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What Does Under Contract Mean?

Scott Steinberg5-minute read

January 09, 2023

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If you’re shopping for a new home, you may be asking yourself: What does “under contract” mean? We don’t blame you: It’s not uncommon to see it posted alongside many real estate listings.

“Under contract” in real estate is when a seller accepts an offer from a buyer to purchase their home. However, the home isn’t considered sold until all of the contingencies (if any) on the property are met.

What Does It Mean To Be Under Contract In Real Estate?

A property that’s under contract is not unavailable. Rather, it’s one that the seller has previously accepted an offer on from a buyer. But as it turns out, until all contingencies on the home are removed and ownership transfers hands at the time the property is “closed” upon, the deal can still fall through.

Noting this, backup offers are also common in real estate. These are legally binding contracts that can put your (secondary) offer next in line to be accepted if a previously accepted deal falls through. If you’re interested in a home under contract and want to make a backup offer, be sure to talk about the pros and cons of doing so with your real estate agent.

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How Do Contingencies Affect A Property Being Under Contract?

Deals on properties under contract fall through more often than you might expect. That’s because real estate contracts often contain a number of contingencies that must be met and clauses that must be fulfilled prior to the sale (or closing) of a home. For example, it’s common for deals to hinge on the following common contingencies: 

  • Purchaser financing: Homes are expensive purchases, and most buyers require outside financing, like a home mortgage, to acquire them. As part of real estate contracts, prospective homeowners are often required to secure this necessary financing with which to purchase the property within a set amount of time after an offer is accepted. While many buyers obtain prequalification letters from mortgage lenders before searching for properties, they must still meet their individual lender’s requirements and secure approvals to obtain the loan.

  • Home appraisal contingency: Lenders want to make sure that they’re not lending more than a property is worth. This is a point they traditionally verify by requiring a home appraisal. If the home appraises for lower than the agreed-upon purchase price, it’s up to buyers and sellers to figure out how to cover the difference. This could be done by the buyer paying more out of pocket or by the seller agreeing to lower the home’s total cost. Often, one or both parties are unwilling or unable to do this and the deal falls through.

  • Home inspection: Of course, it’s also common for home buyers to place contingencies based on a home inspection checking out. In effect, it serves as an escape clause should inspectors find mold, structural issues, water leaks or other red flags that purchasers are unwilling to take a risk on. Should a home inspection turn up problems, many buyers may opt to request money for repairs or that maintenance be done prior to the sale of the property by the seller. They may also demand a lower sale price or cancel the contract outright.

  • Sale of buyer’s existing home: Many buyers who are currently homeowners make their offers contingent on the sale of their existing home, so they’re not inadvertently stuck paying two mortgages. But there’s no guarantee, especially in uncertain markets, that this property will be sold in the time allotted. If not, buyers may be unwilling to proceed with the deal or be unable to qualify for financing based on the added expense on top of that associated with their current home.

 

For example: Say Taylor, a 30-year homeowner, is looking at buying a house that’s larger and offers more space for her growing family. When she aims to put in an offer on a property that she fancies, and put down earnest money, she may include myriad failsafes such as a home inspection contingency that requires any deficiencies that an inspector finds to be cured and repaired within 10 days and a clause that makes any purchase offer contingent on the sale of her existing home prior to closing. Both may prove a handy way out of the deal if, say, she turns up evidence of flooding on the property, or is unable to sell her existing home and can’t afford to pay for two mortgages simultaneously.

What’s The Difference Between ‘Under Contract’ And ‘Pending Sale’?

Just like “under contract,” a pending sale refers to the fact that a homeowner has accepted a buyer’s offer. However, it generally means that most contingencies have already been addressed and a contract has been signed. At this point, all that remains is to finalize closing and escrow.

At this point, the sale of the property is nearly final. But the property still hasn’t officially traded hands yet. Should a home currently have a pending status, you may yet put a backup offer in on it if you wish. However, be advised that by this point, the seller’s hands are largely tied and odds are you won’t acquire the property unless the original deal falls through.

Can Home Buyers Back Out Of A Sale If They Are Under Contract?

Yes, due to myriad contingencies and/or unexpected events in the run up to closing, home buyers can back out of a sale. There are many reasons why real estate purchase agreements may never come to fruition, despite both buyers’ and sellers’ best intentions.

Among the most common are: 

  • Low appraisals, and the subsequent inability to either secure a loan from a mortgage lender or work terms out with the property seller.

  • Home inspection issues, which must be addressed within a certain time-limited period, and the prospective issues and concerns that they may uncover.

  • Problems with the buyer obtaining financing, which can occur for many reasons, such as job loss or issues relating to debt-to-income (DTI) ratio.

  • A buyer who currently owns a home’s inability to sell their existing property.

While there are many reasons a buyer can back out of a sale, it doesn’t always mean they will get their earnest money deposit back.

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The Bottom Line: A Home Under Contract Isn’t Quite Sold Yet

A home that’s under contract is one for which a seller has accepted a buyer’s offer to purchase the property. But before the sale of the home can actually close, certain contingencies (home appraisal, home inspection, buyer financing, etc.) must first be met – otherwise the deal can still fall through.

As it’s common to encounter a host of concerns relating to real estate transactions, from the inability of buyers to obtain financing to issues surrounding home appraisals, many sellers are open to backup offers. Whether these backup offers ever come into play depends entirely on the original purchaser’s ability to live up to the initial offer’s clauses and commitments.

Bearing this in mind, the next time you’re browsing a listing service and see that a home is under contract, don’t assume that it’s off the market for good. You may get a chance to take a crack at buying it.

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Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. A strategic adviser to four-star generals and a who’s-who of Fortune 500s, he’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD. The CEO of BIZDEV: The Intl. Association for Business Development and Strategic Planning™, his website is www.AKeynoteSpeaker.com.