What is Novation in Real Estate?

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  • 0:04 Defining Novation
  • 0:28 Legal Issues
  • 1:23 Examples of Novation
  • 4:24 Benefits of Novation
  • 5:02 Lesson Summary
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Lesson Transcript
Instructor: Tisha Collins Batis

Tisha is a licensed real estate agent in Texas. She holds bachelor's in legal studies and a master's degree in criminal justice.

There are many different legal terms in real estate, each with its own meaning. In this lesson, we'll define novation, how it relates to real estate, and provide some examples.

Defining Novation

The term novation can simply be explained as replacing one thing with another. It replaces something or someone in a contract for something or someone else. In order for the replacement to be valid, all parties must agree to it. This ensures everything is legal and enforceable. If all parties involved do not agree, novation cannot occur.

Legal Issues

In the world of real estate, contracts are created, agreed upon, and entered into on a daily basis. These contracts can affect people's futures, including where they live and where they do business. When a couple wants to buy their dream home, the contract to purchase that dream home can cost them hundreds of thousands (if not millions) of dollars. A new business owner trying to obtain property may place every penny he has saved into starting that business. It's important, then, that everyone understands the contracts they are executing.

With novation, a contract is changed in some area. The change could involve taking one person or one thing out of a contract and replacing him with another person or thing. If everyone agrees to the change, it becomes part of the contract and everyone is legally bound to it. After novation occurs, the original contract no longer exists.

Examples of Novation

Novation, for example, can take place in home buying. Sarah and Andrew are trying to buy a home. They've looked at 20 different places but have finally found their dream home. Quickly, they put in an offer for the home, carefully initialing and signing every page as instructed by their real estate agent. Their savings, which they've been carefully putting away for the last decade, are going to cover the down payment and closing costs. The next day, their real estate agent calls and tells them that the sellers accepted their offer but they want a thousand dollars more for the deposit. Instead of asking you beforehand, they made changes to the contract and sent it to the title company. Is that legal? Are you obligated to pay the extra thousand dollars? This may sound like novation, but it's not. One thing was replaced for another in the contract, but both parties didn't agree.

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