What Does Under Contract Mean in Real Estate (2023)

What Does Under Contract Mean?

When you think you’ve found your perfect property listing, you might start imagining yourself living in the home. But before you start picturing where you’re going to position your furniture, have you checked the listing status?

If the listing says “under contract” or “pending,” your hopes of owning the home could be dashed. But can you still make an offer on a property under contract?

As a potential buyer, you will undoubtedly wonder what under contract means. It is one of those standard real estate terms that get bantered around by real estate agents all the time.

Under contract, real estate listings are those where the buyer and seller have agreed on many of the terms of the sale, like the price, closing date, and contingencies.

Under contract, in contract, and under agreement are often substituted for one another. These terms mean the same thing.

When an offer has been accepted, a real estate agent will often say, “the house is under contract.”

With under agreement houses, the sale isn’t final yet, and there’s a lot more to understand with properties under contract. While the real estate contracts have been signed, a pending sale could undoubtedly fall through.

A real estate transaction is never consummated until the papers are passed at the closing table.

Let’s take a look at the process of selling a home so that you can better understand the house under contract meaning.

The Seller Decides to Sell Their Home

When the homeowner has decided they want their house listed for sale, they will contact a real estate agent to help them.

The listing agent will research the property and local area to advise the seller of the best price to list the home for.

If the seller is happy with the listing price and the terms of the listing agreement, they can sign the contract allowing the real estate agent to market their home.

The real estate agent will create a real estate marketing plan, and this could include:

• Hiring a professional photographer
• Writing compelling listing copy
• Creating full-color marketing brochures
• Providing A listing on the multiple listing service
• Having an open house
• Creating a virtual walkthrough
• Setting up a virtual open house
• Social media posts
• Promotional efforts to other real estate agents

The Under Contract Process For A House

A buyer for the home has come forward with an acceptable offer to the seller.

The real estate agent’s marketing has paid off, and a buyer has been found. The buyer will decide on the price they want to offer for the home with the help of their agent.

The buyer’s agent then puts the formal offer down in writing to pass on to the seller’s agent.

Usually, an offer letter will contain the following essential points:

The Buyer’s Offer Price

Often seen as most important to sellers, the buyer’s price will be clearly stated in the letter. With the help of their agent, buyers have to find a price that will be acceptable to the seller.

In a sellers’ market, higher offers are more likely when there are more buyers. Thanks to more competition, buyers will need to put in strong proposals to secure the home they want to own.

There are often bidding wars and even cash buyers that are challenging to beat.

The offers will naturally be lower in markets where sellers find it challenging to get a buyer. In a buyers’ market like this, offers below the asking price are more likely to be submitted and accepted.

Also, if the home has been on the market for over a month, the seller is more likely to accept a lower offer.

There is also a greater chance a prospective buyer will submit a lowball offer that could insult the seller in a down market. It’s never a good idea to do this for a house you want.

Earnest Money

The offer letter will also include details of the earnest money deposit. The buyer’s earnest money, or good faith deposit, protects the seller should the buyer decide to walk away from the deal without reason covered by common contingencies.

The size of the earnest money often depends on the type of market the home is being sold in. While sometimes this earnest money can be as little as $1,000 or less, typically it is 1% to 5% of the purchase price.

The money is held in an escrow account by the seller’s agents, title company, or real estate attorney.

However, earnest money can increase to as much as 10% in a seller’s market. A ten percent deposit is expected when buying a new home.

Closing Costs

Sometimes the buyer will offer to pay some of the seller’s closing costs. While the buyer will pay their own closing costs, these will generally be less than the seller’s expenses.

Buyer’s closing costs can be up to 5%, with mortgage arrangement fees, home inspection costs, and more. Seller’s closing costs, on the other hand, can be above 6% of the purchase value, including real estate agents’ commissions for both themselves and the buyer.

Depending on the buyer’s mortgage, they might be able to fold these closing costs into the loan. If that isn’t a service offered by the lender, the buyer will have to pay these fees out of pocket.

Real Estate Contingencies

A contingency is a clause that needs to be completed before the home sale can be finalized. Contingencies give the buyer the option to back out of the deal and walk away with their earnest money if things don’t go to plan.

It would be unusual for an offer letter not to contain any contingencies, but they are likely to be less common in a seller’s market. The contingencies could include:

A Contingent Contract Usually Has One of These Clauses

Home inspection contingency: The property inspection is one of the most significant hurdles to clear in a real estate transaction.

A professional home inspector will check the property within a specific time frame and report their findings. If an agreement over any repairs can’t be found, the buyer can back out of the deal.

Appraisal contingency: The buyer can walk away if the home appraisal value is less than the purchase price.

There is also the option of the seller lowering the sale price or the buyer finding the down payment money to make up the appraisal and purchase price difference.

Financial contingency: while the buyer may be pre-approved for a mortgage, a preapproval letter isn’t a guarantee. If the buyer doesn’t get approved for the mortgage they want, this contingency offers them a way out.

The buyer’s financing can be a significant stumbling block which is why cash offers can be so appealing. Having a financing issue, while not commonplace, does happen from time to time.

The odds increase with marginal buyers with minimum credit scores or near the property debt to income ratio.

Home sale contingency: this only allows the sale to continue if the buyer can sell their own home. Sometimes a buyer will try to make the sale of their current home a contingency.

Most seller’s agents will recommend against accepting a contingency contract, as it is precarious. A contingent sale often leads to no deal.

Clear title contingency: The seller will have a standard contingency to deliver a clear title in nearly all real estate contracts. A title search is conducted to ensure that happens.

Any one of these contingencies could lead to different terms or even a lower sale price.

The Seller Accepts The Offer Making The Property Under Agreement

When the seller agrees to the purchase price and the conditions of sale, they can sign the current contract. But if they don’t agree with all the contingencies or the offer price, they can negotiate the details or simply reject the offer.

To satisfy the home seller, the current buyer may have to revise some key real estate terms.

The real estate agents will deal with the negotiations, hopefully resulting in a situation that both parties are happy with. When this point has been reached, the sale is under contract. But that isn’t the end of the story. Contingencies have to be met before the home will get a new owner.

What Does Contingent Mean?

Many buyers ask what contingent means in real estate. Contingent essentially has a similar meaning to under contract. A contingent contract has been executed between a home buyer and seller.

The sale will not become a done deal until all the contingencies have been satisfied. Real Estate agents may opt to say under contract but continue to show in the multiple listing service.

What Does Pending Mean?

A significant amount of home buyers will also ask what pending means in real estate. A pending sale is no longer an active listing because all contingencies have been satisfied, or the seller’s agent is confident enough to change the status in the local MLS to pending.

The pending status is used chiefly when most of the home buying process has been completed. Depending on where you are located, there are some differences between contingent and pending listing statuses.

In different states, agents may change a property to sale pending before all the contingencies have been completed. That is certainly the case here in Massachusetts. The benefit of doing so is that the days on the market (DOM) do not increase.

So under contract vs. pending is the same thing.

What is a Back-Up Offer?

Sometimes, a buyer either does not act quickly enough for their dream house or loses out to another buyer. When this happens, all is not lost.

You can make a backup offer. It is not unusual for additional bids to be collected on a home. These are called under contract backups. If the first deal falls apart, the backup offer will get the house.

It’s commonplace where the first offer does not go through with the sale, especially in the early stages.

Dealing With Contingencies

Before the closing date, the contingencies need to be completed. With everything agreed and most of the contingencies dealt with, the home is effectively off the market, and its status will be changed to pending. The house shouldn’t be listed on real estate websites anymore at this point.

You may also see a real estate agent put an under contract sign out at the property. A real estate agent may also post a sold sign rider when a house is under contract.

The pending stage is a due diligence period that allows the home inspection and appraisal to be completed. While the sale can still fall apart at this stage, it is less likely.

The due diligence stage can last 1 or 2 weeks typically, and the buyer can still cancel the deal if something goes wrong. This stage can stretch out for a more extended period for a few different reasons. If some paperwork is missing, like a property deed, this could cause an extended pending period.

Even when other contingencies have been successfully met, there could still be several weeks until closing. This can happen when all the contingencies in the contract have been completed quickly. Then you’re just waiting for the closing date.

However, if things don’t go so well and the contingencies aren’t met in the timeframe, the buyer might require an extension. Perhaps the buyer hasn’t sold their home, but they might be able to continue with the purchase with an extension.

What Does Under Contract Mean on Zillow?

Under contract on Zillow means the same thing as under contract for a house on MLS or any other website. There has been a contract that has been accepted between buyer and seller. Contingencies have likely been met.

An under-contract property at Zillow probably won’t be back on the market. Most of the time, an under contract house will stay that way.

Closing Day

When all the contingencies have been completed, the closing process can finally happen with the contract terms. It means that the lender has approved the mortgage the home has been appraised and inspected with any repairs completed.

It is then just left for the buyer to check and sign the paperwork before the home will officially belong to them.

Is it Possible to Make an Offer on a Property That’s Already Under Contract?

If you have fallen for an under-contract real estate listing, can you still make an offer?

There is still a tiny chance that the sale will fall through, and if you have submitted a backup offer to the seller, you could get your shot. However, you need to be aware that there is only a limited chance of the deal collapsing.

Typically just 4% of under-contract sales fail to get to closing. The rate of homes returning to the market can increase somewhat during volatile economic situations, but still, it is relatively unusual.

So if you think the home is perfect for you, it could be worth speaking to your agent to put in a backup offer. Though you can do things to increase your offer’s attractiveness, don’t bank on getting the home.

Making Offers on Properties Under Contract

If you find a property that meets all your needs, but you find it too late, and it’s already under contract, it isn’t entirely over. You still have the opportunity to put a backup offer to the seller, though the chances of success are low.

Perhaps the buyer won’t secure the mortgage they expect, they fail to sell their home, or an agreement can’t be reached to deal with repairs. There are many reasons why a sale won’t get to closing, and you just might find that your backup offer is successful.

Final Thoughts

You should now have a much better understanding of what under contract means in real estate. Unfortunately, the odds are long that you will end up buying an under-contract home. The chances of the property becoming an active listing again are slim.

About the author: The above Real Estate information on what under contract means for a house was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 35+ years.

Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.