What Does Under Contract Mean in the Real Estate
There are quite a few popular terms across the real estate industry. Mortgage, amortization, appraisal, due diligence, and DoM (days on market), among many others. One of the most popular, however, is the term “under contract”.
So many times a buyer would browse real estate listings and find the one great house that stands out and has everything they’ve been looking for one. So many times this house will have only one major problem: it is listed as being “under contract”.
Those who have no idea what the term actually means usually find themselves in a bit of a quandary.
They find themselves asking questions such as, “is the house sold yet?” “Is it still available?” Well, the answer is not exactly either. This is because understanding the term “under contract”, while quite easy to understand on the surface, requires a little bit of a deep understanding of real estate negotiation strategies and operations to get a full picture.
You don’t have to worry though. Our in-depth guide below on understanding what the term “under contract” means will help you remove whatever ambiguities you have regarding the concept.
Under Contract Listings Explained
Obviously in the regular sense of the word, many would assume “under contract” to mean that a particular listing has now been sold and therefore unavailable. In the real estate world, however, this means something quite different.
A house listed as under contract in real estate terms indicates that the seller has indeed found a buyer for the house. And not only has a buyer been found, but an agreement has also been reached for the selling price and a few other important factors.
Now you may be asking yourself, naturally, if agreements have indeed been made between buyers and sellers, why are houses listed as under contract still available for viewing to prospective customers?
Well, this is because, despite the fact that properties listed with the “under contract” designation already have agreed on buyers, there is still a possibility that this deal may fall through, thereby giving another interested buyer an opportunity to seal the deal.
So in short, under contract in real estate means that the seller of the property in question already has an agreement with a potential suitor, but the house is technically still on the market because the agreement isn’t finalized yet.
The Property Acquisition Process
To fully understand what under contract means in real estate, it is useful to take a wider look at the entire real estate acquisition process as a whole.
We start from the initial phase – the offer.
Let’s say a buyer sees a property. They like what they see, and look to acquire it. They then contact the seller through an agent. The buyer and the buyer’s agent come together and send an offer to the seller through the seller’s agent.
Now a typical offer of purchase from a buying agent – usually referred to as an offer letter – contains a few key pieces of information.
The Offer Details
The first and most important information in the offer letter is the price. Now if the market is a buyer’s market, it is not unusual for the offer letter to contain a price less than the asking price. In a seller’s market, the price is usually higher to pry the asset away from competitors.
Another important detail is the discussion of closing costs. Closing costs come about thanks to things like closing fees and related services.
Buyers are usually expected to pay about 5% of the full mortgage value on closing costs. Sellers on the other hand let go of about 6 – 10% of their own closing fees and related service costs.
Now at this junction, something happens with closing costs that are worth noting. In a seller’s market, it is quite common for a buyer to offer to pay part of the seller’s closing costs in hopes that this may sway the seller in his favor. In a buyer’s market, sellers also do the same to make sure their property is off the ground as quickly as possible.
Now at the stage of the transaction, the buyer may also include what is known as earnest money. This is a deposit made as a show of good faith and seriousness. Buyers usually make a good faith deposit of about 1 – 3% of the total selling price.
Lastly, the offer letter will include contingencies that need to be met before the deal can be finalized.
Contingencies are certain conditions that have to be met before a real estate deal can be closed. Some popular contingencies found in real estate deals include:
Sales Contingencies – Sales contingencies stipulate that a deal to buy a house will only close if the buyer is able to sell their current property. Contingencies like this are actually quite common in the real estate market, and sales contingencies may even depend on the sale of not one, but two, three, or more homes.
Financial Contingencies – Financial contingencies are measures taken to prove to the seller that the buyer is capable and has been approved for the level of financial requirements needed to acquire the property.
Appraisal Contingencies – Appraisal contingencies relate to demands for the property to be officially appraised for the purchase price or higher. If an appraisal is done and the figure comes in lower than the listed amount, the seller has to lower the price or cancel.
Inspection Contingencies – Lastly, inspection contingencies indicate that a contract is subjected to a professional inspection. Here an inspector performs a thorough check-up on the property to find flaws or any other points in need of fixing.
Contingencies and Under Contract
Why are real estate contingencies important, you may ask? Why have we spent all this time going over the steps involved in purchasing properties, even down to the key details?
Well, they are important because they help us understand the reason why a property could be under contract and still be shown to other potential buyers.
For instance in terms of financial contingency, if a buyer is unable to fulfill the conditions laid down by such a contingency, then the deal will not necessarily go through, and the house will become fully available again.
The same goes for appraisal contingencies. Failure for this contingency to be met, or to facilitate reasonable adjustments, will indicate that such a contract cannot close.
Lastly, inspection and sales contingencies are other conditions that can cause a property listed under contract to not close if those contingencies are not met.
Once an offer letter is sent, a period of negotiation and communication follows. Offers are usually tweaked and expanded until a contract is made. Sometimes deals also fall through at this stage.
But ideally, if an agreement can be made on pricing and contingencies, the buyer and seller then enter into an agreement stipulated under the contract.
It is at this stage that the property is then listed as under contract.
The Cooling Off Period
South Carolina does not have this provision, but some states do. Obviously, as we can see above, a property under contract is still not completely off the market yet. Prices and conditions have been agreed upon, but those conditions haven’t been met yet. As such, the house is still available, and the deal enters what is generally regarded as a cooling-off period.
In a cooling-off period, the buyer ideally has about five business days to consider their purchase and make a final decision.
It is worth noting that if a buyer withdraws from a deal during a cooling-off period, they usually incur a penalty. The actual fees of this penalty would have been earlier stipulated either in the contract or in local laws of states and territories.
However, if both parties choose to mutually terminate a contract, then no penalties are incurred. Also, if certain contingencies fall through, no penalty is also incurred.
Under Contract vs Pending Sale
Houses under contract usually fall under one of two categories when it comes to the way in which they are listed. Some houses are listed as under contract – show listings, while some are listed as under contract – no show listings.
We take a look at what each of these terms means below.
Under Contract-Show Listings
When a property is classified as “under contract – show listing”, it will be listed as under contract on multiple listing services. This implies that the property in question is indeed under contract but can still be available for backup offers.
Backup offers are exactly as the name implies – an offer made as a fallback offer in case the existing contract falls through. Some multiple listing service systems refer to the “under contract – show listing” category as the “backups requested” category.
Under Contract – No Show Listings
As the name implies, the “no show listings” category is the direct opposite of “show listings”. Just like the show listings, the house in question is indeed under contract, but unlike the show listings, the seller of this house no longer wishes to show it to prospective buyers.
In other words, there are no backup offers requested. This may be due to a strong agreement between buyer and seller, high confidence in contingencies or the seller just isn’t interested in showing the house anymore.
What Does Contingent and Pending Mean in Real Estate
Instead of “under contract”, some listing services choose to display properties as “contingent” or “pending”. In case you were wondering what any of these meant, or whether or not they are the same classifications as “under contract”, you don’t have to worry anymore.
We can assure you that “contingent” and “pending,” do in fact mean the same things as under contract.
In the past, a “contingent” listing used to specifically mean that the buyer still had to sell their home (or homes) in order to close the deal. Nowadays, though, it is no longer limited to only this kind of contingency (sales contingency) and can imply other forms too.
At any rate, a house listed as “under contract”, “contingent”, or “pending”, indicates that the house has a potential buyer with an offer letter drafted and agreed upon.
Under Contract Summary
So there you have it. Now you know exactly what under contract means in real estate listings. To summarize, closing a deal in the real estate market requires a few complex steps, from the initial listing phase to a serious offer, contingency clearing, and finally, closing.
Houses listed as under contract have cleared the initial listing phase and offer phase. An offer has been sent and accepted, all that is left is for the conditions (also known as contingencies) to be met and the final deal signed.
Houses in this phase are listed as under contract and not as sold because, despite the advanced nature of this phase, deals are still known to fall through at a significant rate.
So if you happen to find that a beautiful property you admire is under contract, you don’t have to lose hope just yet. The property is not entirely out of the market, just that someone else is ahead of you, and barring contingencies, the deal will close.
Frequently Asked Questions About Under-Contract Listing
Now that you understand what houses that are listed as under contract mean, it is only natural to have some associated questions about what comes next.
Below we have listed a few commonly asked questions about houses under contract, what you can do about them, and your chances of actually hijacking a deal for a house under contract.
Can I Make an Offer on a House that is Under Contract?
As we mentioned earlier, the answer to the question of whether or not you can make an offer for a house listed as under contract is that it depends. It depends on the exact kind of contingency involved.
For instance, in the “under contract – show listing” category, it is possible for the seller to welcome backup offers. So in this case, you can indeed make an offer for a house under contract.
On the other hand for houses that fall in the category of “under contract – no show listing”, you cannot make a backup offer seeing as the seller is assured enough that the deal will go through.
Some under-contract listings can also expressly state whether or not a backup offer is required by listing the category as “Backups Requested”.
How Often Do Listings Under Contacts Fail to Close?
For those who have found a property they really admire listed as “under contract”, it is only natural to wonder what your chances are exactly of getting the house back on sale.
Well, the exact figures vary on a few factors, but generally, we’ll put the probability of a house under contract failing to close at 15%.
Many real estate agents put the figure at 20% based on their own personal experience. Either way, the presence of these figures themselves shows that it is in fact possible that a house under contract fails to close.
And it happens a lot of times, too. Cautious optimism is what we advise for those looking to get a property under contract. It is, in fact, possible so just hope it does but never stop searching for better open options.
Houses under sale contingencies, in particular, are known to fall through at a much higher percentage than those under other contingencies.
How Hard is it to Acquire a House Under Contract?
As mentioned above, the probability for a house under contract to fall through is quite significant at 15% to 20%, but this isn’t the only hurdle you’re facing as a buyer trying to purchase a property under contract.
For instance, in a seller’s market, the seller usually has more power over the buyer in terms of negotiation. And with the property already under contract, you can consider this power tripled.
They already have a serious offer, so there really is no need to make concessions. It is up to the buyer in this scenario to make additional efforts to secure an almost-secured property.
Without mincing words, the challenge is a really big one. But again, it can be done.
What are Certain Conditions Which Make Offer Contracts Fall Through?
Offer contracts may fall through once contingencies are not met. Offer contracts may also fall through due to unforeseen circumstances. More often than not, though, it is the failure to meet one or more contingencies that cause houses under contract to go back on sale.
Houses under sale contingencies, as mentioned earlier, can fall through at a higher rate than others, seeing as the deal only closes once the buyer is able to sell a handful of other properties. This can be a substantial hurdle to climb in some cases.
Financial contingencies are usually easier to overcome. Appraisal contingencies may be a cause of a hiccup but generally, an agreement can be made in terms of the concession.
Inspection contingencies can also be tricky sometimes but are less so than sales contingencies.
What are Conditional Offers?
Instead of the term “under contract”, or “contingencies”, you may also come across the term “conditional offering”. All of these basically mean the same things, which is that a house is already under contract but may require additional conditions fulfilled before the deal is closed.
These conditions are usually the same as the type of conditions highlighted earlier – financial, appraisal, inspection, and sales Contingencies.
How Long Does it Take for Homes to Close?
For those who have an eye for a property listed as under contract, you may be wondering how long it will take before you can finally confirm that the house is totally off the market. Well, the answer to this, again, is that it depends.
It depends on how “hot” the market is, how anxious the buyer and sellers are, and how desperate they are to get the deal over the line.
Buyers generally look to get deals done fast in a hot market (seller’s market) while sellers look to get the deal over the line as quickly as possible in a cold market (buyer’s market).
Usually, though, it takes about 30 – 45 days from the day an offer is accepted (when it goes under contract) to the day the deal is finally closed.
In this scenario, all contingencies are cleared in average time, and you can finally move on and take your mind off the property. Generally, if you have been waiting for a month and the property is still under contract, you may have to take your mind off it anyway.
Understandably, many buyers who find houses they love listed as under contract lose faith quite easily. But once one understands exactly what the term means, it is easier to see that all hope is not necessarily lost.
In our guide above explaining the meaning of “under contract”, we were able to outline in detail just why this is so.
To summarize, consider “under contract” listings as the middle ground between the initial phase and the closing phase. In this stage, a lot of things have gone right. Enough to warrant a provisional contract. But a lot of things can also go wrong, causing the deal to fall through.
This is why despite the fact that some properties are listed as “under contract”, they still keep being shown on multiple listing services.
We have also looked into some frequently asked questions that many buyers looking to purchase properties under contract may have. These include the probability of hijacking the deal; conditions that may cause those deals to fall through; and if it is indeed possible to make offers for properties under contract.
In the end, it is usually advisable to keep an eye on these “under contract” properties, even as you continue to check out other available ones. This way, you may end up finding an even better property while giving yourself a chance to act fast if the deal does fall through.
This helpful info is brought to you by Jerry Pinkas Real Estate Experts – 843-839-9870 – Our team of experts wants to help you avoid those mistakes that can be costly and extremely frustrating when you are buying or selling real estate in the Coastal Carolinas.