What Does Under Contract Mean in Real Estate

Buying a new home is one of life’s biggest and most exciting milestones. Yet, it’s also one of the most complex processes. Everything from the paperwork involved to the multiple parties involved makes it difficult for some people to understand. It’s even more difficult to learn about buying a home when you are going through this process for the first time.

There are so many things for the average person to understand. Things such as understanding what “under contract” means in real estate? What does pending sale mean in real estate? What are closing costs? What is earnest money? It’s a lot to take in.

That said, in this guide, we’re going to break down what under contract means in real estate and how it differs from pending sale.

What Does It Mean To Be Under Contract?

In the real estate industry, there are many terms that are used to describe the different stages of a sale. One such term is being “under contract”.

So what does it mean to be under contract? The most basic definition of being “under contract” is when a buyer has agreed to purchase a property and is legally bound by that agreement. This means that they cannot back out of the sale without penalty or consequence.

So this is how it works. Let’s say you are the buyer, and you have found a home that you love. The next step is to contact your real estate agent and tell them that you want to put in an offer on the property.

Your agent will then discuss with you what price you should offer. Once you agree on a price, your agent will create an offer letter that spells out the details of the sale and send it to the seller’s agent. This letter will include the price, closing costs, and other important details.

The seller’s agent will then take the offer letter to their client, who will either accept or decline it. If they accept it, the deal is done, and now you and the seller are under contract.

If the seller declines, you may need to make a counter offer. This is when you decide how much more money you are willing to offer for the property and send it back to their agent. If that offer is accepted, then you’re back on track toward closing

It’s worth mentioning that before you make a counteroffer, it’s important to know how much money you can afford to spend and still be comfortable. You’ll want to make sure that the price is fair but also that you can afford all of the other costs associated with closing on a home, like closing costs, inspections, title insurance, and attorney fees. Along with these costs, you need to also take into consideration earnest money, which should also be in the offer letter.

Earnest money is the deposit you make when you make an offer on a property. It’s usually between 1% and 5% of the purchase price, but it can be more for expensive homes. This money shows your good faith in buying the home and that you’re serious about closing on it.

While the whole process may seem pretty easy and straightforward, it’s not. There are these little details called contingencies that can ruin your dreams of homeownership.

What Are Contingencies of an Offer?

Before we get into the specifics of contingencies, let’s first understand what a contingency is. A contingency is a condition that must be met before the contract is considered “fully executed” and binding on both parties.

In other words, it’s a condition that must be satisfied before you can close on the property and become its owner. If your offer has contingencies in it, then the seller can’t accept it until those contingencies are removed or met.

There are several types of contingencies. The most common ones are:

Financing Contingency

This is a contingency that allows you to back out of the contract if you don’t receive financing for your purchase within a specific period of time.

For example, if you want to purchase a home for $200,000 but only have $50,000 saved up for a down payment and closing costs, then you might want to include a financing contingency in your offer. This means that if lenders won’t agree to give you a mortgage for the full amount of the purchase price, then you can back out of the contract without penalty.

Appraisal Contingency

This is a contingency that allows you to back out of the contract if your home doesn’t appraise at or above its current market value. For example, if a propery is listed at $300,000 but has been on the market for several months without receiving any offers, then it might be worth less than its asking price. If this is the case, the seller may choose to lower the price or walk away from the deal.

Inspection Contingency

This is a contingency that allows you to back out of the contract if problems are discovered during an inspection. For example, if there are major structural issues in need of repair, then this may be grounds for rejection. However, the buyer doesn’t need to walk away from the deal right away; they can still negotiate a lower price or ask the seller to repair the problems.

Sale Contingency

A sale contingency is an agreement that allows you to back out of the contract if you can’t sell your current home. Using this option ensures that you won’t be stuck with two homes at once, which could be costly.

There are many different types of contingencies in a home purchase agreement, so it’s important to read through the fine print before you sign. Otherwise, you could find yourself stuck with a home you can’t afford or don’t want.

Closing on the Deal

It’s important to understand that a property cannot be under contract if all the contingencies are not satisfied.

The buyer and seller must work together to satisfy each condition before closing on the deal. If any contingency is not met, then the offer will expire, and you’ll have to start over again with another property.

This is why it can take a property under contract for weeks before it actually closes. If you’re the buyer, it’s important to understand that contingencies are not negotiable. You cannot simply drop one or more of them without the seller’s permission.

If all contingencies are met, and the property is under contract, then you’re ready to close on the deal. Closing is when you exchange money for the property, and it’s a process that takes place over several days. You’ll have to sign legal documents, pay some fees, and complete inspections before you take ownership of the home.

This is probably the most important part of the process mainly because before you’re able to close, the property, which at this point is under contract, has to go through an inspection, appraisal, title check and other legal procedures.

If there are issues that need to be addressed before closing, then you’ll have to work with the seller and their agent to resolve them. In some cases, this can take longer than expected.

The Difference Between a Pending Sale vs Under Contract

There are some differences between a pending sale and a property under contract. A pending sale is when the buyer and seller have agreed on the price, but there’s no contract yet. The home hasn’t officially been sold, so there’s still time for things to fall apart before closing.

For example, if you’re the buyer in this situation and your mortgage lender says they won’t approve your loan because of an issue with your credit score or income or if the seller decides they don’t want to sell after all for one reason or the other, then the sale won’t go through.

A property under contract is when a buyer and seller have agreed on all terms, including price and financing. There’s a signed contract between them, but there are still some steps before it becomes official. The contract will have a date by which it must be closed on, or else the deal could fall apart.

How Can You Get Out of a Contract?

If you find out the home isn’t what you thought it was, or if there’s a problem with the property that wasn’t disclosed by the seller, then you can get out of your contract. This is called “walking away,” and it’s not uncommon. In fact, it happens quite often because of issues like structural damage due to termites or flooding damage from recent storms.

The seller is responsible for disclosing any problems with the property that they know about, and if they don’t, then you can get out of the contract. It is not always easy, but it is possible. You will need to make sure, though, that you can prove that the seller knew about a problem before you signed the contract and failed to disclose it.

You may also be able to get out of a contract if the seller does not disclose that they are in default on their mortgage, and you are only finding out about it after you’ve already signed.

Also, if your lender won’t approve the purchase or if the seller won’t come down on the price, then you may have no choice but to walk away from the deal.

There are many reasons why you may need to get out of a contract. You should always check with a real estate attorney before you sign any contract, especially if there is an issue with the property. They can help you understand your rights and obligations under the law.

Final Thoughts

You may find a home that you love in a listing only to find that it’s under contract, but that would be the least of your problems since you can always find another property.

The tricky part is the buying process. You have to get approved for a mortgage, meet contingencies, have the property go through inspections and appraisals, and close on the deal. If any part of this process falls through, then you’ll have to start all over again with another home that may not be quite what you’re looking for.

This is why it’s important to have a real estate agent on your side. They can help you find the best home that fits your needs and budget, as well as walk you through the entire process so that nothing falls through the cracks.