When you set out to purchase a home, you’re likely to find properties “under contract” on a real estate listing.
Houses under contract mean an offer has been accepted, but the sale isn’t finalized.
This stage occurs after both parties agree on a price and sign a formal agreement outlining the terms of the sale but before the sale’s closing.
During this period, contingencies must be met before the sale can officially close. These contingencies often include financing, home inspection, home appraisal, and sometimes the sale of the buyer’s current home.
Under contract properties often go into “contingent status” and then move to “pending status.”
These listing statuses have slightly different meanings, which we will discuss.
A third listing status is “Active under contract,” which indicates the seller will entertain backup offers.
When you think you’ve found your perfect property listing, you might imagine yourself living in the home. But before you start picturing where 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.
“Under contract,” “in contract,” and “under agreement” are often substituted for one another. These terms mean the same thing.
But can you still make offers on houses in this status?
It’s essential to know the sale isn’t final yet. While the agreement has been signed, it can fall through.
A real estate transaction is never consummated until the papers are passed at the closing table.
If you see a property you love in this listing status, I would highly recommend having your buyer’s agent check up on it with the listing agent. They can gain insights on how likely the house could return to the market.
What Does Under Contract Mean?
Let’s look at the process of selling a home so that you can better understand the meaning of a house under contract.
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 the following:
- 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 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. Buyers must make strong proposals to secure their desired home thanks to more competition.
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. Doing this for a house you want is never a good idea.
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 market conditions. While this earnest money can sometimes be as little as $1,000 or less, typically, it is 1% to 5% of the purchase price.
The seller’s agent, title company, or real estate attorney holds the money in an escrow account.
However, earnest money can increase to 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 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. On the other hand, the seller’s closing costs can be above 6% of the purchase value, including the real estate agent’s 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 the lender offers, the buyer must pay these fees out of pocket.
Contingencies to Know
A contingency clause must be completed before the home sale can be finalized. Contingencies allow the buyer 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 House Contract Usually Has One of These Clauses
Home Inspection Contingency
Property inspections are 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 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 lower 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.
Financing Contingency
While the buyer may be pre-approved for a mortgage, a preapproval letter doesn’t guarantee a mortgage commitment.
If the buyer is not 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. A financing issue, while not commonplace, happens 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
A home sale contingency only allows the sale to continue if the buyer can sell their home. Sometimes, a buyer will try to make the sale of their current house a contingency.
Most sellers’ 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.
These contingencies could lead to different terms or even a lower sale price.
The Seller Accepts The Offer, Making The Property Under Contract
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 reject the offer.
The current buyer may have to revise critical real estate terms to satisfy the home seller.
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.
Contingent vs. Under Contract
Many buyers ask what contingent means in real estate. Contingent essentially has a similar meaning. 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 stay in this status but continue to show in the multiple listing service.
Under contract vs. contingent means the same thing.
What Does Active Under Contract Mean?
It means an offer has been accepted, but the seller wishes the home to remain active in the Multiple Listing Service. While in this status, the seller hopes to receive a backup offer.
If the first buyer backs out, a second buyer can move forward.
Under Contract vs. Pending
Many 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 sell pending the contingencies’ completion. 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 Backup Offer?
Sometimes, a buyer does not act quickly enough for their dream house or loses 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. The backup offer will get the house if the first deal falls apart.
Houses in this listing status can sometimes fall through, especially in the early stages.
Dealing With Contingencies to be Completed
Before the closing date, the contingencies need to be completed. With everything agreed upon 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 has an agreement accepted.
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 typically lasts 1 or 2 weeks, and the buyer can cancel the deal if something goes wrong.
This stage can stretch out for a more extended period for several 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.
However, the buyer might require an extension if things don’t go well and the contingencies aren’t met in the timeframe.
Perhaps the buyer hasn’t sold their home, but they might be able to continue with the purchase with an extension.
What Does it Mean on Zillow?
Under contract on Zillow, it has the same meaning as a house on MLS or any other website.
An agreement between the buyer and seller has been accepted. Contingencies have likely been met.
A contract-accepted property at Zillow probably won’t return to the market. Most of the time, the house will stay that way.
When homes change from active listings to under-contract houses, they often will continue to be displayed on Zillow if they are in “contingent” status in MLS.
When the listing status is changed to pending, they will no longer be displayed as active homes for sale.
How Long Can A House Be Under Contract?
No steadfast rules exist on how long a home can be under contract. However, it is unusual for a home to be under agreement for more than four months. Most homes close in 6-8 weeks.
Houses in limbo for an extended period could be short sales or have a home sale contingency.
Can a House Under Agreement Be Sold to Someone Else?
Many potential buyers ask real estate agents if a seller can accept another offer.
The sale must be terminated before selling real estate to a different party. The buyer and seller would need to sign a release ending the deal.
Once a termination agreement is signed, a new buyer can purchase the property.
How Often Do Under Contract Houses Fall Through?
You may wonder how often sales fall apart after being contracted with a Realtor. According to the Realtor’s Confidence Index Survey, these were the percentages of why homes with offers accepted fell apart in 2022.
About 4% of all houses under contract end up falling through.
- Home inspection issues (25%)
- Financing issues (21%)
- Appraisal issues (15%)
- Contingency issues (5%)
- Title/deed issues (3%)
- Buyer lost job (2%)
- Other (29%)
Closing Day Completes The Sale
When all the contingencies have been completed, the closing process can finally happen with the contract terms. It means the lender has approved the mortgage, and the home has been appraised and inspected with any repairs completed.
The buyer is then left to check and sign the paperwork before the home officially belongs to them.
Is it Possible to Offer a Property With an Accepted Contract?
Can you still make an offer if you have fallen in love with a house?
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 must know that the deal has a limited chance of 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.
Final Thoughts
It would help if you now understood this standard listing status much better. If not, reach out, and I will answer your questions. Unfortunately, the odds are long that you will buy 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 in real estate was provided by Bill Gassett, a Nationally recognized leader in his field. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. 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 Metrowest towns for the last 37+ years.
Are you thinking of selling your home? I am passionate about real estate and love sharing 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.
