Understanding the Meaning of "Under Contract" in Real Estate

When browsing homes online or visiting open houses, you may have come across the term "under contract." For those unfamiliar with real estate jargon, this phrase might be confusing. What does it mean for a property to be "under contract," and how does it affect buyers and sellers? In this blog post, we’ll break down the term and explore what it signifies for everyone involved in the real estate transaction.

What Does "Under Contract" Mean?

In real estate, a property is considered "under contract" when the buyer and seller have agreed on the terms of the sale, and both parties have signed a legally binding purchase agreement. This agreement outlines critical details such as the purchase price, contingencies, deadlines, and closing date. While the property is under contract, the seller has committed to selling the home to the buyer, and the buyer has committed to purchasing it—pending the satisfaction of certain conditions.

Key Elements of an "Under Contract" Property

1. Purchase Agreement Signed: The transition from "for sale" to "under contract" happens once the purchase agreement is signed. This document formalizes the mutual understanding and intentions of both parties.

2. Contingencies in Place: Most real estate contracts include contingencies—conditions that must be met before the sale is finalized. Common contingencies include:

   • Home Inspection: The buyer may request a professional inspection to identify potential issues.

   • Financing: The sale is contingent on the buyer securing a mortgage loan.

   • Appraisal: The home’s value must meet or exceed the agreed purchase price.

   • Sale of Another Property: In some cases, the buyer must sell their current home first.

3. Limited Seller Flexibility: Once a home is under contract, the seller cannot accept another offer unless the current agreement falls through. However, sellers may choose to accept backup offers, which only take effect if the original contract is terminated.

What Happens During the "Under Contract" Phase?

The period when a property is under contract is crucial. It typically lasts several weeks and involves various steps, including:

1. Inspections and Negotiations: After the home inspection, buyers may request repairs or negotiate concessions. This step ensures that the property meets expectations.

2. Appraisal: The lender orders an appraisal to confirm the home’s market value aligns with the loan amount. Issues here may lead to further negotiations or contract adjustments.

3. Finalizing Financing: Buyers work with their lender to finalize their mortgage application. This includes submitting documentation, securing approval, and locking in terms.

4. Title Search and Insurance: A title company or attorney conducts a title search to ensure the property has no legal claims or liens. Title insurance is also purchased to protect the buyer and lender.

5. Closing Preparations: The final step is preparing for closing, where all documents are signed, funds are exchanged, and ownership of the property is officially transferred to the buyer.

Can a Deal Fall Through While Under Contract?

Yes, it’s possible for a deal to fall through during the under-contract phase. Common reasons include:

• The buyer’s financing is denied.

• The home inspection reveals significant issues, and the parties can’t agree on repairs or credits.

• The appraisal comes in lower than the purchase price.

• One party fails to meet a contingency deadline.

If a contract is terminated, the seller can relist the property and begin accepting new offers.

What "Under Contract" Means for Buyers

For buyers, seeing a property listed as "under contract" doesn’t necessarily mean it’s off-limits. While the primary agreement is in place, deals sometimes fall through. You can ask your agent to monitor the property and even submit a backup offer, just in case the original deal doesn’t go through.

What "Under Contract" Means for Sellers

For sellers, going under contract is a significant milestone. However, the process isn’t complete until closing. Sellers should be prepared to navigate inspections, appraisals, and negotiations to ensure a smooth transaction.

Conclusion

"Under contract" is an important status in the real estate journey. It represents an agreement between the buyer and seller but also signals the beginning of a detailed process that requires attention and cooperation from both parties. Whether you’re buying or selling, understanding what this term means can help you navigate the real estate process with confidence.