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?

Noah Wright · Answer

Saying "you can" out loud is the right instinct, and sellers can usually tell when they're getting the honest version. The way I'd make it concrete is to put three nets side by side instead of two. Listing it as is, the novation number, and a straight sale to an investor who buys it with fix-and-flip money. That third number is lower, but it doesn't wait on a retail buyer to show up and close. A lot of fix-and-flip lenders will fund most of the purchase and the rehab for an investor with experience and decent credit, so it's a real option and not just a lowball. Sellers are mostly choosing between the biggest number and the surest one, and seeing all three lets them decide which matters more to them.

Rob Bergeron · Answer

Three nets side by side is a good way to frame it. The seller isn't really choosing a buyer. They're choosing between the most money and the most certainty, and seeing all three numbers makes that trade plain.

I'd add a timeline to each one. The as-is listing and the novation both depend on a retail buyer showing up, and for a house that needs work here in Louisville that can take a while. The investor sale is lower but has a closing date attached. For a seller still paying the mortgage, taxes and insurance on a vacant house, those monthly costs belong in the comparison too.

The other thing I'd put in writing is what happens if the novation buyer never shows up. Sellers should know how long they're committed and what their options are if it stalls.

When you've watched sellers weigh those three, how often do they pick the surest number over the biggest one?

Don Konipol · Answer

You’ve laid out the groundwork well, novation COULD work out well for all parties. However, their very nature can lead to lawsuits.

Even if everything is clearly spelled out, when dealing with homeowners, they might feel like they have been taken advantage of AFTER THE FACT. Like when they tell their neighbors, a family member, or an online forum. And as homeowners they do have an elevated status within the legal system not available or “investors”. This isn’t theoretical, I have “real world” experience with this. A good friend of mine and full time real estate investor entered into just such an agreement with a neighbor, the result was three years of legal wrangling, and $40,000 in attorney fees. He ultimately “won”, but he didn’t feel like he did.

Rob Bergeron · Answer

Don, that's a real risk, and I appreciate you naming it. The seller feeling taken advantage of after the fact is the whole ballgame.

A few things I think keep it clean. Put the seller's net number in writing up front, in plain English, before any marketing starts. Give them a clear exit if it doesn't sell by a set date. Encourage them to have their own attorney review it, and say it more than once. And show every fee on the closing statement where they can see it.

Here in Kentucky, marketing a house you have under contract also brings licensing into it, so it should run through a licensed agent anyway.

None of that makes it bulletproof, but it makes the paperwork match what everybody thought they agreed to. Was your friend's fight over the price, the timeline, or the fee?

Rob Bergeron · Answer

@Ashish Acharya Agreed. The spread isn't the profit. Repairs, staging, carrying costs, commissions and closing costs come out first, and a buyer who takes 90 days instead of 30 changes the math fast. That's a big reason I only reach for a novation when a straight listing doesn't fit. The tax and entity piece is a good one for anyone doing these regularly to take to their CPA.

For the folks who've done one: what was the biggest cost you didn't see coming?

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

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