What Does 'Under Contract' Mean in Real Estate?
You've decided to buy a home and whether it's your first home or your tenth you're likely to stumble across homes that are listed as 'under contract' on the real estate listing. Homes under contract in real estate mean there is a contract on the home and is pending sale OR the home is listed as contingent - Both have differences in their meaning.
At some point during the house-hunting process, you've no doubt stumbled upon a listing that at first glance seems too good to be true. The photos look amazing. The house meets every last one of your specifications. The school district is great and the neighborhood has a lot to offer. Then, you look at the status and that other shoe finally has a chance to drop: it's "under contract." This is never a great feeling though there is likely a better home waiting for you that you have not come across, or is possibly not even listed for sale yet!
As you search for that home of your dreams on various real estate websites, you'll likely encounter a wide range of different statuses depending on the listing. "Under contract" is one of them, which is exactly what it sounds like: a prospective seller and a buyer have entered into a process where they've agreed to not only the terms of the contract but other important factors like the sale price, the closing date, contingencies and more. There are many things that take place once you go under contract on a home.
But what does "under contract" actually mean in a deeper sense, and how will it impact your ability to put an offer on this particular property? To get answers to those questions, you must first understand more about how the sales and closing process actually works. So....
Let's Break it Down: What Does Under Contract Mean in Real Estate?
When a buyer makes an offer on a prospective house, they typically work directly with their own real estate agent to come up with an appropriate offer and present their preapproval letter showing they are capable of purchasing the home. Based on this, the agent will create what is called an "offer letter" or "offer to purchase and contract" to send to the seller's agent. There are many things buyers need when buying a house and anything can go wrong during the purchase process, though 'under contract' all starts with the seller's acceptance of the buyer's offer.
This letter will detail a few key things, including price, which is obviously the most important element in any financial transaction as large as this one. If it's currently a buyer's market, the buyer usually submits an offer that is below the asking price to see if it gets accepted. If it's a seller's market, they may submit one higher than the asking price as the chances that the property has seen multiple offers is high.
This offer letter will also include a discussion of closing costs, which can get complicated depending on the circumstances. Generally speaking, buyers are expected to pay roughly 5% of the full value of the mortgage on things like closing fees and other related services. Sellers typically pay between 6% and 10% of the final sale amount on closing costs, which obviously includes things like commissions to their own real estate agents.
If it's a seller's market, this is when a buyer may offer to pay for part of the seller's closing costs in an effort to really make their pitch stand out. If it's a buyer's market, the seller could essentially do the exact same thing to try to get their property off the market as quickly as possible.
At this point in the offer letter, a buyer will also include what is referred to as "earnest money," which is really just a good faith deposit to let the seller know how serious they are. Overall, it's a good idea to put down between 1% and 3% of the final purchase price in earnest money - particularly if the home in question is in a high-value area. Again, it's all about making your offer stand out in a crowd and getting someone to seriously consider what you have to say.
Finally, an offer letter will include any contingencies that need to be met BEFORE a home can be sold. So while the home may be under contract it's still not 'sold' which means it could come back to the market. In essence, these are opportunities for a buyer to back out of a contract if any of these contingencies fail to be met.
Just a few of the most common forms of contingencies found in real estate include but are not limited to ones like:
- Financial contingencies, which are usually a way to show a seller that a buyer has been pre-approved for the appropriate amount of financing. If for some reason the buyer is unable to get approved for the desired type of mortgage, their offer can be canceled without any actual penalty.
- Appraisal contingencies, which demand that the property must be appraised for at least the purchase price, but ideally higher. If the appraisal comes in lower than that amount, the seller can either lower their price or the offer can be canceled without penalty.
- Inspection contingencies, which require a professional home inspector to go over the property with a fine-toothed comb so that the buyer can get an idea of any repairs that they may be looking at. Depending on what that inspector finds, the buyer can either have the seller take care of certain high ticket issues, can negotiate on the price to make up for the costs, or cancel the contract.
- Sales contingencies, which are actually quite common. This means that a buyer will only purchase this new home if they are able to sell their current one. It's not unusual for certain types of real estate contracts to be contingent on the sale of two, three or even more homes.
Once that offer letter has been submitted, there will typically be some back and forth between the buyer and seller agents over things like price and contingencies. At this point, one of two things will happen: the seller will either reject the offer, or they'll negotiate with the buyer to the point where the offer has been accepted.
As soon as that happens, the home will officially be listed as "under contract" on sites like Zillow and Redfin.
Moving Forward With a New Home Purchase
The reason why it was important to understand all of that is to say that just because a home is "under contract" doesn't necessarily mean that the transaction is a done deal.
According to one recent study conducted by the National Association of Realtors, roughly 8% of all real estate contracts are being terminated before they ever have a chance to reach their closing date. Note that this is actually a significant increase of the average of 4% that we've seen over the last few years. Yes, part of this has to do with the current economic uncertainty caused by the ongoing COVID-19 pandemic, but the point stands - just because a house is listed as "under contract" does not mean that it's off the market just yet.
For the sake of example, let's say that a particular house under contract is contingent on not one but three different sales. The prospective buyer needs to be able to sell their current house. The seller has put an offer on a new property of their own, and THAT transaction is contingent on the sale of yet another property. If any of those transactions fall through for whatever reason, the contract you have your eye on is officially terminated and that house goes back on the market in full force.
Or let's say that a professional home inspector has had a chance to look over the property and finds something that the prospective buyer isn't too thrilled about. After a back and forth negotiation with the seller, they're either unwilling to make the repairs themselves or are unwilling to budge on the asking price of the property. At that point, the buyer is free to back out of the contract (and very likely will) - putting the house right back on the market again.
This is a big part of the reason why homes usually sit in the "under contract" stage for several weeks before the closing date arrives. During this time, the property will go through home inspections, appraisals, land surveys, deed and title checks, and much, much more. At any point during this time, a buyer is in a position to cancel a contract if any problem arises without incurring so much as a financial penalty - though they will have to forfeit the due diligence fee that they already paid to the seller in the state of North Carolina.
In the event that all of those contingencies have been met and no unexpected issues crop up, it's very possible that closing day will eventually arrive. Everything went fine with the appraisal and inspection and both parties are every bit as enthusiastic about the deal as they were when this process started. All that is left is for a buyer to sign the appropriate closing documents, pay any remaining fees, and enjoy the home of their dreams.
This part of the process is when a home will be listed as "pending" on real estate websites. That status simply means that all required conditions have been met and the contract is in the process of being executed. It's much less common for a transaction to fall through at this stage of the process, to the point where some real estate agents may not even be willing to entertain additional offers while pending. But at the same time, there's nothing legally prohibiting you from making an offer during the pending phase. The worst someone can say is "no" and while it's rare for a contract to get canceled here, it does happen.
But until that actually happens, you shouldn't consider yourself "out" just yet.
If you absolutely love a home that is under contract, remember that there is always a chance that something can go wrong as outlined above. At the bare minimum, you should submit a backup offer through your real estate agent that essentially says that you're "next in line" should the deal fail to go through for whatever reason.
Of course, there is a high probability that a lot of other people have had this same idea, so you should try to make your backup offer as attractive as you can. If nothing else, take it every bit as seriously as you would if the house were not under contract at all - particularly if it is again in a high-value area.
Final Thoughts on What Under Contract Means in Real Estate
There are few things more disappointing than finding a home that you absolutely, positively love only to quickly find that it is listed as being under contract. But again, all hope is not lost because there is still a wide range of things that can "go wrong" in your favor.
The buyer needs to be able to secure financing, which isn't always a foregone conclusion. The home inspection needs to be completed, which gives the buyer every opportunity to back out of a contract if something is found that they're not comfortable with. No, you're not necessarily going to find out what that is - but you'll have a chance to do a home inspection too should your backup offer be accepted.
The point is that if either party in a transaction fails to meet one of the laundry lists of contingencies and conditions, that contract is terminated and the house is back out on the market. That's why you shouldn't give up hope quite yet - because in an industry that is as fast-paced and as inherently complicated as real estate, you truly never know what might happen.
If you find a home that is under a contract let us know! We are likely to be able to find you one like it or better. Feel free to connect with any of our Realtors in Raleigh to help you find a great home!
Hi there! I'm Ryan Fitzgerald, a REALTOR in Raleigh-Durham, NC and the owner of Raleigh Realty. Chances are you and I share a similar passion, Real Estate! I also have a passion for building businesses, working out, inspiring others, technology, sports, and people. Connect with me on Facebook and Instagram!