What Is Under Contract in Real Estate?

“Under contract” is a frequently encountered term in real estate listings, indicating a specific stage in a property transaction. Understanding what this term implies helps both prospective buyers and sellers navigate the complexities of the real estate market.

Defining Under Contract Status

A property is designated as “under contract” when a buyer and seller have formally signed a purchase agreement. This agreement legally binds both parties to the transaction, but the sale is not yet finalized. The completion of the sale remains contingent upon certain conditions being met by either the buyer or the seller.

For the seller, this status signifies a committed buyer has been found, and the property is effectively off the general market. This differs from an “active” listing, where a property is still available for offers, or a “sold” status, which indicates the transaction is complete and ownership has transferred. Some listings might show “active under contract,” meaning the seller has accepted an offer but is still open to backup offers in case the primary deal falls through.

Key Contingencies

Real estate contracts often include various conditions, known as contingencies, which must be satisfied before a sale can close. These clauses serve as safeguards, allowing parties to withdraw from the agreement without penalty if certain criteria are not met.

Financing Contingency

This makes the sale dependent on the buyer securing a mortgage loan within a specified timeframe. If the buyer cannot obtain financing, they can exit the contract.

Inspection Contingency

This gives the buyer the right to have the property professionally inspected for defects. If significant issues are discovered, the buyer can negotiate repairs, request a credit, or cancel the contract.

Appraisal Contingency

This ensures the property’s appraised value meets or exceeds the agreed-upon purchase price, protecting the buyer and lender from overpaying.

Home Sale Contingency

This means the buyer’s purchase is dependent on the successful sale of their current home by a certain deadline.

Navigating the Contract to Close Process

Once a property is “under contract,” a series of procedural steps unfold to move the transaction toward its conclusion. An initial step involves the buyer providing an earnest money deposit, typically ranging from 1% to 3% of the purchase price, held in an escrow account to demonstrate commitment. Buyers schedule inspections, such as home, pest, or radon inspections. Based on inspection findings, buyers may negotiate with the seller for repairs or financial credits.

The lender initiates the appraisal process, which assesses the property’s market value. Concurrently, a title search is conducted to verify legal ownership and identify any liens, judgments, or encumbrances on the property. This process ensures a clear title can be transferred at closing. Buyers also work to secure final loan approval, and a final walkthrough of the property is conducted shortly before closing to ensure its condition. The closing itself involves signing numerous documents and transferring funds, with closing costs for buyers generally ranging from 2% to 5% of the purchase price.