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Real Estate Novations: A new way to wholesale property

If you’re tired of losing good deals to other wholesalers….

Then you might want to consider adding novations to your tool belt.

It’s grown in attention because real estate wholesalers can put a nice house under contract and still make a good amount just by listing it on the MLS.

The person who is spearheading the most right now is Eric Brewer, of the “Brewer Method”, who teaches investors to make more per deal using novations.

We’ll dive into the details in this article, everything you must know to close your first wholesaling novation deal in real estate!

Let’s jump to it!

What is a novation in real estate?

Novations in real estate are innovative contract agreements that allow a property under a wholesaler’s contract to be transferred to a new buyer, with the original terms intact but the parties changed. Wholesalers leverage novations to essentially step into the shoes of the seller, enabling them to list properties directly on the MLS and capture a wider market, often leading to higher profits. This strategy opens up a realm of possibilities, turning traditional wholesaling on its head by combining the roles of an investor and a broker in one.

Here’s a video showing you how wholesalers do novations: 

What are the advantages of novations in real estate?

The advantage of novation in real estate wholesaling lies in its ability to elevate the wholesaler’s role beyond the traditional, enabling them to unlock higher profit margins. By employing novation, wholesalers can market properties directly on the MLS, tapping into a broader pool of potential retail buyers and securing deals at or near market value, rather than the discounted prices typical of wholesale transactions. This not only increases the wholesaler’s earning potential but also offers sellers a more lucrative exit and buyers access to quality properties, making novation a win-win-win strategy in the competitive real estate landscape.

Who’s a Good Fit for Novations?

In the fast-paced world of real estate wholesaling, we’re essentially peddling two invaluable commodities: speed and convenience. A cash offer usually checks both boxes, offering sellers a quick and hassle-free exit from their property. However, when the property in question is a well-maintained, spruced-up residence, the seller might be on the lookout for something more than just a swift transaction – they might want a better price without sacrificing convenience.

Enter novations, the savvy wholesaler’s ace in the hole. This strategy shines brightest when dealing with sellers who are proud of their property’s condition and are aiming for top dollar, yet still crave the simplicity and ease of a direct deal. By proposing a novation, you’re not just offering them a way out; you’re offering a tailored solution that meets their unique needs, marrying the desire for a better price with the convenience of a straightforward transaction.

What is an Example of Novation?

Imagine you’re a wholesaler who stumbles upon a gem: a well-kept home in a desirable neighborhood. The owner, eager to sell but not at a rock-bottom price, is your perfect candidate for a novation. You enter into a contract to purchase the home, but instead of finding a cash buyer to assign the contract to, you novate it.

Here’s where the magic happens: You find a retail buyer willing to pay market value, perhaps a family seeking their dream home. Through novation, you transfer your purchasing rights to this family, but with a twist – the original sale terms are tweaked to include your profit margin. The seller gets their desired price, the buyer secures their dream home, and you, the wholesaler, walk away with a tidy sum, all without the need for traditional assignment strategies. This real-life scenario showcases novation’s power to create win-win-win situations in the real estate market.

What to say to a seller

When discussing novation with a seller, avoid technical terms and opt for simplicity. Introduce it as an “Equity Protection Program,” which conveys security and value without overwhelming them with legal lingo. Explain it as a straightforward solution that maximizes their home’s value while ensuring a smooth selling process, making it an attractive alternative to traditional selling methods.

Script:

“Hi [Seller’s Name], I’m glad we had the chance to discuss the potential sale of your home. I understand you’re looking for a smooth transaction while aiming to get the best value for your property. We offer a unique approach called the ‘Equity Protection Program.’ This isn’t your typical sale; it’s designed to maximize your home’s value and ensure a hassle-free process. Essentially, we agree on a fair price that reflects your home’s worth and find a buyer who appreciates its value, all while keeping the process straightforward for you. How does that sound?”

Here’s a video on how to pitch novations: 

Are Novations legal?

Navigating the legal landscape of novation agreements in real estate wholesaling can seem like a tightrope walk. It’s essential to start with a disclaimer: we’re not lawyers, and this shouldn’t be taken as legal advice. However, understanding the legality of novations for wholesalers is crucial. The key to legality lies in the contract’s structure and content. A well-crafted novation agreement, ideally drafted or reviewed by a real estate attorney, can ensure that your deal aligns with state regulations and remains within legal boundaries. Be wary of the thin line between novation agreements and net listings, which are exclusive to licensed agents in some states. To stay on the right side of the law, always ensure your contract specifies your role and responsibilities clearly, avoiding any resemblance to a net listing arrangement. Consulting with a legal professional can help you tailor a contract that meets these criteria, keeping your novation deals both profitable and compliant.

What are the pitfalls of novations?

While novation offers a compelling twist to real estate wholesaling, it’s not without its pitfalls. The primary challenge lies in the complexity and legal intricacies involved in transferring contractual rights, which can deter sellers unfamiliar with the concept and potentially complicate transactions. Additionally, because novations require the wholesaler to find a retail buyer willing to pay market value, they can sometimes lead to longer holding times and increased marketing efforts, contrasting sharply with the quick flips expected in traditional wholesaling. Navigating these hurdles requires a solid understanding of contract law and a strategic approach to marketing, making novation a potentially lucrative yet more sophisticated strategy in the wholesaler’s toolkit.

What are the risks of a novation agreement?

Engaging in a novation agreement carries its own set of risks, primarily the reliance on all original parties’ consent to replace the initial contract, which can be a significant hurdle if not all parties are aligned or understand the benefits. Additionally, the process can expose wholesalers to legal and financial liabilities, especially if the new agreement fails to precisely replicate the obligations and protections of the original. This complexity necessitates a deep understanding of contract law and a meticulous approach to drafting the novation agreement, making it crucial for wholesalers to either possess a strong legal background or to seek expert legal advice to navigate these challenges effectively.

Step by Step completing a novation deal

Completing a novation deal in real estate involves a series of strategic steps, each crucial to ensuring a smooth process and maximizing the potential profit. Here’s a streamlined guide to navigate through a novation transaction from start to finish:

1. Initial Contact with the Seller: Establish a rapport and understand their needs and motivations to sell.

2. Present a Cash Offer: Make a straightforward cash offer as the first option, appealing to the seller’s desire for a quick and hassle-free sale.

3. Introduce the Novation Agreement: If the cash offer isn’t enticing enough, propose the novation agreement as a plan B, highlighting the potential for the seller to net more money by allowing more time to sell the property.

4. Explain the Novation Benefits: Clarify how novation works, emphasizing the advantage for the seller in terms of potentially higher sale proceeds due to the property being listed on the MLS.

5. Secure Property Access: Ensure you have the right to access the property for showings and inspections, which is critical for the next steps.

6. Property Should Be Vacant: Ideally, the property should be vacant. This simplifies showings and can make the home more appealing to prospective buyers.

7. List the Property on the MLS: Leverage the MLS to gain maximum exposure for the property, reaching a wider pool of potential buyers.

8. Facilitate Showings: Organize and conduct showings for MLS buyers, showcasing the property’s features and potential.

9. Negotiate with Buyers: Engage in negotiations with interested buyers to secure the best possible offer, keeping in mind the seller’s expectations and the novation agreement terms.

10. Close the Deal: Finalize the sale, ensuring all contractual obligations are met, and that the original seller and you, as the wholesaler, are both satisfied with the outcome.

By meticulously following these steps, you can effectively complete a novation deal, providing benefits to both the seller and yourself as the wholesaler, while also potentially offering a great opportunity to the end buyer.

How to find sellers for your novations

Finding sellers open to novation agreements requires a proactive and strategic approach. Here’s how you can identify potential sellers:

– Find FSBOs (For Sale By Owners): Daily search for FSBO listings can unveil sellers who might prefer a novation agreement over traditional sales channels. Presenting cash offers initially can open the conversation to novation as a lucrative alternative.

– Pull a List: Utilize tools like PropStream or county records to generate a list of potential sellers. Look for properties with characteristics that fit your ideal novation scenario, such as equity-rich homes or those in desirable locations.

– Target Absentee Owners with Equity: Absentee owners, especially those with significant equity, can be prime candidates for novation deals. They might be more inclined towards a hassle-free transaction that novations offer.

– Use Niche Lists: Dive deeper by creating niche lists that may include distressed properties, probates, or high-equity homes. These sellers might be more motivated for a quick and unconventional sale process.

– Skip Trace: Once you have your list, use skip tracing services to find accurate contact information for the property owners. This step is crucial to ensure your marketing efforts reach the right person.

– Mail Them: Direct mail campaigns targeting your curated list can effectively communicate the benefits of novations. Personalize your messaging to resonate with the seller’s potential needs and motivations.

– Call Them: Follow up your mailing efforts with phone calls. A direct conversation allows you to gauge the seller’s interest, answer questions, and build rapport.

– Repeat: Consistency is key. Regularly revisiting and refining your approach based on response rates and feedback ensures a steady pipeline of potential novation deals.

By employing these targeted strategies, you can efficiently identify sellers who might benefit from novation agreements, thereby increasing your chances of closing more deals.

BONUS:

1.) Use Ballpoint Marketing for highest response marketing.

2.) Use Call Porter to work your leads that need following up

Summary – Novations for increased Deal Flow

In the world of real estate wholesaling, novations emerge as a strategic ace up the sleeve for those looking to maximize their deal flow. Traditional wholesaling might see you walking away from leads where a cash offer just doesn’t cut it, but with novations, you’re equipped to transform these seemingly unfitting leads into lucrative deals. This approach not only expands your portfolio but also serves sellers seeking a convenient sale without the hassle of going to market themselves. By adopting novation agreements, you’re not just avoiding leaving money on the table; you’re also providing a valuable service to sellers in need of an alternative solution. It’s a win-win: sellers achieve their sale, and you, the wholesaler, secure more deals, enhancing your reputation and bottom line in the competitive landscape of real estate investing.