What Does Under Contract Mean in Real Estate?

The phrase “under contract” signifies a specific and important stage in the home buying and selling process. It indicates a property is no longer actively available for new offers, as a significant agreement has been reached. Grasping its meaning helps prospective buyers and sellers understand their position and the progression of a transaction.

Defining Under Contract

When a property is listed as “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 and other conditions. At this point, the home is effectively off the active market, signaling that a deal is in progress, though it is not yet complete.

The buyer typically demonstrates their commitment by depositing earnest money, a good-faith deposit. This deposit usually ranges from 1% to 3% of the purchase price and is held in an escrow account, eventually applied towards the down payment or closing costs if the sale proceeds.

While the property is technically “sold” on paper, the transaction remains conditional. The finalization of the sale depends on various conditions, known as contingencies, being met. This phase is where necessary steps, such as inspections and securing financing, are undertaken.

Common Contingencies

Real estate contracts frequently include specific conditions, known as contingencies, that must be satisfied for the sale to proceed. These clauses protect both the buyer and seller, providing an opportunity to withdraw from the agreement without penalty if certain conditions are not met.

• Financing contingency: This makes the sale dependent on the buyer securing a mortgage loan, typically allowing 30 to 60 days to obtain loan approval.
• Inspection contingency: This grants the buyer the right to have the property professionally inspected, often ranging from 7 to 14 days after offer acceptance, to identify any major issues. Based on findings, the buyer may negotiate repairs, a price reduction, or terminate the contract.
• Appraisal contingency: This ensures the property’s value, as determined by a professional appraiser, meets or exceeds the agreed-upon sale price. Lenders often require this to confirm the home provides sufficient collateral for the loan.
• Title contingency: This confirms the property has a clear legal title, free from liens, disputes, or other encumbrances. A title company conducts a thorough search, and if issues arise, the buyer can withdraw.
• Home sale contingency: This is where the buyer’s purchase is dependent on the successful sale of their current home within a specified timeframe.

What It Means for Parties

For potential buyers, a property marked “under contract” has restricted immediate availability. While the property is in a contracted phase, sellers may still accept backup offers. A backup offer is a legally binding agreement that positions a secondary buyer to purchase the home if the initial contract fails to close. Sellers may consider backup offers as a safeguard against the primary deal falling through due to unmet contingencies or other issues.

For the buyer under contract, this phase involves specific responsibilities and proactive engagement. They must diligently work to fulfill all contract contingencies, such as securing final mortgage approval and coordinating property inspections. This includes providing documentation to lenders and ensuring assessments, like appraisals, are completed within agreed timelines. The buyer also reviews reports from inspections and title searches, addressing any concerns that arise.

The seller, during this period, is responsible for cooperating with the buyer’s due diligence, providing access for inspections and appraisals. They must also ensure that any agreed-upon repairs are completed before closing and maintain the property in its stipulated condition. While waiting for contingencies to clear, sellers may continue to show the property to potential backup offer candidates, depending on the terms of their contract. Both parties must maintain open communication with their respective real estate agents, lenders, and other professionals to ensure a smooth progression toward closing.

Different Property Statuses

The “under contract” status differs from other common listing designations. The initial status for a property actively on the market is “active,” meaning it is available for showings and accepting offers from potential buyers. Once an offer is accepted and a purchase agreement is signed, the status typically changes to “under contract.” This indicates a binding agreement exists, but the sale is still conditional upon various contingencies being met.

Following the “under contract” phase, if all major contingencies have been satisfied, the property status often transitions to “pending.” This signifies that the transaction is in its final stages, with most conditions cleared, and the sale is very close to completion. While a pending sale is less likely to fall through than an “under contract” one, unforeseen issues can still arise. The final status, “sold” or “closed,” indicates that the legal transfer of ownership has occurred, and the transaction is complete.