Assignments have been the default wholesaling model for decades. Novations are a rising alternative — especially in states where assignments face increasing restrictions.
This guide covers what each is, when to use them, and the legal and tax differences that matter more than most wholesalers realize.
What an assignment is
You sign a purchase contract with a seller. Before closing, you assign your buyer rights to a new cash buyer for an assignment fee. The cash buyer steps into your shoes and closes on the property with the original seller.
Three parties are on paper: seller, you (assignor), buyer (assignee). The seller knows the transaction is happening; many states require assignment fee disclosure.
What a novation is
A novation is a legal substitution of parties in a contract. The original buyer (you) exits, and the new buyer (your cash buyer) takes their place — but the seller must agree to the substitution in writing.
In practice for wholesalers, a novation looks like this: you contract with the seller. Your end-buyer comes in. Everyone — seller, you, buyer — signs a novation agreement replacing you with the buyer in the original contract. You collect a fee for your role.
Key differences
| Assignment | Novation | |
|---|---|---|
| Seller notice required | Sometimes (state-dependent) | Always |
| Seller consent required | No (usually) | Yes |
| Original contract | Stays in force, you assign position | Replaced by new contract |
| Transparency to seller | Medium | Maximum |
| Earnest money liability | You hold until assignment | Passes to new buyer at novation |
| State restrictions | Growing (IL, OK, PA) | Generally fewer |
When assignments win
- Seller doesn't care who closes — most motivated sellers just want their money
- You need speed — assignments require one signature (yours), novations require all three parties
- Your state allows them freely — most states do
- You don't want to disclose the buyer to the seller — some wholesalers prefer privacy
When novations win
- Your state has assignment restrictions (Illinois post-HB1818, Oklahoma post-HB1104)
- Seller is resistant to assignments — some sellers refuse "Buyer and/or assigns" language
- You want maximum transparency — novations have an ethical edge when the seller deserves clarity
- Assignment fee disclosure laws are tight — novations sidestep some disclosure requirements because you're not technically assigning
- Listing wholesaling — wholesalers who find listed properties (FSBO, expired MLS) often must use novations
Tax treatment (consult your CPA — this is general)
Assignment fees and novation fees are generally both treated as ordinary income for wholesalers. Self-employment tax applies to both.
Some tax practitioners argue novations have specific LLC / pass-through structuring advantages. Others argue the difference is negligible in most cases. Your CPA should look at your specific situation.
The contracts you need
For assignments
- Original purchase contract with "Buyer and/or assigns" in the buyer field
- Assignment of Contract agreement (signed when you assign)
For novations
- Original purchase contract with your name as buyer
- Novation Agreement signed by all three parties (seller, you, new buyer)
- Often a new purchase contract between seller and new buyer replaces the original
Have a real estate attorney in your state review your template for either approach. $300–$500 once, reusable forever.
Practical wholesaling workflows
Standard assignment workflow
- Negotiate with seller, sign purchase contract with "Buyer and/or assigns"
- Find cash buyer from your list
- Sign Assignment of Contract between you and buyer for your fee
- Deliver assignment + original contract to title company
- Buyer closes with seller; you collect assignment fee at closing
Standard novation workflow
- Negotiate with seller, sign purchase contract in your name
- Find cash buyer from your list
- All three parties sign Novation Agreement substituting the buyer for you
- Seller agrees to amended contract terms (often new price reflecting any adjustments)
- Title company closes between seller and new buyer; you receive your fee as documented in novation
A note on transparency
Assignments have an ethical edge case: sellers don't always realize their original buyer made $15K by flipping the contract. Some feel misled when they find out.
Novations are maximally transparent — everyone signs, everyone knows what's happening. Wholesalers who value long-term reputation often prefer novations for this reason alone.
Default recommendations
- Beginner in most states: use assignments. They're simpler, faster, and universally understood.
- Illinois / Oklahoma / restrictive states: use novations. Stay below the broker-license threshold.
- Wholesaling listed properties: novations or double-close.
- Sellers who push back on assignments: offer novation as the transparent alternative.
Bottom line
Assignments are the default. Novations are the better tool in restrictive states, with difficult sellers, and for wholesalers who prioritize transparency. Use both depending on the situation.