What Does It Mean When a Property Is Under Contract?

When a property is under contract, it signifies that a buyer and a seller have reached a mutual agreement on the terms and conditions for the sale of the property. This agreement is formalized in a legally binding purchase agreement or sales contract. It doesn’t necessarily mean the deal is done; rather, it indicates that the parties are in the process of fulfilling specific obligations to finalize the transaction.

Understanding the Contractual Phase

The phrase “under contract” is a pivotal point in the real estate journey, but it’s not the finish line. It’s more like the starting gun for a complex relay race. Let’s break down what it entails:

• Agreement on Terms: The seller has accepted the buyer’s offer (or a counteroffer), and both parties have signed the contract. This document outlines the purchase price, closing date, contingencies, and other essential details.

• Earnest Money Deposit: The buyer typically provides an earnest money deposit, which is a good-faith gesture to demonstrate their seriousness about purchasing the property. This deposit is held in escrow.

• Contingency Period: The contract usually includes contingencies, which are conditions that must be met for the sale to proceed. Common contingencies include financing, property inspection, and appraisal.

• Obligations of Both Parties: Both the buyer and seller have specific obligations during this period. The buyer must pursue financing, conduct inspections, and satisfy other contingencies. The seller must provide necessary disclosures and maintain the property.

• Escrow: An escrow company or agent acts as a neutral third party to hold funds, documents, and ensure all contract terms are met before closing.

The Buyer’s Perspective

For the buyer, being “under contract” can be both exciting and nerve-wracking. It’s an exciting step closer to owning the property, but there’s still work to be done. The buyer must:

• Secure Financing: Obtain approval for a mortgage loan, if applicable.
• Conduct Inspections: Arrange for property inspections to identify any potential issues.
• Review Disclosures: Carefully review all seller disclosures regarding the property’s condition and history.
• Satisfy Contingencies: Take necessary steps to satisfy all contingencies outlined in the contract.
• Stay Engaged: Communicate with their real estate agent, lender, and other professionals involved in the transaction.

The Seller’s Perspective

The seller also has responsibilities once the property is “under contract.” It’s not time to relax just yet. The seller must:

• Maintain the Property: Keep the property in good condition.
• Provide Disclosures: Provide all necessary disclosures to the buyer.
• Cooperate with Inspections: Allow the buyer to conduct inspections.
• Avoid New Offers: Generally, avoid accepting new offers unless the current contract falls through.
• Prepare for Closing: Begin preparing for the final closing process, including packing and coordinating the move.

What Happens Next?

The period “under contract” is a dynamic phase with many moving parts. The parties will be working diligently to satisfy the contractual obligations. If all contingencies are met and both parties fulfill their obligations, the sale will proceed to closing. At closing, ownership of the property transfers from the seller to the buyer.

However, it’s important to note that the contract can fall through if contingencies are not met or if either party breaches the agreement. This is why it’s crucial to have a clear understanding of the contract terms and work with experienced professionals throughout the process.

Frequently Asked Questions (FAQs)

Here are some common questions about what it means when a property is “under contract”:

1. Can a Seller Accept Another Offer While a Property is Under Contract?

Generally, no. Once a property is under contract, the seller is obligated to proceed with that specific buyer, as stated in the legally binding agreement. However, some contracts may have a kick-out clause, which allows the seller to continue showing the property and accept another offer if the original buyer hasn’t met specific milestones (like securing financing) within a certain timeframe.

2. What is a “Contingency” in a Real Estate Contract?

A contingency is a condition that must be met for the real estate transaction to proceed. Common contingencies include financing contingency (the buyer must be able to secure a mortgage), inspection contingency (the buyer must be satisfied with the results of a property inspection), and appraisal contingency (the property must appraise for at least the purchase price).

3. What Happens if the Property Fails the Inspection?

If the property inspection reveals significant issues, the buyer typically has several options. They can request that the seller make repairs, negotiate a lower purchase price, or, if the inspection contingency is in place, withdraw from the contract.

4. What Does “Earnest Money” Mean?

Earnest money is a deposit made by the buyer to demonstrate their good faith in purchasing the property. It’s typically a percentage of the purchase price and is held in escrow until closing. If the buyer fulfills their obligations under the contract, the earnest money is applied towards the purchase price.

5. Can a Buyer Back Out of a Contract?

A buyer can back out of a contract, but the consequences depend on whether they have a valid reason to do so, such as failing to meet a contingency. If the buyer backs out without a valid reason, they may forfeit their earnest money deposit.

6. What Does “Escrow” Mean?

Escrow is a process where a neutral third party (an escrow company or agent) holds funds and documents related to the real estate transaction until all conditions of the contract are met. The escrow company ensures that both the buyer and seller fulfill their obligations before closing.

7. How Long Does a Property Stay Under Contract?

The length of time a property remains under contract can vary depending on several factors, including the complexity of the transaction, the terms of the contract, and the time required to satisfy contingencies. It typically ranges from 30 to 60 days.

8. What is a “Title Search,” and Why Is It Important?

A title search is an examination of public records to determine the legal ownership of a property and identify any liens, encumbrances, or other issues that could affect the buyer’s ownership rights. It’s important to ensure that the seller has clear title to the property before closing.

9. What is a “Closing Date”?

The closing date is the date on which the ownership of the property officially transfers from the seller to the buyer. It’s the final step in the real estate transaction.

10. What Happens at the Closing?

At closing, the buyer and seller (or their representatives) sign all necessary documents, including the deed and mortgage documents. Funds are transferred from the buyer to the seller, and the ownership of the property is officially recorded.

11. What is a “Breach of Contract”?

A breach of contract occurs when one party fails to fulfill their obligations under the contract. If either the buyer or seller breaches the contract, the other party may have legal recourse, such as suing for damages or specific performance.

12. Should I Use a Real Estate Agent When Buying or Selling a Property?

While it’s possible to buy or sell a property without a real estate agent, it’s generally recommended to work with one. A real estate agent can provide valuable expertise, guidance, and representation throughout the transaction, helping you navigate the complexities of the process and protect your interests. Their expert advice can prove invaluable, preventing many problems during the “under contract” phase.

In conclusion, understanding what it means when a property is “under contract” is crucial for both buyers and sellers. It’s a critical phase that requires careful attention to detail, communication, and professional guidance. By understanding the process and your obligations, you can navigate this phase successfully and achieve your real estate goals.