLS. In fact, I'd argue those sellers may be the most open to a novation because they've already tested the market and aren't thrilled with the feedback they're getting.

To me, the biggest risk isn't the renovation budget. It's what happens if the seller changes their mind, gets divorced, files bankruptcy, refinances, or life simply happens after you've already put money into the property.

I'd love to hear from investors who have structured these in Los Angeles. I'm especially curious whether people are recording some form of security interest or if they're comfortable relying solely on contracts and escrow instructions. CA is a very different animal than AZ. 😅

How do you structure novation deals in California?

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