Why Sellers Should Treat ‘Under Contract’ With Cautious Optimism

If your house is under contract, it means you’ve accepted an offer (congrats!) and signed a purchase agreement with a buyer. This agreement locks in the sale price, any personal property that stays or goes (washers and dryers for example), and the closing date when your buyer will take possession of the home.

From here, depending on your local MLS rules and where you live, your listing will either become “contingent” or “pending,” which can vary in meaning but both indicate that you’ve come to a “ratified agreement,” explains Oriana Shea, a top-selling real estate agent in Long Beach, California. However, anyone who’s been through a real estate transaction knows that there’s still a lot of room for negotiation before closing.

Why ‘under contract’ isn’t a done deal

With a real estate contract in hand, you and the buyer have essentially agreed on the big stuff: They love your house. They’re willing to give you a price you want. And you’re on the same page about the next steps.

But most real estate contracts contain certain contingencies you’ll need to clear before you close, meaning the sale isn’t yet final. The contract may hinge on any potential discoveries during the inspection and the appraisal report, as well as the buyer’s finances coming through, unless you’ve managed to negotiate contingencies out of the contract.

How do contingencies work? 

There are four common types of real estate contract contingencies. After you open escrow and the buyer submits a good faith earnest money deposit, some or all of the following contingencies may need to be addressed:

• The financing contingency will appear in contracts where the buyer needs a mortgage to purchase your home. At this point, your buyer has likely been pre-approved by their lender, but there’s still work to be done before the financing officially comes through.
• The appraisal contingency gives the lender the opportunity to have an appraisal done and ensure the amount they’re putting up for your house is fair market value. If the value comes back under the contract price, and you don’t come down on price or meet the buyers halfway, the buyers can walk away from the deal.
• The inspection contingency allows time for a thorough inspection by a third party to catch any issues, minor and major, with your home that the buyer should be aware of. For example, if the inspection reports the roof is shot, the buyer may ask you to lower your price or replace it yourself. If you can’t reach an agreement, and the issue is large enough, they might choose to back out.
• The home sale contingency says the buyer will purchase your house only once they’ve sold another property they own. The first three are almost always in the contract, while this one is a little more of a wild card.

As long as all the conditions in that agreement are met, the sale should go through. Alternatively, if the conditions aren’t met, your house could go back on the market (i.e. it turns out the buyers have hidden debt or can’t cover their down payment after all).

Why is a house ‘under contract’ before it’s sold?

Very few types of consumer transactions will go through as many distinct phases as a real estate deal. When you go to buy a book on Amazon or a pack of razors at the drugstore, the item is for sale, and then it’s sold (or purchased) by a buyer. The “in between” stages aren’t necessary because you aren’t involving a complex structure with decades of history like a home, nor are you involving a third-party lender.

However, with a property sale, your listing will move through different stages:

• Active (you’re on the market, accepting showings and offers!)
• Active – under contract (that’s you now! You’ve signed with a buyer but it’s not a done deal.)
• Active contingent (another way to say you’re under contract, in the early stages.)
• Pending (depending on where you live, contingencies have been cleared or it’s another way to say you’re working out the contingencies.)
• Sold!

With so much money on the line and various interests involved in a home sale, it takes time to check all the boxes, cross your i’s, and dot your t’s specific to the contract. The slow pace and extreme caution applied can be frustrating for sellers navigating a road to closing laced with landmines and opportunities for the buyer to back out. (This is especially true for most financed deals. Having a buyer who is able to pay cash for your home can streamline closing dramatically with the elimination of the appraisal and financing contingencies).

In short, that’s why “under contract” isn’t the same as a done deal.

How does under contract compare to “contingent”?

A home listing that is under contract may be marked as “contingent” on the MLS, so the public knows you’ve signed an offer with a buyer but still have outstanding contingencies to clear. A “contingent” listing could also indicate that the buyer has to first sell their existing home within a specific number of days in order to buy yours.

OK, what about “pending?”

Depending on where you live and how your MLS operates, a “pending” listing status could be the exact same as “contingent” (meaning there are still contingencies to meet), or pending could indicate all contingencies have been lifted (or there never were any, to begin with) — and only the final signatures remain.

In that case, “pending” is a pretty solid place to be as a seller, as far as the deal going through. The inspection and appraisal are complete, your buyer’s finances checked out, and special requests have been met. You’re simply waiting on paperwork to be notarized and wire transfer to go through.

Another advantage to the “pending” status is that it halts your days on market, so your agent may use it as a way to stop the clock!

Collecting backup offers

During the initial under contract or contingent phase, you may be able to accept backup offers and continue to show your home. That’s because your days on market are still ticking up, which can affect your sale price. Research has shown that the longer your home sits on the market, the more likely you are to have to lower your price.

So let’s say the current buyer drags their feet on ordering the appraisal or doing their diligence with the other contingencies, and they end up dropping out. You’re back to remarketing your home and starting from scratch. Meanwhile, the days on market are higher which could turn your second buyer off, or make them feel like they can come in at a lower price.

The lesson? If you still receive showing requests after your house goes under contract, it’s OK to accept other showings — especially if your agent thinks the first offer isn’t a strong one. Shea explains that if she suspects something going wrong with buyers, she’ll encourage other inquiring agents to show the home and make a backup offer.

But once all contingencies are lifted and your listing is pending, most buyers will assume it’s off the market. And it pretty much is. Your home is taken, and you’re just waiting on all the paperwork to be recorded and official. Cue flash mob. It’s time to celebrate. You sold your house!

Header Image Source: (Skitterphoto / Pexels)