Say you’re a first-time homebuyer browsing real estate listings, when suddenly you spot your dream home. Your excitement, however, is short-lived once you see the listing’s status is “under contract.” It seems another buyer beat you to the punch, and all you can do is keep looking.
Or is it?
Here’s what “under contract” means in real estate, how under-contract home sales can fall through, and whether you still can make a successful offer on a home that’s under contract.
- An under-contract home is one with an accepted purchase offer, but with contingencies still in place.
- Common contingencies during the contract period include those for inspections, appraisals, and financing.
- Buyers still can submit offers for homes under contract, as these agreements may fall through prior to closing.
The Basics of Being Under Contract in Real Estate
An under-contract real estate listing means the seller has accepted an offer and signed a purchase and sale agreement with a buyer.
While both parties are one step closer to completing a sale, that doesn’t necessarily mean it’s a done deal.
Most offers include contingencies that must be met for the sale to close. Contingencies offer exit points for the buyer or seller, allowing them to back out of the real estate transaction if specific expectations aren’t met.
When this occurs, the seller may put their home back on the market or consider a backup offer that had previously been submitted.
Under contract vs. sale pending
A home that’s listed as under contract still has contingencies to meet. Any unmet contingencies could scuttle the deal, meaning an under-contract home sale isn’t always a done deal.
“Sale pending” homes, on the other hand, have no contingencies left to meet. Barring an unforeseen circumstance, a home listed as sale pending is all but guaranteed to close.
What does ‘active under contract’ mean?
Depending on your location, you may see a home listed as “active under contract” instead of simply “under contract.” The terms are used interchangeably. Homes listed as active under contract also are properties with accepted offers that still have contingencies to meet.
Can You Make an Offer on a Home That’s Under Contract?
So, what does under contract mean for you if you find a home that you love but already has an accepted offer in place?
Well, if you really love the property or are in a very competitive market, it might still make sense to submit an offer, even if you know that your bid is a backup. This is a common strategy, says Tamara Strait, a real estate agent and founder of Strait Luxury in Boerne, Texas.
“We saw a lot of this in 2021, when housing competition was high and inventory was low,” she says. While the market has shifted in many areas, Strait says inventory is still low, so plenty of buyers are making backup offers on homes under contract.
It’s important to note, though, that making an offer on an under-contract home — even a strong offer — is no sure thing. The majority of real estate purchase and sale contracts do go through, so be sure to keep shopping around if you put in a backup offer.
How Contingencies Affect a Home That’s Under Contract
Contingencies mean that a home listed as under contract still can go back on the market or be offered to another buyer if the current offer falls through.
What are contingencies?
A contingency is a clause written into a purchase and sale agreement that allows the buyer to back out of the contract if certain conditions aren’t met. Some of these contingencies may be limited and only last for the first few days of the contract. Others can be tied to a specific point in the purchase process.
There also are option periods, which can often be purchased from the seller for an additional fee. While not technically a contingency, an option period provides a grace period during which the buyer may decide to cancel the deal for any reason without penalty.
Each state is different, and common contingencies in one area may be uncommon in another. It’s also important to note that contingencies can depend on the market and the individual property being sold.
With an inspection contingency, the buyer is given a certain number of days to obtain a professional home inspection. The inspector examines the home to evaluate major systems such as the plumbing, electrical wiring, and heating and cooling systems. They also evaluate the structure of the home and whether it meets safety standards.
If the inspection reveals the need for major repairs or that the home is unsafe, a buyer with an inspection contingency may cancel the sale if they are unable to negotiate with the seller on acceptable compensation, such as a lower purchase price.
Lenders usually require a home appraisal before approving the buyer’s mortgage application. Most lenders will refuse to approve a loan for more than the home’s appraised value. If the buyer needs to borrow more than the home appraises for, they either have to come up with the difference themselves via a larger down payment, or invoke the appraisal contingency and back out of the deal.
Most home purchases are made with a mortgage loan. If a buyer is unable to get a mortgage after signing a purchase and sale agreement, they likely have to cancel the sale. A financing contingency allows the buyer to cancel for this reason with minimal or no penalties, while also releasing them from any legal obligation to buy the home.
Home sale contingency
Many buyers need to sell their existing home to afford to buy another. But perfectly coordinating the sale of one home and the purchase of another can be difficult. A home sale contingency lets the buyer back out of a real estate transaction if they are unable to sell their existing home in a certain time frame.
How Often Do Contracts Fall Through?
According to the National Association of Realtors, about 5% of real estate contracts are terminated before completion. Many of these contracts are canceled due to contingencies, such as homes that appraise for lower than expected or buyers who aren’t able to secure financing.
Home sales can fall through for trivial reasons, too, especially if a contingency gives the buyer the freedom to cancel for any reason.
“I’ve seen a buyer nearly walk away from a transaction because of a garden spider egg sac on the property, which the sellers intentionally left in place (because they were beneficial to the garden),” Strait says. “In the end, we saved the deal. The buyers had their agent come remove the egg sac from the property.”
When To Make an Offer on a Home That’s Under Contract
So, what does a house under contract mean for you if you come across one that you fall in love with? In many cases, it might be worth making an offer anyway.
While you likely won’t be privy to the details of the contract, including which contingencies are in place, putting in a backup offer could work out if you:
- Are looking in a market with very low inventory.
- Submit a strong offer that can compete with any other backup bids that come in.
- Have financing lined up, ideally with a mortgage preapproval letter.
Just be careful before you put in backup offers on homes all around town. If you sign multiple purchase and sale agreements, you are legally obligated to move forward with each one. Backing out could be tricky — and expensive — unless you have an option period written into those contracts.
FAQ: What Does ‘Under Contract’ Mean in Real Estate?
Here are the answers to frequently asked questions about homes under contract.
Neither a buyer nor a seller can back out of a home purchase contract without just cause, so even the best backup offer won’t beat out a contingent offer on a house that’s under contract. However, submitting a competitive offer — such as with cash or financing in place, contingencies waived, or a quick closing — can be a great way to ensure that your offer is the first one chosen if the contingent offer falls through.
Every contract is different, and the details of contingencies may vary by market, location, and even home type. In general, though, buyers may receive an option period of three to seven days, an inspection contingency of around 14 days, and a financing contingency of about 30 days. In some cases, the financing contingency is tied to the closing date, and may be valid up to a few days before.
The Bottom Line on Being Under Contract in Real Estate
Going under contract is a big step toward buying a home — but not the final one. It’s important to know how and why some home sales fall apart. Being ready with a backup offer can put you in the right place at the right time to achieve your goal of buying a home.