Wholesale vs Novation: When to Use Each
Wholesale and novation are both strategies for profiting from a real estate contract without actually buying and renovating the property. But they work differently, carry different legal implications, and fit different situations. Understanding when to use each expands your toolkit and lets you capture deals that don't fit a standard wholesale assignment.
Wholesale (assignment) overview
In a wholesale assignment, you contract a property at one price and assign that contract to an end buyer at a higher price. Your profit is the assignment fee: the difference between your contract price and what the buyer pays.
The structure: You sign a purchase contract with the seller. Before closing, you assign that contract to your buyer. The buyer closes directly with the seller, and you receive your assignment fee at closing.
Key characteristics:
- You never take title to the property
- Your buyer is typically an investor (cash buyer or hard money)
- The property usually needs renovation (you're selling to a flipper or landlord)
- Your fee is transparent: the buyer sees what the seller is getting and what you're making
- Typical profit: $5,000-$25,000 per deal
- Timeline: 2-4 weeks from contract to close
Novation overview
In a novation, you contract a property, then market it at retail to an end buyer (often a homeowner using conventional financing). Instead of assigning your contract, you facilitate a new contract between the seller and the retail buyer, with your profit built into the transaction.
The structure: You sign a novation agreement with the seller that gives you the right to market the property and find a buyer. When you find a buyer, you introduce a new purchase contract between the seller and buyer at the retail price. Your profit is the difference between the seller's net proceeds and what the buyer pays, minus closing costs.
Key characteristics:
- You never take title (similar to wholesale)
- Your buyer can be a retail buyer using FHA, VA, or conventional financing
- The property is often in decent condition or needs only cosmetic work
- Your fee structure is less transparent to the end buyer
- Typical profit: $15,000-$50,000+ per deal (higher than wholesale)
- Timeline: 30-90 days (longer because retail buyers use financing)
When to wholesale
- The property needs significant renovation: Retail buyers won't purchase a property that needs $40K+ in work. Investor buyers will.
- You need to close quickly: Assignment deals can close in 2-3 weeks with a cash buyer. Speed is your advantage.
- The seller needs to sell fast: Motivated sellers with urgent timelines benefit from the quick close that wholesale provides.
- The deal spread is thin: If there's only $10K-$15K of margin, wholesale is more appropriate than novation because the shorter timeline means lower risk.
- You have an active buyer list: Finding cash buyers quickly is essential for wholesale.
When to novate
- The property is in good condition: Move-in ready or needing only cosmetic updates. Retail buyers will buy it.
- The seller is willing to wait: Novation takes 60-90 days because the end buyer needs financing.
- The retail price is significantly higher than the investor price: A property worth $250K retail might only be worth $200K to investors. Novation captures the $50K difference rather than the $10K-$15K assignment fee.
- The property won't appeal to investors: Some properties (nice neighborhoods, good condition, no renovation upside) don't interest investors but are perfect for retail buyers.
- You want to maximize profit per deal: Novation fees typically exceed assignment fees because you're accessing the retail buyer market.
Legal considerations
Both strategies have legal nuances that vary by state:
Wholesale assignment
- Some states require disclosure that you're assigning the contract
- Some contracts have anti-assignment clauses that must be addressed
- Several states now require a real estate license or specific disclosures for repeated wholesale activity
- Your assignment fee is visible to all parties at closing
Novation
- The novation agreement must be properly drafted to protect all parties
- Some states view novation activity as real estate brokerage, potentially requiring a license
- The seller must agree to the novation arrangement in writing
- Title companies and closing attorneys need to understand the structure
This content is for informational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified professional for guidance specific to your situation.
Marketing approach differences
Wholesale deals are marketed to investors via deal blasts, buyer lists, and investment networks. You need comps, repair estimates, and ARV data to demonstrate the deal's profitability for the end buyer.
Novation deals are marketed to retail buyers via the MLS (through a listing agent), online real estate portals, and open houses. The marketing package focuses on property features, neighborhood appeal, and move-in readiness, not investment returns.
Profit comparison
Consider a property with a $170K contract price and a $250K retail value:
Wholesale: Assign at $190K to an investor. Fee = $20K. Time: 3 weeks.
Novation: Sell at $245K to a retail buyer. Net after seller's closing costs and your costs: ~$40K-$50K. Time: 60-90 days.
Novation produces 2-3x the profit but takes 3-4x as long. Your cost of capital and deal volume goals determine which makes more sense.
Can you do both?
Yes. Smart investors evaluate each deal and choose the strategy that maximizes profit given the property condition, timeline, and market. Some properties are clearly wholesale deals (distressed, needs work). Some are clearly novation deals (good condition, retail-ready). Some could go either way, and the decision comes down to your current priorities.
Use the exit strategy tool to model both approaches and compare projected returns.
Related articles
- Wholesale Exit Strategies Explained
- Creative Finance Exit Strategies
- How to Assign a Contract
- How to Price a Wholesale Deal