When a property is listed for sale, potential buyers make an offer with their best price and any contingencies. If the seller accepts the offer, the property is considered “under contract.” The buyer and seller are now in a legally binding agreement.
The Under Contract Phase
Once a property is under contract, the buyer and seller are subject to the terms outlined in the contract. In the contract, the buyer will usually have a certain amount of time to conduct due diligence on the property, like obtaining a home inspection, reviewing disclosures, and securing financing. During this phase, the seller is typically prohibited from accepting any other offers on the property. Unless the status says Active Under, Contract, which means the seller is still accepting backup offers.
If the due diligence and financing process go well and contingencies are met, the sale will move to the closing phase. At closing, the buyer pays closing costs and any other fees, and the seller transfers ownership of the property to the buyer. The property is no longer considered to be under contract once the transaction has been completed.
What is a Contingency?
Most real estate contracts include contingencies, which are conditions that must be met in order for the sale to proceed. Common contingencies include the buyer's ability to secure financing, conduct a home inspection, or sell their current home before closing on the new property. If the contingencies aren’t met, the contract can be canceled and the property will no longer be under contract.
During the under-contract phase, both the buyer and the seller have certain obligations that must be fulfilled. For example, the seller must continue to maintain the property and ensure that it is in the same condition as when the contract was signed. The buyer must also continue to act in good faith by obtaining financing and completing any required inspections in a timely manner.
Benefits of Being Under Contract
For sellers, having a property under contract can be a positive sign that a sale is likely. It can also provide some assurance to the buyer that the property will not be taken off the market by another offer. For buyers, being under contract means that they have a secure agreement to purchase the property, which can provide peace of mind during the due diligence and financing process.
Being under contract is usually a positive sign that the sale will close, but it doesn’t guarantee it. For example, if any contingencies aren’t met, the contract may be canceled, and the property will be back on the market.
The Bottom Line
When a property is under contract, a buyer and seller have entered into a legally binding agreement that outlines the terms of the sale. During this time, both parties have obligations, and the sale might be contingent upon certain conditions. While being under contract can be a positive sign for both buyers and sellers, it does not guarantee that the sale will close.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
