What does under contract mean in real estate? Let's find out!
Like in any other field, the real estate industry has technical jargon that a layperson might find hard to understand. And if you have searched for a house to buy, you probably have come across some of these terms.
Knowing what these terms mean can be crucial in helping understand the status of a property in the market. For instance, When you see an “Active status,” it means that the house is available for sale. This means that you can present an offer for the property or house. On the other hand, when the status reads “Pending,” it means that the sale is almost closing.
Now, this one term seems to confuse many people or investors searching for properties to buy; “under contract status.” And, I'm almost certain you've come across this term severally during your searches, right?
So what does under contract mean in real estate?
That's what you are about to find out.
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What Does Under Contract Mean in Real Estate?
The term under contract in real estate simply means a sale agreement on the property exists. In other words, a potential buyer has agreed with the seller to buy the house.
Under this property status, the offer has been made, the seller has agreed to the offer, and the buyer has agreed to the terms and conditions of the sale. However, this doesn't mean that the deal is closed. Several steps and actions need to be completed before closing the sale.
At this stage of property sale, there's still a chance that the sale won't go through. In fact, statistics show that around 24% of such contracts get delayed. Around 6% of under-contract cases also get canceled altogether, and only around 70% of such contracts see the sale closing stage.
So what does this mean? You still have a chance of acquiring your dream home even if it has an “Under Contract” status. So, don't give up if you've loved a property but see this status. Give it some time as you continue to search for others to see if the status changes.
Sale Pending Vs. Under Contract
You'll encounter two common terms or statuses when searching for your dream home. And while they might seem to represent the same thing, there's a slight difference between them.
The sale under contract status implies that both parties have agreed, but the process is still in its early stages. Consequently, there is a chance of the sale not closing.
On the other hand, a pending sale means that the offer is made, consensus reached, and most of the contingencies removed. As such, the sale is almost in its final stages and will most probably close. This means that when you see a property on sale pending status, it's better to move ahead and continue looking for others.
However, it's important to note that some real estate agents use these terms interchangeably. Therefore, if you see a property with any of these statuses, don't hesitate to enquire more about it from your real estate agent.
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Why Real Estate Agents Continue Showing a Property that's Under Contract
Contrary to what most people think, some real estate websites continue showing properties even after being under contract. And this might be confusing, considering both parties have already agreed on the sale.
Well, here are some of the reasons why this happens:
1. The Buyer's Contingencies Haven't Been Removed
In real estate contracts, certain conditions should be met before a sale goes through. For instance, the buyer might agree to purchase the house only if he gets a loan from the bank or manages to sell his current property.
As such, until these conditions are met, the deal isn't closed, and the seller can continue showing the house. Remember, if the contingencies are not removed, the buyer might not be able to go on with the sale. And in this case, the property will continue to exist on the real estate listings, despite being under contract.
2. The Buyer is Taking Too Long
Once an agreement is reached, the buyer is given a specified number of days to come up with the deposit or down payment. In most cases, this period is between 24 hours and 72 hours. For instance, you have three days to submit the earnest deposit in California, while Utah allows for four days.
However, some buyers might want to take their time, especially if they are selling their current home. And in this case, the seller can continue showing their property until they find a better offer or the initial buyer honors their part of the deal.
3. The Deal Might Fall Through
As earlier mentioned, not all “Under Contract” deals see the closing stage. Some are delayed, while others get canceled altogether. Therefore, until everything is finalized, the seller can continue showing their home.
In essence, the under-contract status doesn't necessarily mean that other interested buyers can't purchase the property. In fact, you can still try to buy a home that has this status.
However, it would be best if you consulted with your real estate agent first to understand your chances of success.
Common Contingencies in Real Estate Contracts
Before a property sale closes, involved parties must meet several contingencies. Contingencies are conditions put forward by the buyer or the seller to protect them against any potential risks that might occur if the contract falls.
If these conditions aren't met, then either party can walk away from the deal without penalty. However, if all goes well and the contingencies are removed, the sale will go through as planned.
Here are some of the most common contingencies you'll find in most real estate purchase contracts:
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1. The Loan Contingency
Also known as the mortgage contingency, this is one of the most crucial conditions in any purchase agreement. It protects the buyers when they fail to get financing from a lender. If this happens, they can back out of the deal without losing the buyer's earnest money or facing other penalties.
Loan contingency is usually 30 to 60 days, provided for in the purchase contract, after an agreement between the buyer and the seller.
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2. Appraisal Contingency
The property must appraise at or be above the agreed-upon price. This provision protects the buyer from paying more than a home is worth in the market (fair market value).
3. Home Sale Contingency
If the buyer must sell their current home before purchasing another one, this provision protects them in case the sale doesn't go through. As you know, sometimes, as a buyer, you need to sell your current home to raise money for a new home.
If your home doesn't sell as fast, you'll not be liable to pay any penalties. And at this point, any of the parties can terminate the contract.
4. Home Inspection Contingency
The inspection contingency clause allows the buyer to have a professional home inspector look for any problems with the property before closing on the deal. If any major repairs are needed, the buyer can negotiate with the seller to either lower the purchase price or have the seller perform the repairs before closing.
This contingency is usually included in almost all real estate purchase contracts where the offer is based on the quality of the home. The contingency can run for about 10-14 days, during which the buyer can terminate or renegotiate the selling price.
5. Lead-based Paint Disclosure Contingency
Homes built before 1978 might contain lead-based paint, which can be harmful if ingested. Therefore, as part of this contingency, sellers must provide buyers with information on lead hazards in the home. The buyer gets a 10-day period to test for lead-based paint.
If high lead levels are found, the buyer can back out of the deal or negotiate with the seller for a lower purchase price.
How Long Can a Property Stay Under Contract?
Once an offer is accepted and the contingencies are removed, the typical time frame for a home to close is 30 to 45 days.
But, this isn't set in stone, as several factors can delay the closing date.
Some of these factors include:
- The mortgage process is taking longer than expected
- The buyer or seller is unable to meet their contractual obligations
- The appraisal comes in lower than the agreed-upon purchase price
- Issues with the title search
- The buyer or seller has a change of heart about going through with the sale.
But despite these potential delays, most under-contract properties will close within the stipulated time frame.
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Backup Offer: What is it?
A backup offer is when another buyer makes an offer on a home that's already under contract.
The first offer is called the primary offer, while the second offer is referred to as the backup or secondary offer.
If the primary buyers can't follow through with their purchase for any reason, the backup buyers' offer automatically goes into effect.
However, backup offers aren't always binding. It all depends on how they're written up in the contract. For example, some backup offers are only valid if specific conditions are met, such as:
- The primary buyers can't get financing
- The inspection reveals major problems with the property
- The primary buyers back out for any other reason
If you're interested in making a backup offer, working with an experienced real estate agent who can help you navigate this process is important.
Why Would Someone Make a Backup Offer?
There are a few reasons why real estate buyers would make this offer:
1. They really want the house
If you've been searching for a while and finally find the perfect home, you might not want to take any chances. Making a backup offer gives you peace of mind knowing that you have a shot at the property even if something falls through with the primary buyers.
2. It's a good deal
If the property is priced below market value, you might want to put in a backup offer even if you don't think there's a chance the primary buyers will back out. After all, it never hurts to try.
3. The market is slow
If you're in a buyers' market and properties are selling slowly, making a backup offer might give you an edge over other buyers who aren't as willing to take this risk.
What Next When a Home is Under Contract?
After a home is under contract, both the seller and the buyer have to take various steps to ensure that this becomes a done deal.
For any real estate transaction to mature, it follows this home-buying process:
- Before the home goes under contract, the prospective buyer has already seen and loved the house. They have also made a formal buying offer through their real estate agent.
- After this, the buyer and the seller will negotiate, looking at the finer details of the property and the sale offer.
- The next step is for both parties to sign a contract after the buyer's offer is accepted.
- After signing the contract, the buyer will give the seller the earnest money, as agreed.
- After the earnest money has been delivered, the buyer then gets a loan from their bank or lending institution or sells their current home to raise the total purchase money required.
- The final step is for the buyer and seller to close, where they will finalize all the paperwork and exchange the keys.
Note: The final sale will only be effected when all the contingencies put forward during the contract signing are met.
What happens if the primary buyers back out?
If the primary buyers can't follow through with their purchase for any reason, the backup buyers' offer automatically goes into effect. If there's no such offer, the seller's agent returns the property to the “Active Status.”
Can you buy an Under Contract property?
It depends. You might be able to make the purchase if the primary buyer terminates the contract and you have also made an offer.
Why can a property still be listed while under contract?
Agents are not uncommon to continue marketing a property even when it's under contract. That way, if the primary buyers back out, they might be able to secure other offers quickly.