What Is Novation in Real Estate?
Novation is a legal process that replaces one party in a real estate contract with another — with the full consent of all parties involved. It creates a completely new contract, relieving the original party of all obligations.
📘 What Novation Means in Real Estate
A novation replaces an existing contract with a new one. This is different from an assignment, where the original party may still remain partially responsible.
With novation:
- A new buyer takes over the contract
- The seller agrees to release the original buyer
- A brand-new contract replaces the original one
- The original buyer has no remaining liability
Novation requires clear, written consent — all parties must agree.
Compare it to assignment: Assignment Contracts
🔄 Types of Novation Used in Real Estate
1. Buyer-to-Buyer Novation
A new buyer replaces the original buyer in the purchase contract, usually when the original buyer cannot or does not want to continue.
2. Seller-to-Seller Novation
Less common, but can happen when a property changes hands before closing and a new seller steps into the contract.
3. Lender Novation
A lender may be replaced with a new lender (rare but possible in commercial or creative financing deals).
Learn related concepts: Equitable Interest • Under Contract
⚖️ Novation vs. Assignment
- Novation = A brand-new contract. Original buyer is released.
- Assignment = Original contract stays. Original buyer may remain liable.
- Novation requires full consent of all parties.
- Assignment may occur without seller approval (depending on contract).
Novation provides a cleaner, more secure transfer of contract obligations.
🏡 When Novation Is Used in Real Estate
- The original buyer cannot qualify for financing
- A new buyer wants to take over the deal without renegotiation
- A seller or buyer needs to be replaced due to unexpected circumstances
- All parties want a clean transfer of obligations
Novation eliminates risk for the original party because they are fully released from the contract.
Learn more contract concepts: Specific Performance
📝 FSBO Sellers: What You Need to Know
When selling without an agent, novation is especially important to understand — because it determines whether the original buyer stays liable.
- Novation releases the original buyer entirely
- Sellers must explicitly agree in writing
- Title and escrow must be notified
- Financing timelines may restart
If you allow novation, make sure the new buyer is fully qualified and approved.
FSBO resources: DIY Home Selling Playbook
🔑 Bottom Line
Novation replaces an existing real estate contract with a new one, substituting one party for another. It requires full consent from everyone involved and completely releases the original party from liability.
Explore related guides:
Assignment Contracts • Equitable Interest • Specific Performance