What Does Real Estate Under Contract Mean?
Real estate under contract explained. Understand this crucial, conditional phase in property transactions before closing.
When a property is listed as “under contract” in real estate, it signifies that a buyer has submitted an offer, and the seller has accepted it. While this marks a significant step, the sale is not yet complete. This status indicates a mutual agreement is in place, but the transaction still requires a series of conditions to be met before ownership can be transferred.
The Path to Being Under Contract
The path to a property being designated “under contract” begins with a prospective buyer submitting a formal offer to the seller. This offer outlines the proposed purchase price, financing details, and any specific conditions for the sale. The seller reviews the offer and may accept it, reject it, or issue a counter-offer with revised terms.
Once both the buyer and seller agree upon all terms and conditions, they sign a legally binding purchase agreement. This signed agreement transitions the property’s status to “under contract,” signifying the home is temporarily off the market while both parties fulfill their obligations.
Key Elements of Being Under Contract
The “under contract” phase involves specific conditions, known as contingencies, which must be satisfied for the sale to proceed. These contingencies provide protection for both the buyer and seller, allowing either party to withdraw from the agreement without penalty if certain conditions are not met.
Common contingencies include:
Financing Contingency: Allows the buyer a specified period to secure final loan approval. If the buyer’s mortgage falls through, this contingency permits them to exit the contract.
Inspection Contingency: Grants the buyer the right to a professional home inspection. Should the inspection reveal significant issues, the buyer can negotiate for repairs, request a credit, or cancel the contract.
Appraisal Contingency: Ensures the property appraises for at least the agreed-upon sale price. If the appraisal comes in low, the buyer may renegotiate the price or withdraw from the deal.
Home Sale Contingency: Protects a buyer who needs to sell their current residence to fund the new purchase. This allows them a set timeframe to sell their existing home; if they are unable to do so, they can void the contract.
An earnest money deposit is also a standard component of being under contract. This deposit, typically ranging from 1% to 3% of the home’s sale price, demonstrates the buyer’s serious intent to purchase the property. The funds are held in an escrow account by a neutral third party, such as a title company or attorney, until closing. If the buyer defaults on the contract without a valid reason tied to a contingency, they may forfeit this deposit to the seller.
The Period Before Closing
Once all contract contingencies have been satisfied, the transaction moves into its final stages before closing. This period involves various administrative and financial preparations to facilitate the transfer of ownership. The buyer’s lender will finalize loan approval, ensuring all financial requirements are met.
A title search is conducted to confirm clear ownership and identify any liens or encumbrances on the property, with title insurance secured to protect both the buyer and lender against future claims. A closing date is scheduled, typically occurring within 30 to 60 days from the initial acceptance of the offer. Before closing, the buyer conducts a final walkthrough of the property to verify its condition and confirm any agreed-upon repairs have been completed. The closing disclosure, detailing all loan terms and closing costs, is provided to the buyer at least three business days prior to the signing, allowing for review before the official transfer of funds and keys.