What Does Under Contract Mean in Real Estate?

by | Mar 16, 2021 | Buying, Real Estate Glossary, Selling

Thinking about buying or selling a home?

Get the best real estate advice from local experts in your inbox.

When Yogi Berra said a baseball game wasn’t over until it was over, he meant that even as much as a team might be down or up in runs, the game wasn’t over until the last pitch was made. This also applies to the real estate term “under contract.” Under contract in real estate means that a buyer has made an offer on the house, and the seller has accepted. But the sale is not quite final. And many things must happen between “under contract” and “sold.” When everything is finished completely with the transaction, then the home will have been sold. And then it’s officially over. 

What does under contract mean? 

The simple answer is as above. The buyer has made an offer on a house, and the seller has accepted that offer in written form. But that’s typically just the beginning of negotiations on the house. There are often contingencies from both the seller and the buyer. And these must be met and completed to both sides’ satisfaction or compromised on. Real estate contracts discuss many conditions that must be met by both the buyer and seller. And if either side fails to meet one of these conditions, the contract could possibly be voided with one or both sides backing out of the deal. 

Steps in a standard real estate transaction 

And here are the general steps followed for buyers and sellers heading into a contract and toward closing:

  • Buyer finds a house they like – After getting pre-approved and working with their agent to find the right place, the buyer prepares to offer a bid on their chosen house.
  • Buyer makes an offer on the house – After being advised by their agent, the buyer submits an offer of payment to the seller. Sometimes if the house is popular, a multi-offer scenario can arise. And then the seller has multiple contracts from which to choose.
  • Seller accepts the buyer’s offer – When the seller accepts an offer, this means the home is no longer on the market. And its status in the MLS will be updated to Under Contract or Pending. Although the parties have agreed in principle, there could still be multiple points of negotiation on both sides. Those are for example inspection, sale price, length of time to close, etc. These will be enumerated in the contract. And that may be amended several times before closing.
  • Both buyer and seller sign a contract together – We’ve reached the stage of being under contract. The contract is typically contingent on additional things like financing and inspection results. These both allow for the buyer or the seller to back out if necessary.
  • Buyer’s earnest money is deposited into an escrow account – As part of the contract, the buyer offers earnest money to demonstrate seriousness of  their offer. In some instances, it makes sense to try to sway the seller with more than 5% of the purchase price. But the buyer’s agent can advise on what makes sense. The typical earnest money deposit varies of course. But it is generally about 1% to 5% of a home’s purchase price. That means a $300,000 home might call for an earnest money deposit of $3,000 to $15,000.
  • Buyer gets their mortgage lined up with a lender – If the buyer is borrowing money in order to finance their purchase, they will need to disclose enough information to convince the lender that they will be able to pay off their mortgage.
  • Home is inspected – Both of these actions are critical for the contract. Inspection is the buyer’s chance to have an expert look over the home. They’ll do this with a fine-toothed comb to identify any maintenance issues with the home. Inspection is typically followed by a negotiation. The buyer will then object to items found during the inspection. And the two parties will negotiate on resolutions. Inspection resolutions typically consist of financial concessions or agreements to complete the repairs before closing.
  • Home is appraised – The appraisal is the lender’s chance to evaluate the home. An appraiser assesses the value of the home. This is to make sure the buyer and their lender are making a wise financial choice. If the appraisal comes in low, the buyer and seller will need to work together to figure out how to cover the difference between the two prices.
  • Deal is closed – Now the house is not just under contract. The finish line has been reached. And the ownership changes hands from the seller to the buyer.

Contract basics

Written agreement

A house is technically under contract in real estate when a buyer makes an offer and the seller accepts it to transfer ownership to the buyer. But contracts aren’t legally enforceable until someone puts them down in writing. So most people consider a home under contract only when the final side of the agreement signs it. And this signed document is the agreement by the seller to sell the house to the buyer.

Earnest money

Additionally, the buyer needs to give the seller something of value not only to make the contract valid but to signify seriousness for both the buyer and the seller. In most home sale transactions, this is called earnest money. And buyers put this into escrow. 

If the deal goes through, this earnest money goes toward the house’s purchase price. And if the buyer violates the contract, the seller typically gets to keep the earnest money. But if the seller violates the contract or the deal fails for a reason that was no fault of the buyer, the buyer typically gets their earnest money back. 

Contingencies

Contingencies under contract in real estate can be any number of stipulations in the contract, either from the buyer or the seller. This can commonly involve the buyer’s right to inspect the home. And the buyer needing to secure financing to cover the agreed-upon purchase price. 

This home sale would proceed only if the stipulations are met, or some other arrangement around it is made, such as compensation or subsequent offers to fix home inspection issues from the seller. 

And the home’s status changes back to “active,” if the sale falls through and the home goes back on the market. The status changes to “pending,” if all the contingencies are met and agreed upon.

What is the difference between sale pending and under contract? 

Sale pending is a component of the house being under contract. And this is really the last stage of the contract, between numbers 7 and 8 above. Once all contingencies are accounted for, then the sale of the house is pending. 

Can buyers still make an offer while sale is pending under contract?

Sometimes buyers will find a home they are interested in after it already goes under contract.. In this situation, it is sometimes possible, sometimes not possible to submit an offer on the house. 

Why?

If the seller is interested, the buyer can sometimes submit an offer on a house that’s already under pending sale. This is typically known as a backup offer. It definitely helps if the buyer’s potential offer on the pending sale house is higher, quicker, or otherwise more appealing to the seller than the previous offer. 

There could also be components in the pending sale involving short sales, and closing times that extend to more than 4 months, in which case the buyer may default on both, allowing the seller to entertain new offers from other buyers. 

Why Not? 

If the seller is not interested in going through the whole process again with a different buyer, some over-the-top late offers are still not enough, especially if the buyer’s financials and timing are rock-solid. 

Bottom Line

There is always a small chance it won’t work out, as the average real estate contract failure rate is around 4%, as reported by Zillow and HomeGo . It’s small but existent. But if the buyer and seller align, everything is followed and completed to the letter in the transaction process noted above, then there should be a successful change in ownership that’s satisfactory to both the buyer and the seller. 

Thinking about buying or selling a home?

Get the best real estate advice from local experts in your inbox.