What does “under contract” mean in real estate? Well, it can actually mean a lot of things! While your real estate agent should always be able to explain terminology clearly to you, we've put together a short guide that you may find useful when your current home is about to go under contract.
A Note on Real Estate Contract Labels
There can be a lot of confusing language in the real estate world. One of the grayest of gray areas is the whole subset of labels applied to homes throughout the sales process. The most confounding aspect is that they can rapidly change; if you want to understand that general progression then here is a useful guide. Otherwise, read on as we try to quickly demystify the major ones. Also, feel free to consult with knowledgeable real estate agents at any time.
Under Contract: A seller accepts a formal offer to buy a home…. That's it. That is all that is 100% certain for a home sale to receive the “under contract” designation. Some type of offer has been made, via some recognized document. The seller's agent may continue to accept backup offers at this time.
Contingent: An offer to buy a home has been accepted but there are some contingent hurdles that must be cleared for the sale to proceed… This is slightly more specific than just “under contract” but even a home sale that has accepted a contingent offer could be referenced by the blanket “under contract” term and still be accurate. There are many possible reasons for a home sale contingency. A financing contingency means the prospective buyer must obtain financing from a mortgage lender. A home inspection contingency or appraisal contingency mean the buyer's offer is dependent on a clean bill of health for the property.
Sale Pending: An offer to buy a home has been accepted and all contingencies (if any) have already been cleared…. Another term that technically falls under the “under contract” umbrella, but a pending sale pretty much means it is a done deal.
Offer Accepted: An offer to buy a home has been verbally accepted, but without any contractual agreement…. This term is becoming less common, since serious offers now must be more concrete to stand out from the rest (deal sheet, purchase contract). So usually when someone says “offer accepted” they really mean “under contract” nowadays.
In Escrow: An offer to buy a home has been accepted and escrow services have been engaged… Once a popular term, “in escrow” has slowly been phased out as the more descriptive designations have grown in prevalence.
Meaning Is in the Eye of the Beholder
What exactly “under contract” means though depends on the audience. Say you are a seller. It means you have successfully found a buyer who is willing to pay an amount that you have deemed agreeable. But it does not mean you're out of the woods, just that you're approaching the edge of the forest. Depending on whether there are contingencies, there could be some work required on your end to close the sale. Inversely, it may mean that the buyer must take some action to finalize the deal. (Check out some common contingencies here).
For buyers, a home under contract should bring you more peace of mind. Well, assuming you have done your homework. Usually the largest cause of a sale falling through is on your side re: financing. But a serious buyer would have already spoken to mortgage lenders and have a decent understanding of what they're buying. If you handle (and have handled) your homework in the home buying process, you're shortly going to become the owner of a new home.
Show Me the Money
One other caveat merits its own mention in discussing a home purchase “under contract” — the money. A down payment is almost universally made at the time of closing, so after everything has been finalized (when the sale has progressed beyond “under contract” status). However, a practice that becomes more common in sellers' markets is the buyer paying “an earnest money deposit.” This is a pre-payment of part of the expected down payment to show the seller how motivated and serious the buyer is about closing the deal. So long as there is clear protection established over what is refundable, earnest money is a reasonable practice for a home sale under contract.
Conclusion
So, what does it mean when a house is under contract? In short, it means that someone has expressed serious interest in purchasing a property and is in the process of working toward finalizing the sale. A property that has also been designated as pending, contingent, has had an offer accepted, or even in escrow may also be more colloquially described as “under contract.” While the final sale feels imminent, it is not fully guaranteed, especially for the seller who may be sweating the buyer's mortgage approval. One aspect that may make the likelihood of a successful finalization feel stronger to a seller is if a buyer pays earnest money while under contract, before the full down payment in closing. When in doubt, reach out to a real estate agent who can breakdown the status of a properties in all kinds of real estate transactions.
Was this article helpful? Send it to someone who could use an explanation on real estate contracts.
