What Does Property Under Contract Mean?

When a property is “under contract,” it signifies a key stage in a real estate transaction. This means a buyer has submitted an offer, and the seller has formally accepted it, leading to a signed legal agreement. While this marks a significant step towards a sale, the transaction is not yet finalized. The “under contract” phase is a transitional period where various conditions must be met before ownership can officially transfer.

Understanding “Under Contract”

Being “under contract” carries distinct implications for both the buyer and the seller. For the buyer, it means entering a legally binding agreement to purchase the property, provided certain conditions are satisfied. Buyers typically cannot withdraw from this agreement without potential penalties, such as forfeiture of their earnest money deposit, unless a specific contractual contingency is not met.

From the seller’s perspective, accepting an offer and going “under contract” commits them to that specific buyer. The property is usually removed from active public listings or marked with a “pending” or “under contract” status, signaling it is no longer actively seeking new offers. Some sellers might still accept backup offers in case the initial contract falls through. This status indicates progress toward a sale, though the deal is not yet closed.

Common Contingencies

Real estate contracts often include contingencies, which are conditions that must be fulfilled for the sale to proceed. These clauses protect both the buyer and seller by allowing a party to withdraw from the contract without penalty if certain terms are not met. A common type is the financing contingency, which makes the purchase dependent on the buyer securing a loan for the property. If the buyer’s financing falls through, this contingency typically allows them to terminate the contract and recover their earnest money.

Another frequent condition is the appraisal contingency, ensuring the property’s appraised value meets or exceeds the agreed-upon sales price. If the appraisal comes in lower, the buyer may have the option to renegotiate the price or cancel the agreement. The inspection contingency allows the buyer to conduct professional home inspections and negotiate repairs or credits based on findings, or cancel the contract if significant issues are unresolved. Finally, a sale of buyer’s home contingency makes the purchase dependent on the buyer successfully selling their current residence within a specified timeframe.

The Due Diligence Period

Within the “under contract” phase, buyers typically enter a due diligence period for thorough investigation of the property. This period allows the buyer to conduct research and inspections to verify the property’s condition, legality, and other relevant aspects. The duration of this period can vary, often ranging from a few days to several weeks, as specified in the purchase agreement.

During this time, common activities include professional home inspections covering structural integrity, electrical systems, plumbing, and pest issues. Buyers also review homeowners’ association (HOA) documents, conduct title searches to ensure clear ownership, and verify zoning regulations. Based on the findings, the buyer may negotiate with the seller for repairs, price adjustments, or credits at closing. Should significant, unresolved issues arise, the due diligence period often allows the buyer to withdraw from the contract, typically without forfeiting their earnest money deposit.

Potential Results

Following the “under contract” phase, there are two outcomes for a real estate transaction. One outcome is a successful closing, where all contingencies are met and the due diligence period concludes. This involves finalizing financing, transferring title, and exchanging funds, leading to official property ownership transfer. Buyers pay closing costs, ranging from 2% to 5% of the loan amount, covering fees like loan origination, title insurance, and appraisal costs.

Alternatively, a contract may terminate if conditions are not met or a party fails to uphold obligations. For example, if a financing contingency is not satisfied or major inspection issues are unresolved, the contract might be canceled. The earnest money deposit, typically 1% to 3% of the purchase price, depends on the contract’s terms and reason for termination. If termination occurs due to a valid unmet contingency, the buyer typically receives their earnest money back. However, if a buyer backs out without a contractual reason, they risk forfeiting the deposit to the seller.