Exploring Novations in Real Estate: A Cutting-Edge Strategy

In the realms of real estate investment, wholesaling has stood as a proven business model that offers simplicity, rapid turnover, and potential scalability for those seeking an exit from their mundane nine-to-five routines. However, as markets evolve and more tools become available to real estate professionals, there's always room for innovation and improved strategies.

One such emerging strategy that's garnering attention is novations. In this comprehensive exploration, we'll delve into how novations are reshaping the wholesale real estate landscape, spotlighting the journey and insights of Andrew, a successful real estate professional who has seamlessly integrated this tactic into his business operations.

What is Wholesaling?

Before we jump into the intricacies of novations, let's first understand the foundational business model that many budding real estate entrepreneurs start with: wholesaling. Wholesaling in real estate is when an individual, like Andrew, finds a property—usually under market value—and contracts it with the seller.

Subsequently, the wholesaler assigns this contract to an end buyer, typically an investor looking for properties to rehab and sell for a profit. The wholesaler makes money on the fee charged for this assignment, which, as Andrew noted, has usually amounted to a handsome sum of around $10,000 per deal.

The Emergence and Mechanics of Novations

Andrew’s journey into the world of novations came as a step-up from his wholesaling activities. After about a year in the wholesaling business and closing multiple deals successfully, he discovered and transitioned towards novations, which promise even greater returns and benefits not just for him but also for the sellers and end buyers involved.

A novation in real estate is essentially an exchange of one contract for another, enabling more flexibility compared to traditional wholesaling. Here’s how it generally works:

1. Contract Agreement with Seller: The investor agrees on a net price with the seller where the projected costs such as closing costs, potential repairs, and realtor fees are factored into the agreement.
2. Listing by Realtor: Instead of just passing the deal off to an end investor, a realtor is involved to list the property on the market—ensuring that it reaches a broader audience and potentially fetching a higher price.
3. Handling Operations: The investor handles all operational aspects like showings, inspections, and liaison with potential buyers, relieving the seller from these tasks.
4. Profit Sharing: Upon the sale of the property, the seller gets their agreed net amount, and the investor keeps the excess, thereby typically earning more than in a straightforward wholesale deal.

What makes novations particularly appealing is that they allow properties with slightly higher than ideal pricing for wholesalers but still under full market value to be effectively marketed and sold at a profit. This not only widens the scope of potential deals an investor can engage in but also provides better deals for end buyers and convenience for sellers.

Andrew's Real-Life Application and Success with Novations

In one vivid example, Andrew managed to turn around a property deal in Orlando, initially valued at $500,000. By agreeing to handle everything from property clean-up to necessary minor repairs and the sale process, he could list the property at a competitive market rate without requiring the sellers to drop their price drastically or deal with the complexities of selling their home.

This strategic approach allowed Andrew to promise a price of $400,000 net to the sellers while eventually selling the property for $500,000, securing a $50,000 profit from this single novation deal—five times what he would typically make on a standard wholesale.

Why Are Novations Becoming a Go-To Strategy?

Novations address several limitations of traditional wholesaling:

• They allow dealing with properties that don't fit the usual wholesale criteria due to pricing inconsistencies.
• They eliminate the need for the seller to engage directly with realtors or handle showings, thus offering a hassle-free selling experience.
• By listing on the MLS through a realtor, the property reaches a wider market, increasing the chances of fetching a better price.

Conclusion

For real estate professionals like Andrew, novations offer an advanced strategy that not only diversifies their investment portfolio but also maximizes their earnings potential. This method leverages traditional real estate selling mechanisms while providing innovative solutions to common wholesaling challenges.

As more investors learn about and implement this strategy, we could see a significant shift in how property flipping and wholesaling are conducted in the contemporary market. The key takeaway here is that in real estate, as in any business, innovation and adaptability are crucial to staying ahead of the curve and maximizing profitability.