How many times have you come across a listing, and it checks off every box on your list — but the listing status says that it’s “under contract” or “sale pending”? Crestfallen, you move on and hope you’ll find an equally amazing home.
But, what does “under contract” mean in a listing status?
“‘Under contract’ is more or less a meeting of the minds. The buyer and seller have agreed to the terms of the contract, such as the price, the closing date, the personal property, the earnest money, tax preparation, and contingencies.”
Pretty straightforward, right? Well, it’s a little more involved than that, and to fully understand what “under contract” means, let’s take a look at the sales and closing process.
Step 1: Seller puts their house on the market
When a seller decides that it’s time to put their house on the market, they’ll reach out to an agent who then will research the property and collect data about the neighborhood. Then they’ll meet with the seller to go over the information they’ve gathered and they’ll recommend the listing price. If the seller agrees, the agent will present them with a listing agreement and explain the terms before both parties sign.
Then, the agent will create a marketing plan, which consists of (but is not limited to) listing the property on the multiple listing service (MLS), posting on social media, hosting open houses (or virtual open houses in light of the coronavirus pandemic), or reaching out to fellow agents.
Interesting tidbit: Twenty-five percent of Realtors said they’ve had at least one client who has signed a contract without stepping a foot on the property during the coronavirus pandemic.
Step 2: Buyer makes an offer
After weeks of searching, a buyer finally finds a property they’d love to call “home.” They’ll work with their agent to come up with a suitable offer. The agent will then create an offer letter and send it to the listing agent.
The typical offer letter contains four key elements:
Let’s be upfront: Sellers are almost always most interested in how much money they’ll get for their house. The challenge buyers have is figuring out what amount comprises a reasonable offer.
If it’s a buyer’s market, they’re likely to submit an offer that’s below asking price, and it may get accepted. However, if it’s a seller’s market, a buyer would do well to come in strong because there’s a chance the seller received other offers.
Note: As of May 3, 2020, the average property stays on the market for 30 days. If the property has been on the market longer than 30 days, sellers are likely to consider any offer — even if it’s a low-ball offer.
Closing costs and earnest money
The offer letter outlines how much you’re willing to pay for a property, but a buyer could also offer to pay part of the closing costs to sweeten the deal.
On average, buyers are required to pay up to 5% of the full mortgage amount at closing on fees and services. Sellers, on the other hand, are expected to pay anywhere from 6% to 10% of the total sale amount on closing costs, which includes agent commissions.
If a buyer chooses to, they may be able to wrap the closing costs in with their loan. However, please note that not all lenders will do this, and oftentimes closing costs will have to be paid out-of-pocket.
Along with an offer to cover some or all closing costs, a buyer will need to include earnest money, also called “a good faith deposit.” A buyer can put down as little as $500 to $1,000, but a general rule of thumb is 1% to 3% of the total purchase price. Properties in high-value neighborhoods or in a seller’s market can get up to 10% of the purchase price in earnest money.
Remember, the more closing costs or earnest money you’re willing to pay, the more enticing your offer will be to the seller — because who doesn’t like to save a little money?
An offer letter wouldn’t be complete if it didn’t include any contingencies.
A contingency is a stipulation that must be met before the home can be sold. They give the buyer a chance to back out of a contract if those conditions haven’t been met.
The most common contingencies are:
- Financial contingencies state that the buyer has been pre-approved for financing. They can even say what kind of loan they are hoping to receive. If the buyer is unable to be approved for a loan or they do not get approved for the desired type of loan, the offer can be canceled without penalty to the buyer.
- Appraisal contingencies state that the property must be appraised at the purchase price (or higher); Otherwise, the offer is off the table, the seller can opt to lower the asking price, or the buyer must make up the difference.
- Inspection contingencies state that a professional home inspector will inspect the property by a specific date and gives buyers the opportunity to negotiate repairs or cancel the contract with the seller.
- Sales contingencies state that a buyer will only complete the transaction if they can sell their current home.
Step 3: Offer accepted, or negotiations begin
Once the offer is submitted, it needs to be approved and signed by the seller. If the seller isn’t happy with some of the terms (such as the price or any of the contingencies), they can reject the offer outright, or they can negotiate the conditions with the buyer.
This is where your agent’s negotiation skills will truly shine. They’re in your corner and will work hard to negotiate the terms to your favor — or at least get the sellers to meet you halfway.
When the buyer and the seller agree on the offer, then the house is officially under contract.
But it’s not sold yet. There are still some steps that have to be completed before the buyer becomes a homeowner.
Step 4: Contingencies must be met
Once the terms are agreed upon, and the contingencies are met, the transaction is now pending. This means the home is officially off the market, the listing is pulled from real estate listing websites, and now it’s a waiting game until you can close.
Kaczor explains why it’s a waiting game: Suppose a buyer meets all of their contractual obligations several weeks before the closing. Why do they have to wait? “We can’t close because it wasn’t negotiated. So for those three weeks, you’re pending and just hanging out.”
A property in the pending stage typically undergoes home inspections, home appraisals, a land survey, and a title check, also known as the “due diligence stage.” During this period (a span of about one to two weeks, depending on the location), a buyer can terminate the deal if problems arise, no questions asked.
Note: Sometimes, you may come across the term “active with contract,” which is typically associated with short sales. “Active with contract is like a house sale contingency,” explains Kaczor. “The seller can still look at and even accept another offer.”
What happens if contingencies haven’t been met?
If some contingencies haven’t been met, the buyer’s agent can ask for an extension to the contract. Kaczor notes this is usually because the lender or another party in the transaction needs more time to button everything up.
“Then the question is: Why? The buyer can call up and say, ‘Hey, I want to extend my finance contingency at my lender’s request because they couldn’t process the paperwork.’” she explains.
“Suppose there’s a contingency on a house sale, and they’re supposed to close in 60 days, but the buyer couldn’t sell their home within that time. The buyer can ask for a 30-day extension and continue to try to sell.”
Step 5: Closing
It’s closing day. The offer has been submitted, negotiations have been hashed out and settled, and all contingencies have been met. The property has been appraised and inspected, the loan has been approved, and everything is all set to go. All the buyer has to do is sign the closing documents and pay any remaining fees.
What happens if I love a property, but it’s under contract?
If you’re head-over-heels for a house and it is under contract, there’s always a chance that the deal will fall through. That means you can still submit a backup offer.
A backup offer is like a placeholder. It puts you “next in line” should the original offer fall through.
The National Association of Realtors produces a monthly Realtors Confidence Index that tracks how many real estate agents have seen contracts terminated before they reach the closing table. Historically, around 4% of real estate contracts fall through for one reason or another, but when the economy is volatile (such as during the coronavirus pandemic), we saw that contract termination rate double to 8%.
So there’s not an incredibly strong chance that you’ll get a decent shot at buying a house that’s already under contract — but there’s still a chance!
If you find yourself in this position and you want to go this route, definitely speak to your agent, and they’ll be able to guide you through how to submit a backup offer. Your agent can also help advise you on how to make that backup offer as attractive as possible for the seller.
Under contract means you’re closer to homeownership
There’s nothing more disappointing than finding a house that you think is enchanting, only to discover that it’s under contract. Although someone may have beaten you to the punch and submitted an offer, that doesn’t mean you’re entirely out of luck! There are countless reasons why the transaction could fall through: The buyer’s financing doesn’t manifest, there are problems during the due diligence period, or the buyer wasn’t able to sell their home.
If you cannot get that dream home out of your mind, you should talk to your agent about submitting a backup offer. You never know — the odds may be in your favor!
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