What Does Under Contract Mean in Real Estate?
Unpack "under contract" in real estate. Understand this critical, committed stage of a property transaction before the final sale closes.
When a property is listed as “under contract” in real estate, it signifies a pivotal stage in the transaction process. This term indicates that a buyer has submitted an offer, and the seller has accepted it, moving the property beyond merely being available on the market. It marks the shift from active searching to a committed phase where both parties work towards finalizing the sale. Understanding what “under contract” entails is essential for anyone navigating the complexities of buying or selling a home.
Understanding the Contractual Agreement
Becoming “under contract” means a legally binding purchase agreement has been executed by both the prospective buyer and the seller. This agreement outlines the specific terms and conditions under which the property transaction will proceed. While this stage represents a significant commitment, it is important to recognize that it is not the final sale itself.
At this point, the seller typically removes the property from active public listings, although backup offers may still be considered. For the buyer, this commitment initiates the due diligence period, during which they undertake various steps to ensure the property meets their expectations and conditions are satisfied.
Essential Procedures During the Contract Period
Once a property is under contract, several procedures are initiated to move the transaction toward closing. These steps allow the buyer to thoroughly evaluate the property and secure necessary financing. The successful completion of these procedures is paramount for the sale to progress.
A home inspection is a common and important step, where a qualified inspector evaluates the property’s physical condition, including its structural integrity, plumbing, electrical systems, and HVAC. This process aims to identify any significant defects or necessary repairs. Following the inspection, an appraisal is conducted, especially if the buyer is securing a mortgage. An independent appraiser assesses the property’s fair market value to ensure it aligns with the agreed-upon sale price, which is crucial for the lender to determine the loan amount.
The buyer’s financing finalization also occurs during this period. This involves the mortgage lender verifying the buyer’s financial information, such as income, assets, and credit history, to provide final loan approval. Concurrently, a title search is performed to confirm the seller’s legal ownership of the property and identify any existing liens, encumbrances, or disputes that could affect the transfer of a clear title to the buyer.
Conditions for Contract Completion
Most real estate purchase agreements include specific conditions, known as contingencies, that must be satisfied for the contract to proceed to closing. These provisions protect both the buyer and the seller by allowing for an exit strategy if certain agreed-upon criteria are not met. The duration for these contingencies can vary, ranging from a week to several months depending on the type and agreement.
A common condition is the inspection contingency, which grants the buyer the right to negotiate repairs or withdraw from the contract based on findings from the home inspection. Another standard provision is the financing contingency, which makes the contract dependent on the buyer securing the necessary mortgage loan.
The appraisal contingency ensures that the property’s appraised value meets or exceeds the agreed-upon sale price. If the appraisal comes in lower, this contingency allows the buyer to renegotiate the price, pay the difference in cash, or terminate the contract. A sale of existing home contingency is where the buyer’s purchase is contingent upon the successful sale of their current property. If these specified conditions are not met or waived by their respective deadlines, the contract may be terminated, and the earnest money deposit returned to the buyer.