What does “under contract” mean in real estate transactions?
A property listed for sale is considered under contract once a buyer’s offer has been accepted by the seller.
Real estate agents are likely involved (a seller’s agent to represent the party listing the house for sale, and another realtor assisting the prospective buyer), but this is not mandatory to initiate or complete a home sale.
What is mandatory is that — by signing a purchase agreement — both parties are acknowledging that the offer has been accepted (“under contract”), and all sides are now committed to move forward with the sale.
What happens after the under contract phase begins?
Acceptance of this formal offer is the first legally binding step between the two parties.
More than just agreeing on the sale price, closing costs and an expected closing date, this also details the rights and responsibilities of both the home seller and buyer — and this includes contingencies, the conditions that must be met or waived by both parties, respectively, in order to complete the home purchase.
We’ll cover the most common contingencies in real estate contracts below, as well as how clearing this hurdle in the contract means the “pending sale” phase has begun.
How is “active under contract” different?
A home sale that is in under contract status means it will not be marketed the same way as before — however, the sale is not complete, and the seller or seller’s agent may be intentionally seeking backup offers in the event the original buyer backs out and the deal falls through.
If the term “active under contract” is used, this is exactly the case: the property is still on a multiple listing service (MLS), other real estate agents are aware of this status, and for those buyers interested in making the same property their dream home, an active under contract designation encourages them to submit backup offers.
How contingencies affect a home sale that’s under contract
Contingencies are essential components of the home buying process — the conditions regarding inspections and repairs, buyer’s financing, a home appraisal and anything else stipulated in the purchase agreement.
For the buyer, contingencies are contractual obligations that protect them from moving into a new home with unresolved problems or in need of repairs, and without losing their earnest money deposit if the deal falls through.
For home sellers that have just accepted a prospective buyer’s offer, the contingencies listed in the purchase agreement reinforce who is responsible for what — all the criteria that must be met or waived — in order to get to the finish line and make it a “done deal.”
Note: if the purchase agreement stipulates the home sale is “noncontigent under contract,” this means that current home condition is exactly what the prospective buyer will receive — an “as is” real estate transaction.
Here are three of the most common ones you’ll come across in home sales:
1. Appraisal contingency
Appraisals are when licensed appraisers assess a property’s value based on specific criteria.
If the appraised value comes back lower than the listed purchase price, this contingency allows the buyer to cancel the sale without penalty, or possibly negotiate new terms.
2. Home inspection contingency
A home inspection is when buyers hire a professional to assess their potential new home for any problems prior to closing.
This step is considered due diligence and often required by lenders.
Buyers generally have a seven-day window to withdraw from the purchase should the inspection uncover any hazards, accessibility issues or serious deficiencies with the home.
3. Financing contingency
A financing contingency is a contractual clause that conditions the buyer’s offer as dependent on obtaining a loan for the new home.
This protects the buyer from incurring any penalties should they be unable to secure financing.
Does under contract mean a house is sold?
Under contract means the seller has accepted a buyer’s offer, and a purchase agreement has been signed by both parties — but the sale won’t be complete until any contingencies (such as those listed above) are satisfied.
Once contingencies have been fulfilled or waived, the property reaches the pending sale stage.
During this phase, both parties finalize preparations for the sale, such as completing financing, arranging necessary documents, and coordinating with involved entities like lenders, escrow agents, and title companies.
Real estate agents will then take the property off the MLS, stop marketing the house and no longer accept any additional offers.
How long can a home sale be under contract?
Generally speaking, under contract status lasts 30 to 60 days.
However, this time frame is affected by meeting the criteria outlined with contingencies, conducting any negotiations should certain contingencies be waived, and factors tied to financing, local regulations, or other issues that may arise — for example, while conducting a title search.
Can a home buyer back out of the deal once they’re under contract?
Legally, a buyer can back out of a contract if the specified conditions are impossible to meet.
Even if the buyer has made an earnest money deposit, they can reject the contract without financial consequences if they have a valid reason, such as discovering undisclosed repair issues during a home inspection.
Should this occur, and the buyer walks away, any additional offers that were made during the under contract stage may be considered, and/or the home will be placed back on the market and again appear on real estate listings.
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