Tyson Smith explains novation contracts, which replace your original purchase agreement with a new one so the end buyer can use bank financing instead of cash. This lets wholesalers sell to retail buyers at higher prices and scale across multiple markets. You need three documents: a purchase agreement, a novation and indemnification agreement, and an attorney-in-fact letter to list on the MLS.
If you've been interested in wholesaling real estate, or maybe you are currently already wholesaling, you may have heard about something called novation. In this video, I'm going to break down exactly what a novation deal is, how you can use them, and the requirements to do a novation. Let's start by taking a look at the word novation. The root word novate literally means to replace with a new contract, and that's what we're doing in a novation deal. So a novation contract spells out the terms in which you can replace the contract, which terms are going to stay the same and what can change. Now, this is obviously a very powerful mechanism with many different uses, but the way I use it in wholesaling real estate is to allow me to replace my contract with a new contract that will allow for my end buyers to use traditional financing. If you didn't know already, with a normal wholesale deal, the end buyer can only pay using readily available funds like cash or hard money. So in essence, the only people we are going to be able to buy our wholesale deals are savvy real estate investors. But what if instead of selling your wholesale deals to savvy investors, you could sell them to the buyers who always pay the most for properties. I'm talking about retail buyers, the people who are buying the house as an end user, somebody who's going to go to a bank, get a loan for the property, and live in the house. Well, guys, that's what a novation contract allows us to do. And because we can now sell our deals to buyers who pay more money, that means that number one, as an investor who knows how to do novation deals, can make bigger spreads per deal. But we can also do more deals because we are going to be able to offer our sellers way more money than what our competition who don't know how to do novations can. Guys, think about it. Because I know how to do novations, renovations, I'm going to have a much higher MAO than everybody who doesn't. That means I'm going to be able to outbid them on every single house. So in order to do an innovation deal, you're going to typically need 3 agreements plus a certain type of seller with a certain type of property, right? When it comes to the seller, you need to have a person who doesn't really mind having a longer close. This is because once we're dealing with retail buyers, there are a lot more steps that need to happen before the deal can close. Things like inspections, appraisals, getting final approval for loans. So on. So if the buyer is willing to wait a bit longer for closing, you're going to be able to get them more money for their property. The next thing you need to look for is a seller whose property is in decent shape. If the property needs a whole bunch of repairs, then it's not going to pass any bank's appraisal and will only work for a cash deal anyways. Now I'm not saying that the house needs to be full ARV, um, it's completely fine if it's dated, maybe needs some small repairs, but no properties that need like full rehabs or hoarder houses, that kind of thing. So once you've found a seller who doesn't mind a longer closing and has a decent property, you know you've got somebody that's a good fit for an Ovation. So now In order to actually do the novation deal, you're gonna need 3 different agreements. The first, just a standard real estate purchase and sale agreement that you would use to wholesale any property, right? This is how we get the property locked up and establish our basis price with the seller, basically agreeing to how much the seller is gonna get from the deal and when close of escrow will be. The other terms of the contract aren't gonna matter as much because in addition to the purchase and sale agreement, you are also going to need a novation and indemnification agreement. The novation agreement is the bread and butter here, right? This is what's gonna allow us to sell the property to buyers using conventional finance. A novation agreement basically says that the first purchase agreement we signed, the AB contract, is going to get replaced with a new purchase agreement with the end buyer, which is an AC agreement, provided that certain terms stay the same, such as the price the seller is going to get and the close of escrow date. Next, you're going to need a document called an attorney in fact that allows you to list the seller's property on the MLS on their behalf. So this document is going to allow you to sign listing documents for the property for the seller so that you can get their property listed on the MLS so that these retail buyers can easily find your deal. And this is one of the craziest parts about novations, guys, because it completely eliminates the need for a buyer's list since you can just list all the deals on the MLS, right? Guys, knowing how to do novations is what has allowed me to do deals in almost 20 different states this year alone since I don't need a big buyer's list in every single market. But once you have those 3 documents signed, you now have a novation deal that you can sell on the MLS, which will allow you to make a bigger fee, get the seller a better price for their property while still having a lot of the same convenience as a cash offer, and help a family get into a new home for a great price. So if you want to learn more about how to do novation deals, click the link below this video to see the available dates and times to book a free strategy call with me and my team, where we're going to give you all the resources and the help that you need to get novations implemented in your real estate business. And also guys, if you're still need help getting your first real estate deal, I'm doing a free live training this week where I'm gonna show you step by step how I would go about getting my first deal if I had to start over from square one. So you can sign up for that using the link in description as well. Now guys, if you have any questions about Novation deals, make sure to leave a comment below. And if you've watched this video all the way until now, I feel like you owe me at least a like and to subscribe to my channel. I set a goal for myself to reach 10,000 subs on here before 2024. And I'm like only halfway there. So please help me out here. Anyway, guys, thank you so much for watching and we'll see you on the next one.
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