What Does “Under Contract” Mean in Real Estate?

Real estate transactions involve a specialized vocabulary. Understanding “under contract” is important for anyone navigating the housing market, as it signals a significant development in a property’s sale journey. This term clarifies a home’s current status and the steps involved in its ownership transfer, indicating an agreement has been reached but the transaction is not yet complete, and various conditions must still be fulfilled.

Defining “Under Contract”

When a property is “under contract,” a seller has formally accepted an offer from a buyer, and both parties have signed a legally binding purchase agreement. This agreement details the terms of the sale, including the price, financing arrangements, and a proposed closing date. Although an accepted offer marks a major milestone, the sale is not yet finalized, and ownership has not transferred. The “under contract” status typically means the property is no longer actively marketed to other potential buyers, reflecting the commitment made by both buyer and seller.

The purchase agreement outlines the obligations of both the buyer and the seller, establishing a framework for the transaction’s progression. While the property is off the general market, its status indicates a conditional agreement, meaning certain requirements must be satisfied before the sale can be completed. This status provides a degree of assurance to both parties, but it also acknowledges that the deal remains subject to various factors.

The Path to “Under Contract” Status

The journey to a property being “under contract” begins with a prospective buyer submitting a formal offer to the seller. This offer includes the proposed purchase price, any desired contingencies, and a suggested closing date. Sellers then review the offer and may choose to accept it, reject it, or issue a counter-offer, proposing adjusted terms. This negotiation process aims to reach mutually agreeable conditions.

Once both the buyer and seller agree on all terms, they formally sign a purchase agreement. This signed document legally binds both parties to the outlined conditions of the sale. The execution of this agreement transitions a property into “under contract” status, signifying a commitment from both sides to proceed. At this stage, an earnest money deposit, typically 1% to 3% of the purchase price, is often placed into an escrow account to demonstrate the buyer’s serious intent.

Contingencies During the “Under Contract” Period

The “under contract” period is characterized by specific conditions, known as contingencies, which must be met for the sale to proceed. These clauses protect both the buyer and seller by allowing them to withdraw from the contract without penalty if certain agreed-upon events do not occur.

One common provision is the inspection contingency, which grants the buyer a specified period to conduct professional home inspections. If significant issues are discovered, the buyer can request repairs, renegotiate the price, or terminate the contract.

Another frequent contingency is related to financing, protecting the buyer if they are unable to secure a mortgage loan within a stipulated timeframe. An appraisal contingency is also standard, allowing the buyer to renegotiate or withdraw if the property’s appraised value is less than the agreed-upon purchase price.

A title contingency ensures that the property’s title is clear of any liens, encumbrances, or ownership disputes. A title company conducts a thorough search of public records to verify legal ownership. If a contingency cannot be satisfied or waived, the buyer typically has the right to terminate the contract and receive their earnest money deposit back. This conditional nature highlights why “under contract” is distinct from “sold.”

Steps from “Under Contract” to Closing

After a property goes “under contract,” a series of steps unfold, guiding the transaction toward its final closing. The buyer typically proceeds with scheduling and completing all agreed-upon inspections within the specified contingency period. Following inspections, any necessary repair requests are negotiated between the buyer and seller.

Simultaneously, if the buyer is obtaining a mortgage, their lender initiates the appraisal process to determine the property’s market value. The buyer’s loan application then moves through underwriting for final approval. A title company performs a title search to confirm clear ownership and prepares for the issuance of title insurance.

As the closing date approaches, the buyer conducts a final walkthrough of the property. This walkthrough confirms that the property is in the agreed-upon condition and that any negotiated repairs have been completed. Finally, on closing day, all parties sign the necessary legal documents, and funds are transferred, officially transferring ownership from the seller to the buyer.