Why aren’t novation agreements fraud?

Question

I know it’s hard to prove intent in an offer when it comes to wholesaling, but isn’t it a dead giveaway with novation agreements?

Is the government going to shut down novation agreements like they did ringless voicemail (e.g. $25k fine per RVM is pretty steep)?

Why are gurus pushing this strategy so hard?

Lydia R. · Answer

I feel like some of the issue is that the term 'novation' is being used differently by different people. In the traditional sense, a novation is just a change to an agreement. But some guru found the word and decided to use completely differently from its true definition. The alternate way i have seen novation described is essentially a JV partnership with the seller. Seller adds investor to the deed, investor spends their money rehabbing the house, rehabbed house is put on the market and sold, investor and seller split proceeds after investor is reimbursed all their capital spent on the rehab.

The gurus have to come up with 'new' and 'innovative' strategies that no one has heard of before. So they manufacture terms and alternate strategies to get people to watch their videos and subscribe to their channels and buy their masterclasses. I dont understand how novations arent just amendments. But thats the game now, come up with something new for clicks and likes.

Charles Carillo · Answer

@Mike Schorah

I do not think the issue is with the agreement itself; every time a real estate agreement is renegotiated it is a novation. For example, you are purchasing a house for $100k, and then during the inspection, it is discovered that the hot water heater requires immediate replacement. The seller does not want to replace it so both the seller and the buyer agree to lower the purchase price to $98k and both parties sign the new agreement. Wholesalers are just changing the name of the purchaser instead of the price.

I feel the issue with some wholesaler tactics is that the wholesaler is not being truthful and honest with the seller. If you are not going to buy it, tell them. A partner of mine that has been wholesaling for decades always tells the seller up front (before any agreement is presented) that he is not buying the property himself. The wholesalers that mislead sellers are the ones that tarnish this strategy.

Lydia R. · Answer

Exactly! All the fluff is so unnecessary. Wholesaling is simple. Put a house under contract for a discount and then sell that contract for a little bit more. The difference is the profit. That's it. All the other fancy words and made up terms are just click bait. Glad you were able to spot it and save your hard earned money. You are in one of the best places to learn everything you need to know. For free!

Greg Scott · Answer

How do you tell the difference between a guru and a teacher?

A guru has secret "tricks" that they can teach you.  It makes people feel like this one little thing is going to unlock financial freedom, so I NEEEEEED to have it.

A teacher recognizes that almost everything that works has been done in the past, and teaches you the best practices.

Marc Maitre · Answer

I definitely know who you're referring to lol it's crazy because I've just learned from this post Novation is not what it is; I was all ready to dive deep into it, but yall have already made it super simple, and that everything else on youtube is just fluff to get me to spend my hard earn money. And I've watched videos of guys trying to sell their course and call it anything but wholesaling to trick newbies into thinking it's something else.

Troy Gandee · Answer

@Charles Carillo You hit the nail on the head. There's a certain guru who has been enchanting quite a few people in my market lately. I don't doubt his sub-to and similar content is valuable, but the novation stuff is a problem waiting to happen.

In contract terms, a novation is just an amendment or change of contract that all parties agree to, so calling these complicated arrangements "novations" is questionable to begin with.

This particular guy is also teaching methods that are blatantly illegal in some states. Net listings are one of their tactics, which are very unlawful in my state. I was also told by one of their students that they've made agreements and contracts that are valid in "all states". That's virtually impossible. Especially regarding real estate agreements. Laws, specifically real estate laws and terms are different in most states, so claiming anything is "legal in all states" is reckless at best.

I was approached recently by one of these students on a deal they want to least. I ran the situation by 2 of the biggest RE attorneys in town to get their opinions. Both said these things sound like fraud lawsuits waiting to happen. The term "equity stripping" was used more than once.

My state is also cracking down on assignment of contract as we speak, so I don't think these "novations" have a half life. I've been doing this stuff for 10 years and had never heard that term until this year. It seems to me to be language intended to confuse and deceive the seller.

Charles Carillo · Answer

https://www.fool.com/investing...

https://blueprinttitle.com/wha...

Norberto Villanueva · Answer

First, I am not an attorney. With all due respect, I disagree that any renegotiated contract is a novation. Where the inspection scenario you mentioned may require an amendment to commemorate any renegotiation, that is not the same. A novation literally voids the original contract.

Norberto Villanueva · Answer

Per Floss Law's legal opinion, perhaps they are indeed fraudulent. And now confirmed, I didn't know RVM's were no bueno! Great post!!

Why aren’t novation agreements fraud?

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