Buying or selling a home is an exciting yet complex process. There are various stages you’ll encounter along the way, and understanding each one is crucial for a smooth transaction. One term you’ll often come across is “under contract.” But what does it mean when a house is under contract? We’ll dive deep into this concept, exploring its implications for both buyers and sellers.
The Real Estate Transaction Process
Before we delve into the specifics of a modern house being under contract, let’s briefly overview the real estate transaction process. It typically begins with a property being listed for sale. Potential buyers then make offers, and once an offer is accepted, the property enters the “under contract” phase. From there, it moves through various stages, including inspections, appraisals, and financing, until it reaches the closing.
Why Understanding Phases Matters
Understanding the different phases of a real estate transaction is essential for both buyers and sellers. It helps you know what to expect, how to prepare, and what actions to take at each stage. By being well-informed, you can navigate the process more effectively and make better decisions.
Introducing “Under Contract”
Now, let’s focus on our main topic: what does it mean when a house is under contract? This term is crucial to grasp, as it signifies a significant milestone in the home-buying or selling journey. In the following sections, we’ll break down this concept, its legal and practical implications, and what it means for both buyers and sellers.
What Does It Mean When a House Is Under Contract?
When a house is under contract, it means the buyer and seller have agreed on the terms of the sale and signed a legally binding contract. This contract outlines the price, closing date, and any contingencies that must be met for the sale to proceed.
Defining “Under Contract” in Real Estate
In real estate, “under contract” means a purchase agreement has been signed by both the buyer and the seller. This agreement is a legally binding document that outlines the terms of the sale, including the purchase home price, closing date, and any contingencies that must be met.
Differentiating from Other Stages
It’s important to differentiate “under contract” from other stages in the real estate transaction process. Here’s a quick breakdown:
- Listed: The property is actively on the market and available for offers.
- Under Contract: A purchase agreement has been signed, but the sale is not yet final.
- Pending: The sale is further along, with most contingencies met, and is likely to close soon.
- Sold: The transaction is complete, and the property has changed hands.
Why Buyers and Sellers Need to Know
Understanding the “under contract” status is crucial for both buyers and sellers. For buyers, it means they have a legal right to purchase the property, subject to meeting any contingencies. For sellers, it means they have agreed to sell the property to the buyer, and they must fulfill their obligations under the contract.
The Legal and Practical Implications of a House Being Under Contract
When a house is under contract, there are both legal and practical implications that both buyers and sellers need to be aware of.
Binding Agreement Basics
A purchase agreement is a legally binding contract between the buyer and seller. It outlines the terms of the sale, including the purchase price, closing date, and any contingencies. Once signed, both parties are obligated to fulfill their respective duties as outlined in the contract.
Contingencies and Contract Validity
Most real estate contracts include contingencies, which are conditions that must be met for the sale to proceed. Typical contingencies include home inspections, financing, and appraisals. If these contingencies are not met, the contract may be voided, and the property could go back on the market.
Duration and Timeline
The duration of the under-contract phase can vary depending on the specific terms of the contract and the contingencies involved. Typically, this phase lasts anywhere from 30 to 60 days, but it can be shorter or longer depending on the circumstances. During this time, the buyer and seller work together to meet the contingencies and move towards closing.
Step-by-Step Process: From Offer to Under Contract
Let’s walk through the step-by-step process of how a house goes from being listed to under contract.
Making and Accepting an Offer
The process begins with a potential buyer making an offer on the home property. This offer includes the proposed purchase price, any contingencies, and other terms of the sale. The seller then reviews the offer and decides whether to accept, reject, or counter the offer.
The Role of the Purchase Agreement
Once an offer is accepted, the next step is to draft and sign a purchase agreement. This document formalizes the terms of the sale and becomes the legally binding contract between the buyer and seller. It’s essential for both parties to carefully review and understand the purchase agreement before signing.
What Happens After Going Under Contract
Once the purchase agreement is signed, the property officially goes under contract. From here, several things happen:
- Inspections: The buyer typically has the right to conduct a modern home inspection to assess the property’s condition.
- Disclosures: The seller must provide any necessary disclosures regarding the property’s condition or history.
- Earnest Money: The buyer typically pays an earnest money deposit to show their commitment to the purchase.
During this phase, the buyer and seller work together to meet the contingencies outlined in the contract and move towards closing.
Common Contingencies Included in Home Contracts
Most real estate contracts include contingencies, which are conditions that must be met for the sale to proceed. Let’s explore some of the most common contingencies:
Home Inspection Contingency
A home inspection contingency allows the buyer to have the property facts professionally inspected. If the inspection reveals significant issues, the buyer may request repairs, a price reduction, or even the right to back out of the contract.
Financing Contingency
A financing contingency protects the buyer in case they are unable to secure a mortgage. If the buyer’s loan application is denied, they can typically walk away from the contract without penalty.
Appraisal Contingency
An appraisal contingency ensures that the property’s appraised value meets or exceeds the purchase price. If the appraisal comes in low, the buyer may request a price reduction or cancel the contract.
Title Contingency
A title contingency ensures that the seller has a clear title to the property. If there are any liens or other issues with the title, the seller must resolve them before the sale can proceed.
What Buyers Should Do When a House Is Under Contract
When a house is under contract, buyers have specific responsibilities and actions to take during this phase.
Due Diligence Responsibilities
As a buyer, it’s essential to conduct thorough due diligence during the under-contract phase. This includes:
- Scheduling and attending a home inspection
- Reviewing any disclosures provided by the seller
- Ensuring that the property meets your needs and expectations
Preparing for Potential Issues
It’s wise to be prepared for potential issues that may arise during the contingency period. This could include:
- Setting aside funds for potential repairs or price negotiations
- Having a backup plan in case the deal falls through
- Staying in close communication with your real estate agent and lender
Communicating with Agents and Lenders
During the under-contract phase, it’s crucial to maintain open lines of communication with your real estate agent and lender. Keep them informed of any developments or concerns, and be responsive to their requests for information or documentation.
What Sellers Should Expect When Their House Is Under Contract
When a house is under contract, sellers also have responsibilities and expectations to manage during this phase.
Disclosures and Inspections
As a seller, you are typically required to provide certain disclosures about the property’s condition and history. You may also need to allow the buyer to conduct a home inspection. Be prepared to address any issues that arise from these processes.
Handling Backup Offers
While a house is under contract, the seller may still receive backup offers. These offers can serve as a safety net in case the primary contract falls through. Sellers should carefully consider any backup offers and work with their real estate agent to determine the best course of action.
Managing Timelines and Preparing for Closing
During the under-contract phase, sellers need to stay on top of timelines and prepare for the closing process. This includes:
- Keeping track of contingency deadlines
- Ensuring that any necessary repairs or preparations are completed
- Coordinating with the buyer, real estate agents, and other professionals involved in the transaction
How Does “Under Contract” Differ From “Pending”?
In the real estate world, you’ll often hear the terms “under contract” and “pending” used interchangeably. However, there is a subtle difference between the two.
Clarifying Real Estate Terminology
“Under contract” means that a purchase agreement has been signed, but the sale is not yet final. “Pending” typically indicates that the sale is further along, with most contingencies met, and is likely to close soon.
Contract Status vs. Marketing Status
The distinction between “under contract” and “pending” can be viewed as a distinction between contract status and marketing status. “Under contract” is a legal term that describes the binding agreement between the buyer and seller. “Pending” is more of a marketing term that indicates to potential buyers that the property is likely to sell soon.
Importance in Decision-Making
Understanding the difference between “under contract” and “pending” can be important for both buyers and sellers. For buyers, it can help them gauge the likelihood of a successful purchase. For sellers, it can influence how they market the property and handle backup offers.
Can a House Go “Back on the Market” After Being Under Contract?
A house can go back on the market after being under contract, but it’s rare. Let’s explore the reasons and implications of this happening.
Common Reasons for Contract Termination
Contracts can fall through for various reasons, including:
- The buyer is unable to secure financing.
- The home inspection reveals significant issues.
- The appraisal comes in lower than the purchase price.
- The buyer or seller backs out of the deal.
Implications for Buyers and Sellers
If a contract is terminated, it can have significant implications for both buyers and sellers. For buyers, it means they may lose their earnest money deposit or have to restart the home search. For sellers, it means relisting the property and potentially starting the selling process from scratch.
Relisting a Property After Deal Cancellation
If a deal falls through, the seller typically relists the property. The real estate agent will update the listing status and resume marketing the property. In some cases, the seller may need to make repairs or adjustments based on feedback from the previous buyer.
Frequently Asked Questions About Houses Under Contract
Let’s address some common questions about houses under contract:
Can You Still Make an Offer if a House Is Under Contract?
In most cases, you can still make an offer on a luxury house that is under contract. This is known as a backup offer. While the primary contract remains in place, the seller may consider your offer a contingency plan in case the first deal falls through.
What Happens to the Earnest Money During Contingencies?
The earnest money deposit is typically held in an escrow account during the contingency period. If the contingencies are met and the sale proceeds, the earnest money is applied to the buyer’s down payment or closing costs. If the contingencies are not met and the buyer backs out of the deal, they may be entitled to a refund of their earnest money, depending on the terms of the contract.
How Long Does a Typical Contract Stay Active?
The duration of a typical real estate contract varies, but it usually lasts between 30 and 60 days. The exact timeline depends on factors such as the specific contingencies included in the contract and the closing date agreed upon by the buyer and seller.
Tips for Buyers and Sellers on Navigating the Under Contract Phase Smoothly
Navigating the under-contract phase can be challenging, but with the right approach, you can make the process smoother for both buyers and sellers.
Staying Proactive and Organized
Both buyers and sellers should stay proactive and organized during the under-contract phase. This includes:
- Keeping track of important dates and deadlines
- Responding promptly to requests for information or documentation
- Staying in close communication with your real estate agent and other professionals involved in the transaction
Working Closely with Real Estate Agents
Your real estate agent is your partner throughout the home-buying or selling process. Work closely with them during the under-contract phase to:
- Address any issues or concerns that arise.
- Navigate the contingency process.
- Prepare for the closing.
Keeping Contingencies in Mind
Remember that contingencies are a crucial part of the under-contract phase. Keep them in mind as you navigate this stage, and be prepared to negotiate or make decisions based on the outcomes of the contingencies.
