Being under contract in real estate signals that the buyer and seller have agreed to the essential terms of a transaction, and a formal process is underway to finalize the sale. This status is different from merely submitting an offer or having ongoing negotiations. It typically involves earnest money, a formal contract, and specific contingencies that protect both sides.
What Under Contract Really Means
When a property is under contract, it indicates that a legally binding agreement has been reached on the major terms of the sale. The purchase contract outlines price, property details, financing, closing timeline, and contingencies. Until contingencies are satisfied or waived and all formal documents are executed, the deal remains contingent and not yet final. Buyers and sellers must adhere to agreed deadlines to keep the contract alive.
Key Phases Of Being Under Contract
The under-contract phase generally follows these steps:
- Contract Execution: Both parties sign a written purchase agreement detailing core terms such as price, earnest money, and contingencies.
- Earnest Money Deposit: The buyer typically deposits earnest money to demonstrate serious intent. This money is held in escrow and later applied to closing costs or at risk if the contract is breached.
- Contingency Periods: Timeframes for inspections, appraisals, financing approval, and title review are defined. These contingencies determine whether the contract can be canceled without penalty.
- Due Diligence And Inspections: The buyer may inspect the property, review disclosures, and verify condition and condition-related disclosures.
- Financing And Appraisal: Lenders assess the buyer’s qualification, and an appraisal ensures the property’s value supports the loan amount.
- Waivers And Amendments: If issues arise, parties may negotiate amendments or waivers to keep the contract intact.
Common Contingencies And How They Protect You
Contingencies are conditions that must be met for the contract to proceed. Popular contingencies include:
- Financing Contingency: Allows withdrawal if the buyer cannot secure a loan under specified terms, protecting both sides from a failed deal due to financing.
- Inspection Contingency: Grants the buyer the right to request repairs, credits, or termination based on inspection results.
- Appraisal Contingency: Ensures the property appraises at or above the contract price for the loan to proceed.
- Title Contingency: Verifies a clear title and resolves any liens or defects before closing.
- Sale Of Current Home Contingency: Allows the buyer to back out if their current residence does not sell within a specified period.
Tip: Understanding these contingencies helps buyers avoid unnecessary risk, while sellers should be prepared for potential renegotiations if contingencies affect the deal.
Earnest Money And Deposits
Earnest money demonstrates commitment and is usually held in escrow. If the buyer honors the contract, the deposit is typically applied to closing costs. If the buyer breaches without a valid contingency, the seller may claim a portion or all of the earnest money as damages, depending on state law and contract terms. In some cases, the contract may specify how to handle default, dispute resolution, or liquidated damages.
Rights And Responsibilities Of Each Party
Under contract, both sides have defined responsibilities. The buyer typically:
- Provides earnest money within the agreed timeframe
- Completes inspections and communicates findings
- Secures financing and meets all contractual deadlines
The seller typically:
- Maintains property condition during the contingency period
- Discloses known defects and disclaims undisclosed issues that are not required by law
- Works with the buyer to finalize title, disclosures, and escrow arrangements
Communication is crucial during this phase. Timely responses to requests for information or document waivers can prevent a contract from dissolving.
What Can Happen If Terms Change
Life events or new information can necessitate changes to the contract. Possible outcomes include:
- Amendments: The parties agree to modify terms, such as the closing date or repair credits.
- Waivers: A contingency may be waived if both parties consent, allowing the deal to move forward.
- Termination: If a contingency is not satisfied or a party breaches, the contract may terminate with defined remedies.
- Renegotiation: Price or included repairs may be adjusted to reflect new findings or market conditions.
How To Remove Contingencies And Move Toward Closing
Removing contingencies typically requires:
- Resolving Inspections: Agreeing on repairs, credits, or alternative solutions.
- Securing Financing: Getting loan approval or providing alternative financing documentation.
- Final Appraisal And Title Review: Confirming value and clearing title issues.
- Escrow And Closing Coordination: Aligning dates for escrow instructions, deed transfer, and recording documents.
Proactive planning helps ensure contingencies are satisfied or waived in a timely fashion, keeping the contract on track.
What To Do If The Contract Fails Or A Term Is Not Met
If the contract cannot be fulfilled, parties may seek to terminate with appropriate remedies. Common steps include:
- Reviewing the contract for breach terms and notice requirements
- Consulting a real estate professional or attorney to interpret state-specific rules
- Negotiating a mutual termination agreement or a revised contract
Important: Real estate laws vary by state, and remedies or timeframes for breaches differ. Always refer to the executed contract and local regulations for precise guidance.