Novation Vs. Assignment In Real Estate Wholesaling
When it comes to real estate wholesaling, understanding the difference between novation and assignment is crucial for successful deals. Let’s break down these important concepts.
Novation in Real Estate
Novation creates a new contract that completely replaces the original agreement. All parties must agree to terminate the first contract and enter into a new one.
Key aspects of novation:
- Transfers both rights and obligations
- Requires consent from all parties
- Creates an entirely new contract
- Releases the original party from obligations
Assignment in Real Estate
Assignment transfers only the rights of the contract to another party. The original party maintains certain obligations.
Key aspects of assignment:
- Transfers only rights, not obligations
- Generally doesn’t require seller consent (unless specified)
- Original contract remains in place
- More common in wholesaling
FAQs
Q: Which is better for wholesaling – novation or assignment?
Assignment is typically preferred as it’s simpler and requires less paperwork and fewer parties’ consent.
Q: Do I need the seller’s permission for an assignment?
Not usually, unless the contract specifically prohibits assignment.
Q: What’s the typical assignment fee in wholesaling?
Assignment fees typically range from $5,000 to $15,000, depending on the market and deal size.
Q: Can I assign a contract multiple times?
Yes, unless prohibited by the original contract terms.
Q: Is novation more legally secure?
Yes, novation often provides more legal protection as all parties explicitly agree to the new arrangement.
Q: Which method is faster to execute?
Assignment is generally faster as it requires fewer signatures and less negotiation.
Q: Are there tax differences between novation and assignment?
Yes, assignment fees are typically treated as ordinary income, while novation might have different tax implications.
The Bottom Line
For most real estate wholesaling situations, assignment is the preferred method due to its simplicity and efficiency. However, understanding both options allows investors to choose the best strategy for their specific situation. Always consult with a legal professional before proceeding with either method.