Novation Agreements in Real Estate: How They Work, and Where They Don't

September 15, 2026 at 4:00 AM

by Rob Bergeron

Novation Agreements in Real Estate: How They Work, and Where They Don't

A novation is how you get paid on a house that is too nice to wholesale.

You know the one. Three bedroom in Fern Creek, dated but clean, needs paint and carpet and a countertop. No investor will pay you a spread because there is no rehab margin to make money on. And the seller cannot take a cash offer at 70 cents on a house worth 100 that needs six thousand dollars of work.

An assignment dies right there, every time. A novation is the structure built for that exact house.

I'm Rob Bergeron, a licensed Kentucky Realtor and the owner of Winner Realty in Louisville. This page covers how a novation actually works, when it beats an assignment, what Kentucky law does and does not say about it, and — at the end — the one version of this deal I'd tell you to walk away from.

Not legal advice. A working explanation.

What a novation actually is

The word just means substitution. A new contract replaces an old one, and one of the parties gets swapped out. In this structure, that party is you.

Here is the mechanism.

You agree with the seller on a net number — what they walk away with, guaranteed. Then instead of buying the house, you put it under contract with novation language, and you sign a separate fee agreement at the same time. The seller stays on title. You pay for the paint, the carpet, the countertop, the staging and the carrying costs. A licensed agent lists it on the MLS at retail price. A retail buyer with a retail mortgage shows up and makes a retail offer.

Then the novation executes. Your contract is replaced by a new contract between the seller and that buyer. You step out. At closing the seller receives their agreed net, and you are paid your fee from the proceeds.

You never owned the house. You never financed it. You never paid a transfer tax on it.

The math, honestly

Seller nets $200,000. Retail sale at $255,000. Gross spread of $55,000.

That $55,000 is not your profit, and anyone who quotes a gross novation spread next to a net assignment fee is comparing two different things on purpose.

Out of it: commission, call it $7,500 to $15,000. Closing costs around $5,000. Repairs and staging, $6,000. You land at roughly $29,000 to $36,000 net.

Against an assignment fee on the same house of — nothing, because there was no assignment to make. That is the actual comparison.

The risk nobody mentions

Once the novation executes, you have nothing.

No equitable interest. No cloud on title. No contract position to sell if the buyer walks. What you have left is whatever you were smart enough to put in writing before you signed.

Which is why the fee agreement gets signed at the same time as everything else, never after. And why you confirm with the title company — before you list the property — that they will disburse to a party who is not on the contract. Find that out in week one, not on the settlement statement.

Label the fee plainly when you get there. Underwriters scrutinize unusual line items, and a vague disbursement to an entity nobody can explain is how deals die in the last 72 hours.

Novation vs. assignment: which one

Novation wins on cosmetic-only houses where the seller can wait and a retail buyer will clearly pay more than any investor would.

Assignment wins on heavy rehab, on sellers who need out this month, and on anything where the end buyer is paying cash anyway.

The tradeoff is time. An assignment closes in two to three weeks. A novation runs 45 to 90 days, because you are now waiting on a retail buyer's financing, appraisal, inspection and underwriting. That is a mortgage timeline, not an investor timeline.

Assignment is the default. Novation is the exception. Anyone teaching it the other way around is selling a course.

Where Kentucky law sits on this

The same statute that governs wholesaling applies here. KRS 324.020, as amended by House Bill 62 in 2023, makes it unlawful for an unlicensed person to advertise for sale an equitable interest in a purchase contract.

A novation involves marketing a house. So the question is: who is doing the marketing?

The answer has to be a licensed agent, working under a written listing agreement signed by the owner — and the owner here is the seller, who is still on title. That is precisely why the structure works. Under 201 KAR 11:121, a Kentucky listing contract requires the listing price, the signatures of all parties authorized to sell, the principal broker and brokerage name, dates, fee, and property description. The seller signs it because the seller owns it. The investor is not the client.

And KRS 324.020(4) means the agent's commission cannot be split with an unlicensed investor. So the investor's payout is a seller-side obligation paid from proceeds under that separate fee agreement — not a piece of the commission. Those are two different things, and the settlement statement shows which one you did.

Here is what I am not going to pretend. I could not find any Kentucky Real Estate Commission guidance, Kentucky Bar ethics opinion, or MLS rule that addresses novations by name. Not one. That is not the same as a green light and it is not the same as a prohibition. It means the structure has not been tested here. Talk to your principal broker before you run one, and do not let anybody tell you the Commission has blessed it.

Short sales in Kentucky

A short sale is a different animal, and it is worth understanding because the two get confused constantly.

A short sale is when the house is worth less than the loan and the lender agrees to take less than it is owed. The seller is not the one giving up money. The lender is. That single fact governs everything that follows.

The process is more standardized than people think. On a Fannie Mae loan: hardship documented on Form 710, the property listed with a licensed agent who is not the borrower, a minimum of five consecutive days active on the MLS before submission, commission capped at 6%, up to $6,000 to subordinate lienholders, and a $7,500 relocation incentive for owner-occupants. The servicer must acknowledge an offer within five business days, give a written decision within 30 calendar days, and close within 60.

FHA runs its own program, the Pre-Foreclosure Sale, with a sliding scale of minimum net proceeds — 88% of appraised value in the first 30 days, 86% through day 60, 84% through day 120 — and a four-month marketing window. VA has a parallel process called a compromise sale.

In Kentucky, the deficiency waiver is the entire negotiation

This is the local fact that matters most and the one sellers here do not know.

Kentucky is a judicial foreclosure state, and it permits deficiency judgments. KRS 426.005 allows a judgment for the sale of the property and for recovery of the debt against the defendant personally.

So when a Kentucky homeowner does a short sale, the question is not only whether the lender will take less. It is whether the lender will write off the rest in writing.

On most Fannie Mae short sales the servicer releases the borrower from deficiency liability on completion — with a carve-out where mortgage insurance is involved and the insurer has not delegated authority. Get it in the approval letter, every time. On an FHA pre-foreclosure sale, HUD does not pursue a deficiency after a good-faith PFS. But those are program rules on specific loan types, not a general rule of Kentucky law, and not something to assume on a portfolio loan or a second lien.

On credit: a short sale reports as settled for less than the full balance and stays up to seven years from first delinquency. The waiting period for a new Fannie Mae loan after a preforeclosure sale is four years, or two with documented extenuating circumstances, versus seven after a foreclosure. That four-versus-seven is the honest case for a short sale over letting the house go.

The Kentucky foreclosure timeline

Kentucky's judicial process leaves a paper trail, which is why pre-foreclosure is a workable lead source here. The lender files a complaint and a lis pendens in Circuit Court. Twenty days to answer. Then judgment, then the Master Commissioner orders an appraisal, advertises, and sells. If the sale brings less than two-thirds of the appraised value, the defendant may redeem within six months by paying the purchase price plus 10% per annum.

You will see "twelve months" for that redemption period on some local sites. The statute says six, and only when the sale comes in under two-thirds of appraised value.

Louisville Metro publishes an upcoming foreclosure sales dataset several weeks ahead. Sale logistics — the day, the courtroom, the cash caps for bidders — change periodically, so confirm those with the Master Commissioner's office rather than relying on something you read.

The one door that is closed

Somebody reading this page will put the two halves together: negotiate the short sale down, novate it, sell retail, keep the spread.

Don't.

Fannie Mae's short sale carries a deed restriction that runs with the land. The buyer cannot convey the property at any price for 30 days, and cannot convey it above 120% of the short sale price until 90 days have passed. Every party signs a Short Sale Affidavit. The listing broker attests that all purchase offers were presented and that none were held or concealed. The borrower and purchaser must not receive any funds or commissions from the sale.

An investor engineering a spread between a lender-approved price and a higher retail price has a name at FHFA: flopping — buying a distressed property below market through a short sale, typically by making the house look worse than it is, and reselling higher. FinCEN describes it as a sale at an artificially low price to a straw buyer who resells higher and pockets the difference. The deception is the offense.

But Fannie's deed restriction and that affidavit are built specifically to make the honest version of the spread impossible too. Which is why the answer is to stay out of it rather than hunt for a clean lane.

The compliant short sale is narrow and boring. The agent lists at market. Every offer goes to the seller and the servicer. The highest legitimate offer gets submitted. The seller's only upside is the approved relocation incentive. There is no legitimate investor spread inside a short sale, because the lender is the party taking the loss. If you want the house, buy it, hold it through the deed restriction period, and make your money like everybody else.

That is the one structure on this site I will tell you not to do. Everything else is open.

If you are the one behind on payments

Different note, and I mean it.

If you are reading this because you are the homeowner and you are behind, the worst version of this is the one where you wait. Kentucky's process gives you a real window — twenty days to answer a complaint, and months before a Master Commissioner sale — and almost every option gets better the earlier somebody looks at it.

A short sale is one option. So is a novation if you have equity and the house shows well. So is selling with terms. So is reinstating. What you want is somebody looking at the actual numbers before it becomes a court filing rather than after.

Frequently asked questions

What is a novation agreement in real estate?

A novation replaces an existing purchase contract with a new contract between the seller and a retail buyer, substituting out the original buyer. In investor practice, the seller stays on title while the investor funds cosmetic repairs and the property is listed at retail by a licensed agent; at closing the seller receives an agreed net and the investor is paid a fee from proceeds under a separate agreement.

How is a novation different from an assignment?

An assignment transfers your contract position to an end buyer, who then closes with the seller — typically in two to three weeks, usually to a cash investor. A novation keeps the seller on title while the house is renovated and sold at retail, taking 45 to 90 days. Assignments suit heavy-rehab properties; novations suit cosmetically dated houses where a retail buyer will pay far more than an investor.

Are novations legal in Kentucky?

Assigning and novating contracts are not prohibited, but Kentucky's KRS 324.020 requires a license to advertise an equitable interest in a purchase contract, so the property marketing must be done by a licensed agent under a listing agreement signed by the owner. No Kentucky Real Estate Commission guidance or MLS rule addresses novations by name, so the structure is untested here — consult your principal broker.

Does Kentucky allow deficiency judgments after a short sale or foreclosure?

Yes. Kentucky is a judicial foreclosure state and KRS 426.005 permits a judgment for the sale of the property and for recovery of the debt against the defendant personally. That makes a written deficiency waiver the central term in any Kentucky short sale negotiation.

How long is the redemption period after a Kentucky foreclosure sale?

Six months, and only when the property sells for less than two-thirds of its appraised value, with redemption requiring payment of the purchase price plus 10% per annum. Some local sources state twelve months; the statute says six.

Can an investor buy a short sale and resell it at a profit right away?

No. Fannie Mae short sales carry a deed restriction running with the land that bars any conveyance for 30 days and any conveyance above 120% of the short sale price for 90 days, and all parties sign an affidavit attesting that no offers were concealed. Engineering a spread between the lender-approved price and a higher resale is the fact pattern FHFA calls flopping.