Defining "Under Contract" in Real Estate
What Does "Under Contract" Mean?
When a property is described as "under contract," it means that the seller has accepted an offer from a buyer, and both parties have entered into a binding agreement, often formalized through a purchase and sale contract. This status indicates that the property is no longer actively for sale to other prospective buyers, although it may still be subject to certain contingencies or conditions.
In essence, "under contract" signifies that the property transaction is progressing toward completion, but it is not yet finalized. This phase is a crucial part of the home buying and selling process, bridging the gap between the initial offer and the closing day when ownership officially transfers.
Difference Between "Under Contract" and "Pending"
Though often used interchangeably, "under contract" and "pending" can have nuanced differences depending on regional real estate practices:
- Under Contract: Usually indicates that an offer has been accepted, but some contingencies may still be active, or the contract is in the process of being finalized.
- Pending: Implies that all contingencies have been satisfied, inspections completed, financing secured, and the deal is close to closing. At this stage, little is expected to change before the closing date.
However, these terms can vary by location and broker practices, so it's essential to clarify their meanings within specific contexts.
The Process Leading to "Under Contract"
Understanding how a property reaches the "under contract" stage involves several steps:
1. Listing and Marketing the Property
Sellers list their property on the market, often with the help of a real estate agent, including details like price, features, and terms of sale. The property is marketed through MLS listings, online platforms, open houses, and other channels.
2. Receiving Offers from Buyers
Potential buyers submit offers, which include offer price, contingencies, proposed closing date, and other terms. The seller reviews these offers and may negotiate to reach a mutually agreeable deal.
3. Acceptance of an Offer
Once the seller accepts an offer, both parties sign a purchase agreement. This legally binding contract details the price, contingencies, deposit amount, and other conditions.
4. Property Moves to "Under Contract"
After signing, the property status is updated to "under contract," indicating that negotiations have concluded and the transaction is progressing.
Implications of a Property Being Under Contract
The "under contract" status has specific implications for buyers, sellers, and other stakeholders:
For Buyers
- The property is no longer available for other offers, although the deal isn't finalized.
- Contingencies (such as inspections or financing) are typically still active.
- The buyer must adhere to deadlines and fulfill contractual obligations to avoid losing earnest money or risking the deal falling through.
For Sellers
- The property is off the market, but the sale is not yet final.
- They may still entertain backup offers or be prepared for possible contingencies to fall through.
- The seller must cooperate with the buyer through inspections, appraisals, and other process steps.
For Real Estate Agents
- They coordinate inspections, appraisals, financing, and other steps.
- They monitor contingencies and deadlines.
- They prepare for potential issues that could derail the sale.
Contingencies and Conditions During the Under Contract Period
Contingencies are conditions that must be satisfied for the sale to proceed. Common contingencies include:
1. Inspection Contingency: Allows the buyer to inspect the property and request repairs or renegotiate based on findings.
2. Financing Contingency: Ensures the buyer can secure a mortgage or loan approval.
3. Appraisal Contingency: Confirms the property appraises at or above the purchase price.
4. Title Contingency: Checks for any title issues or liens that could affect ownership transfer.
5. Sale of Buyer’s Property Contingency: For buyers needing to sell their current home first.
During this period, either party can negotiate or, in some cases, back out of the deal if contingencies are not met, depending on the contract terms.
What Happens After a Property Is Under Contract?
Once all contingencies are satisfied, and the contractual obligations are fulfilled, the process moves toward closing.
1. Final Walkthrough
The buyer typically conducts a final walkthrough to confirm the property's condition and ensure agreed-upon repairs or changes have been made.
2. Appraisal and Inspection Confirmations
The lender may require an appraisal to confirm the property’s value. Inspections should be completed successfully.
3. Securing Financing
The buyer finalizes mortgage approval, providing necessary documentation.
4. Closing Disclosure and Final Paperwork
Both parties review closing documents, disclose costs, and prepare for settlement.
5. Closing Day
Ownership transfers, funds are exchanged, and the property officially changes hands.
Potential Risks and What Could Go Wrong
While being under contract indicates progress, several issues can still threaten the deal:
- Contingency Failures: If inspections reveal significant problems or financing falls through, the deal may be canceled.
- Appraisal Discrepancies: If the property appraises below the purchase price, negotiations or further steps are needed.
- Title Issues: Unresolved liens or ownership disputes can delay or derail closing.
- Buyer or Seller Withdrawal: Either party may choose to back out if conditions are not met, often subject to contractual penalties or earnest money forfeiture.
Backing Up and "Backup Offers"
A property under contract can sometimes accept backup offers. These are offers made by prospective buyers who are willing to step in if the current deal falls through. This safeguard allows sellers to have a secondary option without relisting the property.
Summary and Final Considerations
Understanding what "under contract" means in real estate is essential for navigating property transactions effectively. It signifies a critical phase where an agreement has been reached, but the sale is not yet finalized. Both buyers and sellers need to be aware of their rights, responsibilities, and potential pitfalls during this period. Clear communication, diligent adherence to deadlines, and thorough inspections are vital to ensuring a successful closing.
In conclusion, "under contract" status is a positive indicator that a property sale is progressing, but it also underscores the importance of careful management of contingencies and timelines. Whether you're buying your dream home or selling a property, knowing what this stage entails helps set realistic expectations and prepares you for the steps ahead toward ownership transfer.
Frequently Asked Questions
What does 'under contract' mean in real estate?
'Under contract' indicates that a buyer and seller have agreed on the terms of a property sale, and a contract has been signed, but the sale has not yet been finalized or closed.
How long does a property typically stay 'under contract'?
The duration varies depending on the transaction complexity, but it generally lasts from 30 to 60 days until all conditions are satisfied and the sale is closed.
Can a property go 'under contract' and still be available for other buyers?
Usually no. Once a property is 'under contract,' it is considered pending, though in some cases, if the deal falls through, it can go back on the market.
What are some common contingencies in an 'under contract' real estate deal?
Common contingencies include financing approval, home inspection, appraisal, and the sale of the buyer's existing home, which protect the buyer's interests during the process.
Does 'under contract' mean the sale is guaranteed to close?
Not necessarily. 'Under contract' indicates an agreement is in place, but the sale can still fall through if contingencies are not met or issues arise during inspections or financing.
