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The Cowboy Sales Process
The Cowboy Sales Process

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Navigating Novation Agreements Funding

I. Introduction: The Core Conflict

Forget the theory. The real world of novations presents a critical fork in the road, a point of confusion that trips up even seasoned investors: Do you need to fund the deal or not?
One investor describes a novation as a clean, no-funding-needed transaction
While other defaults to a double close, which requires transactional funding.
Both are using the term "novation," but they're executing it on two completely different operational battlefields.

Understanding the difference isn't just academic—it's the key to navigating lender restrictions, state laws, and ultimately, getting paid. This document dissects the two primary paths for closing a novation deal.
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II. Path 1: The "Pure" Novation (The A-to-C Transfer)

This is the textbook definition of novation: replacing one contract with another. It's the cleanest, most direct route and, crucially, requires no funding from you, the investor.
The Mechanics:
Name
Notes
Contract A-B:
Open
Marketing:
Open
The Novation:
Open
Contract A-C:
Open
Getting Paid:
Open
There are no rows in this table
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Key Battlefield Advantages:
No Funding Required: You never take title to the property. The deed passes directly from the original seller (A) to the end buyer (C). This means you don't need transactional funding or hard money.
The FHA/VA Workaround: This is a mission-critical tactic. Government-backed loans (like FHA) often have anti-flipping rules, such as a 90-day seasoning period. This means a new owner cannot resell the property for 90 days. If you were to double close, you (Party B) would be subject to this rule, killing your deal. The Pure Novation bypasses this entirely because you never become the owner. The only "sale" that occurs is from A to C, satisfying the lender.

go

Tip:

"You had to go A to C. So we had to get the seller to sign an agreement with the end buyer, and then we were written into the special stipulations... that's a way to get around FHA loans."
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III. Path 2: Novation via Double Close (The A-B-C Transfer)

This is the more common method in wholesale real estate and is often applied to novation-style deals, especially in legally restrictive states. While effective, it requires you to fund the A-to-B transaction.
The Mechanics 2:
Name
Notes
Two Separate Transactions:
Open
Closing 1 (A-to-B):
Open
Closing 2 (B-to-C):
Open
Getting Paid:
Open
There are no rows in this table
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Key Battlefield Advantages:
Legal Simplicity: Some states and title companies are unfamiliar or uncomfortable with the "Pure Novation" structure. A double close is simply two standard real estate transactions, making it legally straightforward and universally understood. It can provide a firewall in states that are cracking down on unlicensed brokerage activity.
Privacy of Profit: In a double close, neither the original seller (A) nor the end buyer (C) sees your total profit margin. Seller A only knows what you paid them, and Buyer C only knows what they paid you.
Critical Drawback:
Funding is Mandatory: You cannot execute this without capital.
FHA/VA Incompatibility: As mentioned, this structure will trigger lender seasoning requirements on government-backed loans, making it unusable for FHA/VA end buyers unless you plan to hold the property for 90+ days.
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IV. Field Manual: Choosing Your Path

Your choice of execution is dictated by the environment. Use this decision matrix to determine your strategy.
Choosing A Path
Analyze the End Buyer's Financing First.
Column 2
2.Analyze Your State and Local Regulations.
Column 2
3.Analyze Your Capital Situation.
Column 2
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Final Verdict:
The "Pure Novation" is the more advanced, flexible, and capital-efficient strategy. It is the only viable tool for capturing the massive market of FHA-backed retail buyers. However, its viability depends entirely on the legal and practical acceptance within your operational area.
The Double Close remains a reliable workhorse. It's legally robust and simpler to explain to traditional closing agents, but it demands funding and is instantly nullified by lender seasoning requirements.
Mastering both allows you to adapt to any deal, any lender, and any legal environment.
Novations work when you have the right leads—Prexium brings them straight to yo. Start today 👉
The Cowboy Marketer
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