Understanding What "Under Contract" Means in Real Estate
When navigating the world of real estate, whether as a buyer, seller, or investor, you'll frequently encounter the term "under contract." This phrase holds significant importance because it indicates a particular stage in the transaction process. But what exactly does "under contract" mean in real estate? How does it impact the parties involved? This comprehensive guide aims to clarify this term, explain its implications, and shed light on the steps that follow once a property is marked as under contract.
Defining "Under Contract" in Real Estate
What Does "Under Contract" Mean?
In real estate, when a property is described as "under contract," it signifies that the seller and buyer have entered into a binding agreement—typically a purchase contract or sales agreement—pending certain conditions or contingencies. Essentially, the property is no longer actively available on the open market for new offers, as a deal is in progress.
The phrase indicates that both parties have agreed on the main terms of the sale, including price, closing date, and other relevant conditions, but the transaction has not yet been finalized or closed. During this phase, the property is often marked as "pending" or "under contract" in listings, signaling to other potential buyers that the property is no longer readily available.
Difference Between "Under Contract," "Pending," and "Sold"
While these terms are sometimes used interchangeably, they can have nuanced differences depending on regional real estate practices:
- Under Contract: The property has an accepted offer, and the contract is in progress but not yet finalized. Contingencies like inspections or financing are still being satisfied.
- Pending: The contingencies have been removed or fulfilled, and the sale is close to closing. The transaction is nearing completion.
- Sold: The sale has closed; the property has officially changed hands, and the transaction is complete.
Understanding these distinctions helps buyers and sellers gauge the current status of a property and what to expect next.
The Process Leading to "Under Contract"
Initial Listing and Offers
A property typically begins its journey as available on the market, with listings advertised by real estate agents or owners. Interested buyers submit offers, which can include price, contingencies, and other terms.
Negotiation and Acceptance
Once an offer aligns with the seller's expectations, negotiations may ensue to finalize terms. When both parties agree, they sign a purchase agreement, officially marking the property as "under contract."
Contingencies and Due Diligence
The period after an offer is accepted but before closing is critical. It often involves:
- Financial contingencies: Buyer securing mortgage approval
- Inspection contingencies: Home inspections to assess property condition
- Appraisal contingencies: Ensuring the property appraises at or above the purchase price
- Title review: Confirming clear ownership rights
These contingencies protect the buyer and allow for negotiations or withdrawal if issues arise.
Implications of a Property Being "Under Contract"
For Buyers
- Protection of Interest: The buyer has secured the property under agreed terms, pending contingencies.
- Limited Opportunity: Other buyers are typically discouraged from submitting offers, though some contracts include clauses allowing backup offers.
- Inspection Period: The buyer can conduct inspections and renegotiate or withdraw if problems are discovered.
For Sellers
- Secured Sale: The seller has a committed buyer, reducing market exposure.
- Potential for Contingencies to Fall Through: If contingencies are not satisfied, the contract can be canceled, and the property may go back on the market.
- Preparation for Closing: Once contingencies are satisfied, both parties prepare for the final transaction.
For Real Estate Agents
- Managing Expectations: Agents communicate the status to clients and coordinate next steps.
- Contingency Management: Ensuring all necessary inspections, appraisals, and paperwork are completed timely.
- Backup Offers: In some cases, agents may encourage backup offers in case the current deal falls through.
What Happens Next After a Property Is "Under Contract"
Contingency Period
This is a defined window—often 10 to 30 days—during which the buyer completes inspections, secures financing, and satisfies other contingencies. If issues are discovered, the buyer can request repairs, renegotiate, or withdraw.
Removing Contingencies
Once all contingencies are satisfied, the buyer formally removes them, making the contract "firm." This step is crucial before proceeding to closing.
Escrow and Closing Process
Following contingency removal, the transaction moves into escrow—a neutral third-party holding period where:
- Title searches are completed to confirm clear ownership
- The buyer arranges for the transfer of funds
- Final documents are prepared and signed
- A closing date is set
Ultimately, the property officially transfers ownership from seller to buyer, and the deal is closed.
Can a Property "Fall Out" of Being Under Contract?
Yes, despite the binding nature of purchase agreements, transactions can fall through for various reasons:
- Unmet Contingencies: Issues uncovered during inspections or appraisal gaps
- Funding Problems: Buyer failing to secure mortgage approval
- Contractual Breaches: Any party violating terms of the agreement
- Title Issues: Discovery of liens or ownership disputes
- Mutual Agreement: Both parties agree to cancel the contract
When this occurs, the property may return to active status on the market, and negotiations may restart or the sale may be abandoned altogether.
Legal and Financial Considerations
Earnest Money Deposits
Typically, buyers provide earnest money—a deposit demonstrating serious intent—when entering into a purchase agreement. If the deal falls through due to contingencies, the earnest money is usually refundable. However, if the buyer defaults outside contractual protections, the seller may retain the deposit.
Contingency Clauses and Penalties
Contracts often include clauses that specify penalties or remedies if either party breaches the agreement. Understanding these terms is vital for both buyers and sellers.
Summary: The Significance of "Under Contract"
In essence, "under contract" is a vital milestone in a real estate transaction, representing a committed agreement between buyer and seller but with steps remaining before final ownership transfer. It signifies progress toward closing but also encompasses a period where the deal can still fall apart, depending on the satisfaction of contingencies and other conditions.
Recognizing what "under contract" entails empowers buyers, sellers, and agents to navigate the process confidently, ensuring they are prepared for the subsequent steps toward completing the sale.
Final Thoughts
Whether you're considering purchasing your first home or selling a property, understanding the meaning and implications of "under contract" is essential. It marks a crucial point in the journey, offering reassurance that a deal is progressing while reminding all parties to stay vigilant about contingencies and deadlines. With this knowledge, you can approach real estate transactions with greater confidence and clarity.
Frequently Asked Questions
What does 'under contract' mean in real estate?
'Under contract' indicates that a buyer and seller have agreed on a sale, and the property is pending final approval, but the sale hasn't closed yet.
How long does a property typically stay 'under contract'?
The duration varies but usually ranges from 30 to 60 days, depending on the terms of the agreement and any contingencies involved.
Can a property under contract still be sold to someone else?
Generally, no. Once under contract, the seller is committed to the current buyer unless the contract is canceled or expires.
What are the common contingencies associated with an 'under contract' property?
Contingencies may include financing approval, home inspection, appraisal, and sale of the buyer's current home.
Does 'under contract' mean the sale is final?
No, it means the parties are in an agreement, but the sale is not finalized until all conditions are met and the closing occurs.
What should a buyer do when a property is 'under contract'?
Buyers should wait for the sale to close and avoid making any changes that could jeopardize the contract, but they can also look for other properties.
Can a seller accept another offer on a property that's 'under contract'?
Typically no, unless the current contract has a contingency allowing the seller to cancel, or the deal falls through.
What happens if the contingencies in an 'under contract' deal are not satisfied?
The contract may be canceled, allowing the seller to relist the property or accept another offer, depending on the terms.
