Why novations are such a great tool, and the 4 questions every seller asks

Question

Rob here, a Louisville agent who works mostly with investors. I think the novation is the most underrated tool in the toolbox, because it's the one strategy where every side gets what they actually want and nobody needs a discount.

The seller gets their number. The buyer gets a clean, move-in-ready house at market price. The investor gets paid on a house that was too nice to wholesale. And you never buy it, never borrow on it, and never pay transfer tax.

Why it works: investors need a discount because that's how they make money. A family buying a home to live in will pay full price. That gap is the paycheck.

Quick math. The seller nets $200,000 and the house sells for $255,000. That's a $55,000 gross spread, and gross is not profit. Agent commission runs $7,500 to $15,000, closing costs about $5,000, repairs and staging about $6,000. That leaves roughly $29,000 to $36,000.

The four questions every seller asks, and the honest answers:

• "Why don't I just list it?" You can. A novation only earns its keep if someone else pays for the repairs, covers the bills while it sells, and takes the hit if it falls apart. If the house needs nothing and the seller can wait, they should list it and keep the whole thing. Say that out loud. It builds more trust than any script.
• "Are you selling my house behind my back?" No. The seller approves in writing before any sale, and they stay on the deed the entire time.
• "What happens to the difference?" The seller gets paid first, in full, at the number you agreed on. The investor is paid after, out of what's left, and it shows on the settlement statement.
• "Will this hurt my credit?" A novation involves no loan, so no. A short sale is a different animal. Never soften that answer.

"Why don't I just list it?" You can. A novation only earns its keep if someone else pays for the repairs, covers the bills while it sells, and takes the hit if it falls apart. If the house needs nothing and the seller can wait, they should list it and keep the whole thing. Say that out loud. It builds more trust than any script.

"Are you selling my house behind my back?" No. The seller approves in writing before any sale, and they stay on the deed the entire time.

"What happens to the difference?" The seller gets paid first, in full, at the number you agreed on. The investor is paid after, out of what's left, and it shows on the settlement statement.

"Will this hurt my credit?" A novation involves no loan, so no. A short sale is a different animal. Never soften that answer.

What kills novations:

Time. Plan on 45 to 90 days, because you're waiting on a regular buyer's appraisal, inspection, and underwriting. An assignment closes in two to three weeks.

Paperwork. Once the novation executes, you have no ownership rights and no contract to sell to anyone else. All you have is what you got in writing beforehand. The fee agreement gets signed at the same time as everything else, never after.

Fees nobody can explain. Label the fee and disclose it. Underwriters read every line of the settlement statement.

Skip it when the house needs heavy repairs, when the seller needs out this month, or when the end buyer is paying cash anyway. Assignment is the default. Novation is the exception.

In Kentucky, a licensed agent has to do the marketing under a written listing agreement signed by the owner. I'm a realtor, not a lawyer, so this isn't legal advice. Have your attorney and title company look at the paperwork before you start.

Two questions for the group. If you've closed or walked away from a novation, what made it work or made you pass? And for anyone who's been on the seller side of one of these, which of the four questions above would have been your biggest hesitation?

Ashish Acharya · Answer

Rob, I like how you broke this down. The part that stands out to me is that the spread isn't really the investor's profit once you account for everything that happens between the purchase and the final sale.

I'd add one more line to the underwriting: what does the investor actually keep after all project costs and taxes?

Repairs, staging, financing and holding costs, commissions, and closing costs can eat into that $55K spread pretty quickly. And if someone is doing novations repeatedly as part of their real estate business, I'd also want to look at the tax treatment and entity structure rather than treating each deal as a one-off investment.

The other thing I'd watch is whether the deal still makes sense if the end buyer takes longer to close than expected. Ninety days of carrying costs can change the economics pretty quickly.

Your point that a novation should be the exception rather than the default is probably the biggest takeaway. If the property already works as a straightforward listing, there's not much reason to add another layer of complexity.

Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

Rob Bergeron · Answer

@Ametria Chaney Agreed, and you put your finger on the one that trips sellers up the most: the point where they no longer control the sale.

I'd add one item to your list. Spell out in writing what happens if the end buyer's appraisal comes in low, because that's the most common way these wobble. Does the price drop, does the investor absorb it, or does the seller get the right to walk? If that's decided before anything is signed, nobody is negotiating it at the closing table with a family's move hanging on it.

In Memphis, are novations coming to you mostly through listing agents, or through investors who bring the seller to you?

Ametria Chaney · Answer

Thank you for laying out the seller questions so clearly — that transparency is what makes or breaks a novation. The most important points for a seller are understanding the agreed net number, the timeline, who pays for repairs, and what happens if the end buyer's appraisal, inspection, or financing changes. Everything should be in writing, including approvals, fees, and the marketing arrangement, and the seller should understand when they no longer control the sale. Novations are not a fit for every home, especially when repairs are heavy or the seller needs a fast close. When the structure, timeline, and disclosures are clear up front, both sides can make a more confident decision.

Why novations are such a great tool, and the 4 questions every seller asks

3 Replies