What Does Under Contract Mean in Real Estate?

Entering the real estate market often introduces unfamiliar terms, and “under contract” is common for both buyers and sellers. This status indicates a significant stage in a property transaction, signifying that a seller has accepted a buyer’s offer. It represents a conditional agreement moving towards a potential sale, essential for anyone navigating buying or selling a home.

What “Under Contract” Means

When a property is listed as “under contract,” a buyer and seller have agreed to purchase terms and executed a contract. This is not a finalized sale, but a conditional transaction dependent on certain terms being met. The property is no longer available for new offers, earmarked for a specific buyer, though closing is not guaranteed.

This status differs from “active,” where a property is still on the market and accepting offers. Once an offer is accepted, the property transitions to “under contract,” indicating a mutual commitment. While “pending” is sometimes used interchangeably, it often implies most contingencies are satisfied and closing is near. “Under contract” specifically means the sale depends on fulfilling outlined conditions.

The “under contract” period typically lasts 30 to 60 days, allowing time for conditions to be satisfied. During this time, the buyer provides an earnest money deposit, a good-faith payment held in escrow, demonstrating commitment. This deposit, typically 1% to 5% of the purchase price, applies towards the down payment or closing costs. If the deal fails due to an unfulfilled contingency, the earnest money is usually returned to the buyer.

The Role and Types of Contingencies

Contingencies are contract conditions that must be satisfied for a sale to proceed, protecting both buyer and seller. They allow either party to withdraw without penalty if specified events do not occur. They ensure transaction aspects, like financing or property condition, meet standards. Without them, a party might be bound to an unsound deal.

The financing contingency makes the sale dependent on the buyer securing a mortgage. This protects the buyer, allowing them to exit if funding isn’t secured, often within 21 to 30 days. If the loan is denied, they can terminate and receive earnest money back. This protection is especially important in competitive markets.

The inspection contingency grants the buyer the right to a professional property inspection. This occurs within 7 to 14 days of signing, allowing the buyer to uncover defects or necessary repairs. Based on findings, the buyer can negotiate repairs, request a credit, or terminate the contract for major issues.

The appraisal contingency ensures the property’s appraised value meets or exceeds the purchase price. Lenders require an appraisal to confirm worth before approving a loan, lending only up to the appraised value. If the appraisal is lower, the buyer can renegotiate, pay the difference, or withdraw.

The sale of existing home contingency allows a buyer to make their purchase conditional on selling their current residence. This provides flexibility for buyers needing to sell their home to finance a new purchase. If the buyer’s home doesn’t sell within a specified period, typically 30 to 90 days, they can cancel without losing earnest money. This contingency is less favorable to sellers, introducing uncertainty and extending the timeline.

Navigating the Under Contract Period

During the “under contract” period, buyers and sellers fulfill conditions outlined in their purchase agreement. This phase involves coordinated efforts and adherence to deadlines to move the transaction toward closing. Effective communication among all parties, including agents, lenders, and title companies, is important.

After going under contract, the buyer applies for their mortgage loan. The lender orders a property appraisal and reviews financial documents. The buyer also arranges professional home inspections, typically within the first two weeks. Findings may lead to negotiations with the seller for repairs or credits.

Sellers grant access for appraisal and inspections. They review and respond to repair requests or renegotiations from the inspection report. Sellers also provide disclosures about the property’s condition, defects, and environmental hazards, as required by law. These include information on lead-based paint, structural issues, or past repairs.

Third parties facilitate the under contract period. An escrow or title company holds the buyer’s earnest money deposit in a secure account. This entity conducts a title search to ensure no liens or encumbrances prevent clear ownership transfer. They also prepare closing documents, like the deed and settlement statements, ensuring financial aspects are accounted for.

Both parties work to satisfy contingencies within specified timeframes. For instance, if financing requires approval within 21 days, buyer and lender work to meet that deadline. Near closing, typically within a few days, the buyer conducts a final walkthrough. This confirms the property is in agreed-upon condition, negotiated repairs are complete, and no new damage has occurred.

Understanding Backup Offers

A backup offer is a secondary purchase agreement submitted by a buyer on a property that is already under contract with another party. This type of offer becomes relevant when a property is highly desirable or when there’s a perception that the initial deal might fall through. Submitting a backup offer allows a buyer to position themselves as the next in line if the primary contract fails to close for any reason.

For a buyer, making a backup offer can be a strategic move, especially in a competitive market where desirable properties are scarce. While the property is still technically under contract, a backup offer can provide a sense of security, knowing they have a chance if the first buyer encounters issues, such as problems with financing or unfavorable inspection results. This approach can save the buyer time, as they avoid having to restart their property search if the initial contract collapses.

Sellers may consider accepting a backup offer to mitigate the risk of their current deal falling apart. Having a backup in place provides a safety net, ensuring a quicker transition to another buyer if the primary transaction does not materialize. This can be particularly beneficial if the seller is on a tight timeline, perhaps due to a contingent purchase of their own. Accepting a backup offer does not obligate the seller to sell to the backup buyer unless the first contract is officially terminated.

It is important for both parties to understand that a backup offer only becomes the primary contract if the initial “under contract” deal is formally canceled or terminated. Until then, the seller remains obligated to the terms of the first contract, and the backup offer simply remains in a waiting status. The terms of a backup offer can be negotiated just like a primary offer, including price, contingencies, and closing dates, providing flexibility for both the potential buyer and seller.