What Does Under Contract Mean In Real Estate?
So, you’ve been searching for the perfect home on every website, been to a number of open houses, and eventually, you’ve just stumbled upon the property of your dreams.
It checks the boxes in every department, you’ve been stringent with your viewings, and now you’re ready to contact the realtor in charge of the listing.
But, when it comes time to contact the real estate agent, you discover that the property has changed from being available to be listed as under contract. What does under contract mean?
What does under contract mean?
While it may seem pretty straightforward, it isn’t. When someone says, “house under contract”, some may describe this situation as an initial meeting that both parties are interested in moving forward with the offer that the owner has accepted.
But there are still many details to be determined such as the closing date, the personal property, the amount of cash coming from the deal, some tax preparation, and of course the possible numerous contingencies.
The deal is not complete until all the aforementioned aspects have been dealt with and that all the contingencies stipulated have been met. If one of these contingencies is to do with financing, this deal might be far from over.
Also, there is a contingency called an appraisal contingency, which is heavily dependent on whether the company supplying the mortgage to purchase the property is able to loan the cash for the full value of the property.
But, in short, under contract means that proceedings are just starting, there is a long road until everything is completed. Maybe even some work getting the home ready.
To understand what needs to happen, we must take a few steps backward in the whole contractual home-selling process.
The first step is:
Seller puts property on the market
When the seller has decided it is time to part ways with their home, the usual step is to reach out to a real estate agent. This is a process that can’t be taken lightly.
After all, real estate agents are owed 6% of the asking price on the home at the end when all the transactions are completed.
If you’re struggling to put that figure into numbers, have a look at this: if, for example, you’re planning on selling your home for $250,000, at the end of the sale you’ll owe the estate agent around $15,000, which is a sizable amount of cash.
But if you are okay with the proceeding, the real estate agent will create a marketing plan. This strategic plan will consist of listing the property on the multiple listing service (MLS), deciding what social media channels to share your listing to, and whether they will be hosting an actual open home or just a virtual one.
Once the strategy has been settled and put into action, there’s the wait. That wait ends when someone decides to put in an offer and the status could move to “under contract”.
But, let’s first see if the offer is worth putting your home under contract.
Buyer makes an offer
It may take weeks or even months but eventually, a buyer will find your property and say, “Perfect!”
The buyer or their real estate agent will work with your real estate agent to come up with a suitable offer, as well as an offer letter.
It’s important that we focus on the key points in this offer letter.
Price
We can all be honest about the fact that price matters when it comes to real estate. Especially to the seller, who may need the money from the deal to fund a new home.
There’s an equilibrium that the buyer needs to feel and figure out. Finding that perfect price is a reasonable offer for both parties.
When it’s a buyers market, we can assure you that they are going to make an offer below the asking price. But if the tables are turned, and it’s a seller’s market then the buyer will need to come in with a stronger offer.
Also, if the property has been on the market for a lengthy period, then buyers will come in with a lower offer.
Offering to address closing costs
While the offer letter will detail how much the buyer is offering for the home, they can also include a clause that says they will pay for the closing costs - just to make the offer more attractive.
It’s estimated that most buyers will need to pay up to 5% of the full mortgage amount at the closing on fees and services. While this may seem a hefty chunk of change, the seller is liable for the 6% of the total costs to the realtor for the commission.
Although banks can help with these closing costs, it’s very unlikely, and in most cases, this money will need to come out of the buyer’s own pocket.
As a buyer entering into a deal, the more you choose to pay in these closing costs, the more enticing you make your offer. And the less likely the seller will pull out. If you are looking to get your dream home under contract, make sure your offer covers more closing costs.
Contingencies
As with anything in life, there may be contingencies. A contingency is a clause or stipulation, that needs to be met before the home can be sold, or be considered an offer pending. Most potential buyers will make a contingent offer.
These contingencies give the buyer, as well as the seller, a chance to back out of the contract. If there is a moment where an “under contract” deal will fall through, it’s when certain contingencies are not met.
There are a few common variations of these contingencies, such as:
Financial contingencies:
This states that the buyer must be pre-approved for a mortgage or financial help. In this contingency, they can outline exactly what type of loan they are expecting. In this case, if the buyer is not approved for financing then the deal is off, without anyone having to pay cancellation fees.
Appraisal contingencies:
No financial institution will approve a mortgage without an appraisal. This evaluation needs to be done by an unbiased appraiser. The banks require this to ensure they are not funding a purchase of a house that is risky.
Also, the banks want to know whether the asking price is warranted. If the appraisal value comes in too low and the banks pull out, the contract is canceled.
Inspection contingencies:
Some buyers might want to double-check certain aspects of the home before sealing the deal. This means hiring an inspector to do a quick inspection of the home to see if there are any underlying issues. If there are any repairs needed, the buyer might put the repair costs into the final contract.
If the seller is unwilling to pay for these repairs, then the contract could be canceled.
Sale contingencies:
Some buyers will come with a financing deal, and others with cash. Some will need to pay for their new home with the proceeds from the sale of their last home.
This contingency has a time limit, where the buyer will need to sell their property within a given timeframe.
If the home isn’t sold, the contract is canceled.
While these contingencies are drawn up to protect both parties from entering into a bad deal, if they aren’t met the buyer can ask for the offer period to be extended, if the seller allows.
But once all these contingencies have been met, it’s time to proceed to close.
Closing
When the offer has been submitted, it’s time for negotiations to take place and to smooth out the smaller details.
At this stage, the home has been appraised, and inspected, and the loan has been approved. All the buyer has to do is sign the document on the dotted line.
This period is referred to as a deal pending. But there can still be snags, even at this late stage, if the seller or buyer changes their mind. But what are the differences between pending and under contract?
Under contract Vs. sale pending
So, what does it mean if a house is sale pending? When a home is under contract, a buyer has only made a formal offer and the seller has accepted. As discussed above.
When a home is a sale pending, the home is under contract and all the stipulated contingencies or requirements have been met. This means a sale pending property is much closer to being sold.
With a home being in a status of sale pending, there’s not much an eager outside buyer can do.
So, now that we understand what happens with a home being under contract and what a sale pending home is, what can one do if it is their dream home?
What can you do if you love a house under contract?
So, you’re in love with this property and it is under contract. All hope isn’t lost! There is a chance that the deal can fall through. This means you can still submit a backup offer.
During this contractual process, sellers and real estate agents can still accept backup offers.
Put in a backup offer
While this is a real swing for the bleachers moment, there are a few pros and cons to putting in a backup offer. Which we can discuss now:
The major positive of submitting a backup offer is that it shows your intent is true for the home. And while you can only hope the other buyer falls through, it is a moment that is best summed up by the adage of, “You miss 100% of the shots you don’t take.” By putting in a backup offer, you are guaranteeing that if the opportunity comes around again, you’re first in line. Also depending on the real estate listing agreement, the real estate agent could help swing your offer towards the homeowner and can change their mind.
It’s always good to be positive, but the major downside of putting in a backup offer is that time and effort are wasted, as the majority of the time the original deal will go through. If you have your heart set on a home, it shouldn’t mean you stop looking. There’s always another option in the real estate market.
And for sellers who are tired of having to go through the process of being under contract to only discover that the buyer can’t fulfill his contingencies, you can always sell your home to House Buyers of America!
House Buyers of America will give you cash for your home
We buy houses for cash and have been since 2001. Our Real Estate Consultants are always able to take your phone call, or you can fill out our quick form.
When you decide to give us a call at 855-659-3289 or use our online form, we’ll give you a fair cash offer within 10 minutes.
If you accept the offer, your real estate consultant will arrange to meet you at your home with the paperwork, and once you’ve signed the funds will be reflected in your account within just days!
So, no need to waste energy engaging in lengthy negotiations. Give House Buyers of America a call today!
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