Summary of "3 Types Of Novation Agreements"

Summary: 3 Types of Novation Agreements (Fix-and-Flip Real Estate Strategy)

Presenter: Pace Morby

Core Concept: Novation Agreement in Real Estate

A novation agreement allows a real estate investor to fix and flip a property without actually purchasing it upfront. Instead, the investor contracts with the seller to pay a guaranteed amount after renovation and resale.

Primary Strategy: Fix-and-flip only (no long-term holding).
Value Proposition: Enables investors to offer sellers more money than traditional cash buyers by avoiding upfront purchase costs such as closing, title insurance, and hard money loan fees.
Example: Seller Eric values his property at $400K (ARV). Investors typically offer $275K due to the property’s condition. Using a novation agreement, an investor offers Eric $300K, promising to pay after renovation and resale, thus outbidding others without upfront capital.

Business Frameworks and Processes

3 Types of Novation Agreements

Net Listing (Agent-Based)
- Investor acts like an agent (though Pace is not licensed).
- Seller wants a guaranteed minimum price (e.g., $300K).
- Investor renovates and lists the property on MLS.
- Upon sale (e.g., $400K), investor pays seller the guaranteed amount and keeps the difference minus renovation costs.
- Note: Net listings can be legal if structured properly despite common misconceptions.
- Typically used by licensed agents but can be adapted for non-agents with novation agreements.
Standard Novation Agreement (Investor-Led)
- Investor contracts directly with seller promising a minimum payout after resale.
- Investor sources renovation capital via:
  - Personal or corporate credit lines (e.g., prime corporate services).
  - Financial partners (friends, family).
- Investor renovates, sells, pays seller, repays lender/partner, and keeps remaining profit.
- Functions like a consignment model.
- Eliminates upfront purchase, closing, and loan fees.
Partnership with Seller
- Seller and investor share upside beyond guaranteed minimum.
- Example structure:
  - Seller guaranteed $300K.
  - If sale price ≤ $300K, seller keeps all proceeds.
  - Between $300K and $400K, investor keeps the margin.
  - Above $400K, profits split between seller and investor.
- Useful when seller overvalues property; aligns incentives.
- Flexible, negotiable sliding scale structures.

Key Metrics and Financial Considerations

ARV (After Repair Value): Example $400,000.
Seller’s Discounted Price Expectation: Example $275,000.
Investor’s Guaranteed Payout: Example $300,000.
Typical Cost Savings: Avoid $10,000–$25,000 in closing costs, lender fees, title insurance.
Profit Example: Sell at $400K, pay $300K to seller, minus renovation costs, keep remaining profit.
Capital Sources for Renovations:
- Corporate credit lines (e.g., prime corporate services).
- Credit cards.
- Private financial partners.

Operational and Legal Notes

Novation agreements are complex and require proper legal structuring.
Title companies and lenders may be unfamiliar or resistant to novation agreements.
Proper paperwork and negotiation skills are critical.
Novation agreements can be assigned or wholesaled to other investors.
Pace Morby teaches detailed legal and operational frameworks in his mentorship program (sub2.com).
Mentorship and community support are recommended for mastering novation agreements.

Case Studies & Examples

Chuck Billy & Ryan Peterson: Students who made over $1 million in a year using novation agreements nationwide.
DJ Martin: Made $80,000 using novation agreements after learning from Pace’s mentorship.
Creative Finance Facebook Group: Community of 40,000+ investors sharing deals, capital raising, and novation strategies.

Actionable Recommendations

Use novation agreements to outbid cash buyers by avoiding upfront costs.
Source renovation capital via corporate credit or partners.
Structure deals with clear guaranteed payouts and profit splits.
Join mentorships or communities to learn legal and operational nuances.
Negotiate flexible terms tailored to seller motivations.
Consider wholesaling novation agreements as an additional revenue stream.

Resources Mentioned

Mentorship: sub2.com/start
Corporate Credit: prime corporate services (primecoreservices.com)
Facebook Group: Creative Finance with Pace Morby
Podcast: “Get Creative” episode with Chuck Billy on novation agreements

Summary

Pace Morby explains novation agreements as a creative fix-and-flip strategy allowing investors to contract with sellers, renovate, and sell properties without upfront purchase. There are three main structures—net listings, standard novation agreements, and seller partnerships—each enabling investors to offer sellers more money while avoiding traditional transaction costs. Success depends on negotiation, capital sourcing, legal structuring, and leveraging community and mentorship resources.

Presenter: Pace Morby