What Does Under Contract Mean?

By 

Michael Yessis

Updated 

February 5th, 2021

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Can you make an offer? | What's in a contract? | House price | Closing costs | Earnest money | Contingencies | Pending status | Contracts can fall through | Failure to resolve items | Frequently asked questions 

In real estate, under contract means a buyer's offer on a house or property has been accepted by the seller. The buyer and seller have agreed on a price. A timeline for the transaction has been outlined. Documents have been signed.

But the sale isn't final.

It's only the beginning of a process that can stretch for weeks, sometimes months. The buyer and seller still must work through the finer points of the deal they've agreed to in the contract.

Can you make an offer on a house that's under contract?

What's involved in a house under contract?

The core clauses buyers and sellers usually agree to in a contract include:

The price of the house

Typically, the seller lists a price for the house and the buyer submits an offer above, below, or exactly at that price.

If it's a buyer's market, where houses for sale outnumber buyers, a buyer may submit an offer below the asking price.

If it's a seller's market, where buyers are more plentiful than sellers, a buyer often bids higher than the asking price to try to top competing offers.

The parties then negotiate and settle on a price, which is included in the contract.

» READ: What is a Real Estate Purchase Agreement? (In-Depth Guide)

Closing costs

The contract includes costs for appraisal, home inspection, property taxes, insurance and other items, which will be paid when the transaction concludes.

Closing costs can range from 2-5% of the cost of the house.

» READ: What Are Closing Costs?

Earnest money

This good-faith deposit on the home by the buyer demonstrates their seriousness. Typically, it ranges from 1-3% of the cost of the house.

Contingencies

Contingencies — conditions that must be met before a contract becomes legally binding — are likely the biggest hurdles to be cleared for a house under contract to move forward.

» READ: What Does Contingent Mean in Real Estate?

According to the May 2020 Realtors Confidence Index Survey, 76% of home sale transactions include some sort of contingency. The most common contingencies in a contract are: financial (47% of home-purchase contracts), appraisal (46%), inspection (59%), clear title (12%), and sale of current home (6%).

What happens after the parties resolve the items in the contract?

The status of the house turns to pending.

» READ: What Does Pending Mean in Real Estate?

Don't fret if you're still interested in the house. You're not out of the running. Pending status comes with its own hurdles to be cleared by the buyer and seller, including issues with the title, financing, and plain old cold feet from the buyer.

What's the likelihood of a house under contract falling through?

According to the November 2020 Realtors Confidence Index Survey, 6% of overall contracts that month were terminated. So a contract will fall through no more than six out of 100 times.

The contracts within that 6% generally fell through because of:

Appraisal Issues 

What might happen: The buyer backs out of the deal because an appraisal values the property below the mutually agreed-upon price.

» READ: The Ultimate Home Appraisal Checklist

Financing Issues 

What might happen: A buyer's home mortgage loan doesn't come through. The deal dissolves.

» READ: A Step-by-Step Guide to the Home Loan Process

Home Inspection Issues

What might happen: The home inspection reveals a deal-breaking issue during the home inspection, like a damaged roof or a critical structural problem.

» READ: 7 Must-Know Home Inspection Tips for Buyers

Title Issues 

What might happen: A legal claim against the current owners — known as a lien — could mean the new owner might have to take on responsibility for debts.

» READ: 7 FAQs About Title Companies and What They Do at Closing

Job Issues 

What might happen: The buyer loses their job and no longer has the income to pay for a property.

What happens if the parties fail to resolve the contract items?

The house returns to the market, goes off the market, or the seller considers any backup offers. A backup only becomes the primary offer if the initial offer falls through.[1] 

Frequently asked questions

Can I make an offer on a house under contract?

Yes, but not in every case. If it's unclear in a listing, an experienced agent can gather information to help you determine if the seller's open to backup offers. 

A backup offer comes into play only if the initial offer terminates.

Should I make a backup offer on a house under contract?

Your decision will depend on many variables, which a good agent can help you sort out. 

Generally, these are a few pros: 

  • You're reserving your place as next-buyer up. 
  • You're showing you're motivated. Many sellers appreciate that.  

These are a few cons:

  • If the title issues or other major concerns arise with the first buyer, those issues become your issues to navigate.
  • Waiting on the status of your offer might stop you from searching for and finding a home you fall in love with even more. 
  • The seller could be using your offer as a tool to nudge the original buyer into acting.

What are my chances of buying a house under contract?

Not great. Only six out of 100 home-purchase contracts were terminated in November 2020, according to that month's Realtors Confidence Index Survey.

A savvy real estate agent at your side might improve your chances of getting a home that's under contract.

» NEED A SAVVY AGENT? Connect with a top-rated agent in your area 

ARTICLE SOURCES
[1]

Realtor.com. "What Does 'Active With Backup Offers' Mean?." Accessed February 3, 2021.