Epic Real Estate Investing - How Does a Novation Agreement Work in Real Estate (Contract Download) | 1325

Episode Date: August 2, 2024

Are you leaving money on the table in your real estate deals? Discover how a simple contract adjustment can transform your profits and propel you from traditional methods to more lucrative strategies. In this podcast, we dive deep into the power of novation agreements—a game-changer in real estate that can help you sell properties at retail prices, tapping into a broader buyer pool and maximizing your gains. You’ll learn: The Basics of Novation: What is a novation agreement and how does it differ from traditional assignment methods? Step-by-Step Guidance: From negotiating with sellers to drafting crucial documents, get a clear, actionable blueprint for using novation to your advantage. Practical Insights: Hear real-world examples comparing novation to other flipping strategies, and see how it stacks up in terms of profitability. Essential Documents: Get access to key contracts and paperwork you need to execute novation agreements effectively. Whether you’re new to novation or looking to refine your approach, this episode offers a comprehensive guide to leveraging this powerful technique. Don’t miss out on potential profits—tune in and learn how to revolutionize your real estate transactions. Plus, stay tuned for a special bonus that’ll take your understanding of seller financing to the next level! P.S. Whenever you're ready to go deeper and further with your real estate investing, looking into my partner program to help you get your first deal might be the move... take the first step here for free 👉 Here’s the deal, I’ll partner with you on your first real estate deal, and we’ll split the profits. It’s that simple. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Hey, strap in. It's time for the epic real estate investing show. We'll be your guides as we navigate the housing market, the landscape of creative financing strategies, and everything you need to swap that office chair for a beach chair. If you're looking for some one-on-one help, meet us at rei-aise.com. Let's go, let's go, let's go, let's go, let's go, let's go.

Let's go. How does a simple contract change make you, thousands more in real estate. Well, by the end of this, you'll know how a Novation agreement works to max out your profits because missing out on more money because you're confined to traditional methods can be a bummer. You see others succeeding, right? You selling their properties at retail price and you wonder what you're doing wrong. Well, the good news is maybe you're not doing anything wrong, but rather it's what you're not doing at all, using the Novation Method to wholesale or flip your deals. So I put together a comprehensive guide for you here on what it is,

how it works and how I use it. So consider this year, get to the point step-by-step instruction manual that you can come back to as a reference over and over and over again on how a simple contract change can make you thousands more per deal. And I'll even give you all of the contracts and the paperwork for you to pull it off yourself. Okay. So if you're subscribed to the channel, you're familiar with an assignment of contract to wholesale properties. That's when you assign your rights in an existing contract with your seller to an end buyer. You assign them to them using a number. Novation contract is when you replace your existing contract with a new contract between your

seller and end buyer. This novation method, it allows for selling properties to retail buyers at retail prices, often resulting in higher profits than traditional wholesale deals. So step one, the definition, Novation means replacement or new. In real estate, it involves replacing the initial purchase agreement with a new contract between the seller and the end buyer voiding the previous agreement. And this is important because, unlike

traditional assignments, which typically require cash buyers, Novation allows selling to retail buyers who can use various financing options like FHA, VA, or any other conventional loan that allow them to pay you more. It opens up a whole new world to you as a real estate investor. A bigger buyer pool that can pay more translates to more competition, and that drives greater profit. Step two, contract with the seller. So the purchase agreement, you want to make sure it's included in your purchase agreement

is your novation language to give you the right to replace the contract with a new one. An example clause could be something as simple as buyer has the right to novate the property. So add that to your existing agreement, or you can just use mine that I'll give you when we're all done here. Number two, transparency. Clearly explain the novation process to the seller. Ensure that they understand that you will be marketing the property and you do need reasonable access for showings. This is much of where the magic is in the novation method, how you explain it to the seller.

And although this method will give you the ability to market the seller's property on the multiple listing service, I would refrain from using it in your language. Don't say MLS because it has the potential to open up a whole new can of worms. So rather, explain to the seller how you'll be sharing their property with your network and the open market to get them a better price. After all, that's what's most important to you, Mr. Seller, isn't it? Three, the Seller Motivation. Assess the seller's timeline and financial needs. This will help you decide if Novation or another strategy is.

more appropriate. I find this novation method to be most applicable when the seller and I have reached an impasse on price, and they don't like the idea of selling on terms. So a novation deal, it's almost a no-brainer for a motivated seller at this point. For setting expectations, use a consultative approach to understand the seller's needs, to understand their goals and understand their problems. Ensure full disclosure, explaining that you will be selling to a third party for a profit, but always include what's in it for the seller in your explanations to help the seller keep their eye more on their own wallet than yours. Step three, the initial documents you're going to need is your purchase agreement to make sure it has that novation clause and it gives

you the right to novate. You'll need that. And then you'll need the novation and indemnification agreement. I need one of those for sure. And then you need a limited power of attorney for the property sale. And I'll give you these, all of these to you in a minute. Plus, you're going to need these additional documents. You'll need the MLS authorization form for property sale through a innovation agreement. It's an extra disclosure that I just started using because a cooperating broker recently required it. But I hadn't needed it up until that time, but now I just, I go ahead and use it just in case. And then you need the memorandum of understanding for property sale through an ovation. So this is another disclosure that's not required, but it does help cover your ass and make sure

everything is above board and everybody understands what they're supposed to do. And then you need this, the affidavit of interest or memorandum of agreement. You need this because it's going to protect your position in the deal and it's going to ensure that you get paid at closing. So don't forget this one. I'll give you all these at the end. Now, step four, find the retail, buyer. So we do that by marketing the property. You can list the property on the open market, the MLS, Zillow, Redfin, wherever you want, targeting retail buyers who plan to live in the home. See, you're selling to resident owners most of the time with the Novation method. It's a little bit of a different game if you've never done it before. And two, you want to coordinate with an agent.

So work closely with both listing and buyer agents, ensuring that they understand the innovation process and the specifics of the deal. Educate them if necessary. And it's almost always necessary. Handling showings. Arrange showings in a way that minimum It minimizes disruption to the seller. So setting their expectations of showings up front, that helps a lot if you do it up front. And consider offering incentives such as gift cards for the seller to vacate during showings. Like, buy them lunch. Send them to happy hour on you, right?

Step five, replace the contract. So when a retail buyer is found, replace the initial purchase agreement with the new one, where the buyer contracts directly with the seller. Hold on to the original agreement, though. Even though it's voided, you're going to need that to get paid. Then the notice of interest. You want to record your notice of interest to protect your position and ensure that you do get paid at closing. This notice, it acts like a lien showing your interest in the property.

And the seller, they can't sell now without taking care of you because of that. And then the limited power of attorney. You want to obtain a limited POA from the seller to execute necessary documents. But avoid using it to sign the final closing documents on the seller's behalf to prevent any red flags with lenders. They're getting pretty touchy these days. Now, step six, underwrite the deal. And I want to use this here, this spreadsheet here, to compare the different flipping strategies that you have available to you because you really do need all of them in your toolbox,

because not every deal will be good for the Novation method as much as you may want to use it. So let's assume with each of these flipping strategies that all things here are equal. So I pulled this property off the internet somewhere. It was listed for $360,000. And if you were to fix it up, it's after repair value would have been about $580. If I negotiated a purchase price of $300, it would make $4,000. it would make for a good wholesale deal, where I could likely sell it at gooffmarket.com for $320,000. And I might have some transaction costs or incidentals, like, I don't know, $300 or so.

And that would net me $1,650. Now, let's say I found a buyer for $340,000. And I wasn't too sure how the seller would feel about me making $40,000 after I negotiated him down to $300. So I opted for a double escrow to keep my A to B and B to C separate and private. Now, since I'm doing two transactions, I'm going to have two sets of closing costs. One set for my closing costs on the A to B transaction and one set for my B to C transaction. But this would net me 26,900. I mean, sometimes you got to do this to keep everyone happy while you earn a few extra bucks.

Now, let's say I'm working with a title company that won't do assignments or double escrow where the end buyer's money is used to close the deal. It's becoming more and more common. So I have to use transactional funding to get this flip done. So this will look just like a double escrow, but I have a transactional funding charge. of $6,000. And this nets me $20,900. Now, the next scenario is where I may want to do the fix and flipping myself, considering I couldn't get the seller down to the $300,000 in order for me to wholesale it, but I was still okay with a $320,000 purchase price. So I borrowed 100% of the capital to purchase and fix it up from investorbags.com. And that cost me $34,020. And the rehab job was

58,000. It took me 180 days from purchase to sale, and I sold it for full ARV, $580,000. I had to pay agent commissions $34,800, and that left me with $114,480. Not too bad if you like doing all that work and waiting that long. Now, what we've been waiting for. Let's see how the Novation method plays out compared to the other flipping strategies. So the seller didn't like the $320,000, but they agreed to 330. So I chose to clean the place up a bit, paint and floor. and then I spruced up the curb appeal a little bit. And that cost me $450 to borrow the $10,000 for the fixer funds from, I just got that from a credit card.

And that took me 90 days from purchase to sale to complete. I sold it for $450,000. I paid the agent commissions of $27,000. And that left me with a net of $73,200. When your toolbox is full like this, you've got choices. And now you can see how the Novation method compares to everything else that you got. Stem seven, close the deal. So once the buyer has completed,

their due diligence and remove their contingencies, you want to use a title company that's experienced with Novation deals to handle the paperwork and the closing process. Make sure all agreements, including the original purchase agreement, the Novation Agreement, and the new purchase agreement are given to Title. You need to make sure that they get everything, but make sure you got those three and confirm that the settlement statement is detailed and clear about how and when you will get paid. If your title agent doesn't do this frequently, stuff gets missed. So make sure that you run through that settlement statement very, very carefully. Now, seller cooperation. You want to ensure that the seller signs all necessary closing documents to maintain transparency and avoid legal issues.

By following these steps, you ensure that the process is fair and transparent and that you receive your profit at the time of closing. Now, I'll give you the link to download all of the documents in just a sec, but here are some key considerations and strategies that you want to keep in mind. The property condition, the ideal properties for Novation are moving ready and make sure that they meet FHA requirements. They should need minimal repairs. Although some people like to do full rehab jobs using this process, I prefer not. Now, market understanding.

You want to know your market well. You want to understand the current market value of properties and what conditions they need to meet. This is going to be critical in finding a buyer in a timely manner. Negotiation techniques. You want to team up with the seller and take on the market together. You want to play the role of the good cop. And then you want to position the market as the bad cop.

It's you two against the world. Use logical and data-driven negotiations. Help the seller understand the numbers and the market conditions and help them understand what you have control over and what you don't have control over. Team up for success too. Consider joint ventures with experienced investors to learn the process and manage your first dealer to until you're comfortable doing it on your own. Now, regarding market analysis, regularly update your knowledge of the market trends and

property values. It's critical. And then clear communication. It's really important. Maintain transparency with all parties involved, including the sellers, including buyers, including the agents, don't get sneaky and don't make people chase you. And then leverage your relationships. You want to build strong relationships with title companies and agents that are familiar with Novation deals. I mean, nothing is worse than having to

explain our creative ways to non-creative operators every time. So build those relationships and hold on to them. Buffer for soft costs. Always include a buffer for unexpected costs that might arise during inspections or negotiations. In somewhere between 5 to 10 percent of the ARV, that's the best practice and then document everything. Keep meticulous records of all communications and agreements to avoid misunderstandings. I mean, if ever in question, over disclose and document it. It's never worth it to try and sneak something by in the interest of closing a deal, even if you really need the money. The most common challenges and their solutions would be the seller's concerns. You want to address any seller concerns about the novation process by explaining the

benefits and providing examples of successful deals. Then agent education. You want to educate agents about Novation to ensure smooth transactions and avoid confusion. Agents have a way of inadvertently getting in the way sometimes, a lot of times. Lender requirements. Be prepared to handle lender required repairs and build them into your offer. And then avoiding legal issues. Ensure all actions and documents are transparent and legal. Avoid signing on behalf of the seller and less necessary and agreed upon. And to help you out with that, my attorney gave me permission to share these documents that he prepared for me. He gave me permission to share them with you, although he

did say in typical attorney fashion, no warranties or guarantees are given. So please run the paperwork by your own legal counsel before using it in your market. And I made it super easy and uploaded a full bundle of paperwork for this Novation Method at Novation Method.com. Now that you know how to boost your profits with Novation agreements, how's your seller financing chops? I mean, imagine closing deals without banks, selling above market value and having a get-out-of-jail-free card for your investments. Until next time, thanks for watching. Take care. And that wraps up the epic show.

If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them. And ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings, and success to you. I'm Matt Terrio. Living the dream.

Yeah, yeah, we got the cash flow. We didn't know home for us. We got the cash flow. This podcast is a part of the sales. C Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.