Novation

Novation is the substitution of a new contract or party for an existing one, with all parties' consent, extinguishing the original obligation.

Novation is the substitution of a new contract — or a new party — for an existing one, with everyone's consent, in a way that extinguishes the original obligation. That is the key difference from an assignment: an assignment transfers rights while the original contract survives, but a novation replaces the contract entirely and releases the original party.

In wholesaling, "novation" usually refers to a specific strategy. An investor signs an agreement with a seller, then markets the property — often on the open market to retail buyers, who pay more than cash investors. When a retail buyer offers, say, $240,000 on a house the investor agreed to at $200,000, the seller signs a new purchase contract directly with that buyer, novating the investor's contract away. The investor's agreement entitles them to the spread — roughly $40,000 before costs — paid at closing. It is a way to capture retail pricing on houses too nice to discount to a flipper.

What beginners get wrong: treating novation like an assignment with extra steps. It is not — it needs a properly drafted novation agreement, a seller who genuinely understands the arrangement, a plan for how the spread gets paid on the settlement statement, and attention to state licensing rules, since marketing a house to retail buyers looks a lot like brokerage. This structure has drawn regulator attention in some states. Use an attorney who has papered these before — this is not legal advice.