What Does Under Contract Mean in Real Estate Terms?

When a home is listed as “under contract,” it signifies a stage where a buyer and seller have agreed on terms and signed a purchase agreement. The property is no longer actively available for new offers, but the sale is not yet finalized. Specific conditions must be satisfied before ownership can transfer.

Understanding the “Under Contract” Status

The “under contract” designation means a legally binding agreement has been established between a buyer and seller. This agreement outlines the purchase price, financing terms, and a timeline for completing the transaction. The deal remains contingent on various conditions being met before it can be completed.

This status differs from an “active” property, which is still on the market and available for offers. It is also distinct from “sold,” which indicates the transaction has closed and ownership has transferred to the new buyer. The “under contract” phase represents an intermediate stage where both parties are committed to the sale, but specific requirements must be fulfilled to finalize the transfer.

During this period, the property is taken off the market, reflecting the seller’s commitment to the accepted offer. In some cases, a property might be listed as “active under contract,” meaning the seller is open to receiving backup offers. This provides a safety net if the primary deal encounters unforeseen issues and does not proceed to closing.

The Contingency Period

The “under contract” phase is defined by the contingency period, during which specific conditions, known as contingencies, must be met. These clauses protect both the buyer and the seller. If a contingency is not satisfied within the agreed-upon timeframe, the contract may be terminated, allowing the buyer to recover any earnest money deposit.

A common condition is the financing contingency, which allows the buyer a specified period to secure a mortgage loan. If the buyer cannot obtain financing within this timeframe, they can withdraw from the contract without penalty, and their earnest money is returned. This protects buyers from a purchase they cannot finance.

Another frequent contingency is the home inspection contingency, which grants the buyer the right to have the property professionally inspected. If the inspection reveals significant issues, the buyer can negotiate with the seller for repairs or a price reduction. If an agreement cannot be reached, the buyer can terminate the contract and receive their earnest money back.

The appraisal contingency ensures the property’s appraised value meets or exceeds the agreed-upon purchase price. Lenders require an appraisal to confirm the home’s value aligns with the loan amount. If the appraisal comes in lower, the buyer can renegotiate the price, cover the difference, or terminate the contract without losing their earnest money deposit.

A title contingency provides the buyer a timeframe to review the property’s legal ownership records. This ensures no undisclosed liens, legal disputes, or errors affect clear ownership transfer. If title issues are discovered that the seller cannot resolve, the buyer can terminate the agreement, protecting them from future legal complications.

Implications for Buyers and Sellers

For buyers, being “under contract” means fulfilling responsibilities to move the sale forward. Buyers must complete contingency requirements, such as scheduling and attending property inspections within the stipulated timeframe. They also work closely with their mortgage lender, providing documentation to secure loan approval. If any contingency cannot be met, the buyer has the right to terminate the contract, recovering their earnest money deposit.

Sellers also have obligations during this phase. They must allow property access for inspections, appraisals, and any other agreed-upon due diligence activities. Sellers may be required to address repair requests from the inspection report, involving negotiation with the buyer. The seller maintains the property in its current condition until closing.

While under contract, some sellers may market their property for backup offers, particularly if the initial contract includes a ‘kick-out clause’ or similar provision. This allows the seller to pursue other buyers if the primary contract falls through, minimizing potential downtime. The earnest money deposit, held in an escrow account, depends on whether the contract’s terms are met or if a party defaults on their obligations.