What Does Under Contract Mean in Real Estate?

Article Summary:

During your search for a home, you may discover properties that are “under contract.” This means that another buyer has made an offer and the seller has accepted. Several steps must be taken before such loans close. During this time, the sales may fall through and the homes become available again.

Home hunting can be a daunting process. Finding your dream home in the right location and at an affordable price might seem impossible. And when you do come across your ideal home, you may be disappointed to discover a sale pending on the house.

To make home hunting with real estate agents and on real estate websites run more smoothly, it helps to understand this real estate transaction. It’s also good to know that as real estate contracts go, under contract does not mean a sale is final. There is always a chance the home may fall out of contract and become available again.

What does under contract mean in real estate?

When a house is under contract or a real estate agent informs you there is a sale pending, this means there is currently a real estate contract on the home. Basically, another homebuyer has dibs on the pending property. But what does that mean for a home you want for yourself or for an investment?

Under contract means that a seller has accepted an offer on the property. Before the home moves to final sale, however, there are certain contingencies that must be resolved. Until these contingencies are met, the home is technically still pending sale.

A home sale contingency can include approved real estate financing, home inspection, and home appraisals. The buyer may also need to sell their current home before qualifying.

Under contract process

Under contract starts with a buyer’s offer letter. This formal offer goes to the listing agent and homeowner and stipulates key information, which includes the home purchase price. In a buyer’s market, the party wishing to buy the home may offer less than the listing price. However, if it is a seller’s market and property value is high, the buyer will often accept the current offer and move to loan status as soon as possible.

Under contract definition: Under contract means that a seller’s agent has accepted an offer on the property on the part of the homeowner. Before the home moves to final sale, there are certain contingencies that must be met.

The offer letter will also contain information on closing costs. The amount paid in terms of closing costs varies depending on the situation. In general, the buyer usually pays about 5% of the full value of the property in closing costs. The seller then pays another 6% to 10% on closing costs.

What is the due diligence period?

Due diligence is the time between when a buyer’s home offer is accepted by the seller and when the house closes escrow and the closing table is held. Any remaining fees are dealt with at this time. Once the loan closes, an escrow account is often set up as part of the buyer’s new mortgage loan.

The length of the due diligence period varies depending on the home sale. The purpose of the due diligence period is to give the buyer the opportunity to ensure that there are no issues with the home that could delay or compromise the home purchase. It also gives both buyer and seller an opportunity to back out of the sale if contingencies aren’t met.

Earnest money deposit

Usually, the buyer will also provide the seller with an earnest money deposit, also known as a good faith deposit. The buyer’s earnest money deposit represents the buyer’s commitment to holding up their end of the deal during the real estate transaction.

Generally speaking, under process is not a done deal. While sales contingencies are being met, some sellers will take a backup offer. Such offers provide a safety net if the contract falls through during the home buying process. The best way to know if the seller will accept backup offers is to ask. You may find that such an offer becomes your path to an eventual purchase contract. You could own the property you desire should the current contract fail.

Difference between under contract and contingent

Under contract with a home sale simply means the buyer has submitted an offer to buy a property and the seller has accepted. If both parties agree to the property sale, the transaction will move forward. But there is a chance that the sale could still fall through at this point.

Once a property is under contract, then certain criteria must be met, which makes the sale contingent. For instance, there may be inspection contingencies that must be fulfilled. The buyer may need to negotiate repairs on the contract property. Once the contingencies are met or waived, the home moves to pending status for the home sale.

Difference between under contract and pending

When you’re checking out a real estate listing, you may see the term “pending sale.” This means something slightly different than under contract. The latter term simply means that a buyer has submitted an offer.

If a sale is pending, that usually means there are no more contingencies on the property. At this point, the seller’s agents are usually waiting on only a few details, such as a final inspection by a professional home inspector. When the buyer makes certain the final details are completed, then a closing date will be determined.

Once the sale is pending and there isn’t a mortgage contingency on the contract property, the seller no longer accepts any backup offers.

Pros and cons of putting in backup offers

There are benefits and drawbacks to a buyer’s real estate agent putting in a backup offer. It’s a good idea to put in a backup offer just in case. That way, if the buyer’s financing falls through, for instance, you’ll be next in line. The seller may then accept your offer instead. If you are pre-approved, that could mean that you have a good chance of buying the property.

On the downside, there is a good chance that you won’t get the house, even though you put in a backup offer. The process of putting in the offer is time-consuming and will take away from the time you could put into searching for a house that is available.

If you decide to put in a backup offer, it’s a good idea to go above the seller’s asking price. That way, if the listing status changes to “for sale” again, you have a good chance of being the next buyer in line.

Pro Tip

Though it might seem like a long shot, it’s a good idea to put in a backup offer on a dream home that you really want. That way, if the deal falls through, you are first in line for the home. This will prevent the property from going back on the market and help you avoid a bidding war you may not win.

How being under contract protects realtors

As is the case with most legal documents, being under contract protects those involved, including realtors. It’s important for the buyer and seller to keep in mind that realtors and real estate agents make their livings selling homes and rely on sales commissions. They can only earn money by selling real estate.

Contracts are in place to ensure that the buyer and the seller don’t back out of the deal without a valid reason. If, for instance, a problem is found during a title search, this could be a good reason for canceling the sale. On the other hand, the buyer or seller simply changing their mind is not a valid reason.

What are the chances that a contract could fall through?

Contract listings can and do fall through. Some contract deals have a chance of not being finalized. According to the National Association of Realtors’ March 2020 Realtors Confidence Index Survey, 8% of contacts that went into settlement during the first quarter of 2020 were terminated.

That means that if you find homes in real estate listings indicated as under contract, they could still fall through. For that reason, it can be worth the effort as a buyer to check out a multiple listing service for homes that are under contract. You could find homes that have fallen out of contract to bid on.

What happens if the contract is canceled?

If a buyer fails to follow through with all of the required contingencies, the contract can and will be canceled. At that point, other buyers will be able to put in offers for the home and potentially buy it.

Before you proceed to put in an offer, find out why the prior contract didn’t work out. For instance, it could be that there were problems during title searches or land surveys. Asking real estate agents what happened will help you decide if you want to proceed with an offer.

FAQs

What are the odds of a contract falling through?

There is always a chance that a contract could fall through. This will occur if a buyer fails to fulfill certain contingency obligations. A recent National Association of Realtors survey found that 8% of sales were terminated prior to the closing process.

Can you still put in an offer if a house is under contract?

Yes, a buyer or the buyer’s agent is free to put in an offer if a home is under contract. There is always a chance that the contract could fall through, in which case you’ll be next in line.

What does it mean if the contract gets canceled?

If a contract gets canceled, that stops the sale of the home. When this occurs, there are consequences for the buyer or seller, depending on who canceled the sale. There are contingencies for buyers and sellers that protect both parties. Generally, there are clauses in contracts spelling out what conditions must be met for a home sale. If those conditions aren’t met, the buyer or seller can walk away.

Why are real estate properties that are under contract still listed?

Just because a property is under contract doesn’t mean that the sale is final. The properties remain listed until the home is officially sold.

Can you make an offer on a home that is under contract?

You can make an offer on a house that is under contract. Doing so doesn’t guarantee you will be able to buy the home, but it does give you a chance should the original sale be canceled.

What is the difference between pending and under contract?

Under contract means that a buyer has submitted an offer, whereas pending means that there are no more contingencies on the property and the sale is imminent. When a home reaches pending status, that usually means no more offers will be accepted.

What is the difference between under contract and contingent?

Under contract means that a buyer has made an offer on the property. Contingent is the next step. This means that the home sale will be finalized once certain contingencies are met.

Can a seller put a property back on the market while under contract?

Under contract is legally binding between the seller and buyer. That means that once a house is under contract, a seller can still show the home in case the first offer falls through. However, as long as the house is under contract, the seller can’t change their mind and move forward with another offer instead. The seller can, however, accept backup offers. Such backup offers will be considered if the original offer falls through.

Key Takeaways

  • Under contract means that a seller’s agent has accepted an offer on a property from a prospective buyer.
  • Under contract does not mean that the home sale is final.
  • Before a home under contract can move on to home sale, certain contingencies must be met by the seller and buyer.
  • If you are interested in a home under contract, you may be able to put in a backup offer until the property reaches pending status.
  • Homes sometimes fall out of contract, making them available once again.
  • A small percentage of homes under contract have their sales canceled.

“Under contract” is not a done deal

Under contract does not mean sold. The term simply indicates that the buyer has made an offer and the seller has accepted. Both parties then work toward closing the deal. Much can happen during the time a home is under contract. This includes the deal falling through due to unmet contingencies. If this occurs, you may then put in an offer for the house and potentially buy it yourself.

View Article Sources
  1. Under Contract – NC Real Estate Commission
  2. How to Put an Offer on a House That’s Already Under Contract – National Association of Realtors
  3. Home Buying and Moving – Texas Attorney General
  4. Working with a Buyer’s Agent – CT Department of Consumer Protection