Real Estate Guide: What Does Under Contract Mean?

When a home is "under contract," it means that a home seller has accepted an offer from a buyer for the sale of their home. The buyer and seller have agreed to the terms of a sale which may include the offer amount, closing costs, earnest money deposits, and contingencies that might prevent the sale.

“Under contract” is an early stage in the home buying process, meaning that there is a chance that these deals will not be finalized. A new buyer can make an offer on an "under contract" property (which is called a “backup offer”) and if the current buyer falls through, that offer is first in line for consideration.

You may encounter the terms "under contract," "pending," and "contingent" while looking through real estate listings. While the three different statuses are related, there are some unique differences.

• Under contract: A home is under contract when a seller accepts a buyer’s offer and both parties agree to the terms of sale. This is the earliest stage of finalizing a home sale. A home that is under contract may have contingencies that prevent the home sale from coming to fruition. When a home is under contract, an earnest money deposit will often be placed in an escrow account to protect the seller in the event that the buyer changes their mind and walks away. However, there are a number of reasons that a buyer can recoup their earnest money deposit if a contract falls through. These reasons include ownership inconsistencies with a title search, to home inspections turning up potential issues.
• Contingent: With a contingent offer, a homeowner has reached an agreement with a buyer for the sale of a property but the sale is contingent on one or more conditions before the sale is finalized. Contingencies will come up when a home is under contract. Some common contingencies include home appraisal contingencies, mortgage contingencies, and home sale contingencies. A home appraisal contingency is when a sale is contingent on a home appraisal confirming the home’s listing price matches its value. A mortgage contingency is when the home buyer is waiting to find out whether or not they have been approved for a home loan. A home sale contingency is when a buyer is waiting to sell a property they already own before finalizing the purchase.
• Pending: Pending is the next stage of the home sale process, after the terms in the initial contract have all been satisfied. A property listed as “pending” or “sale pending” means that the deal between buyer and seller is very close to being finalized. A pending sale means that all contingencies have been met and the terms of the real estate contracts between buyer and seller have been satisfied. This is also the period when the parties will do due diligence to shore up the final sale, like land surveys, home appraisals, inspections, and title searches. It is still possible for a pending home sale to fall through, but real estate agents will be less likely to accept an offer on a pending property than they would for a contingent or under contract property.

You can still make an offer on a home that is under contract. Many real estate agents will accept backup offers on under contract properties in case the current sale falls through. Under contract listings can be listed as "show" or "no show" properties. With "show" listings, the real estate agent is allowed to show the under contract property to other prospective buyers who may make backup offers. "No show" properties cannot be shown to buyers, although buyers may still make offers.

There are benefits to making an offer on a home that is under contract instead of simply waiting to see if the original deal falls through. If the real estate agent has a good backup offer in place, they may be less likely to negotiate on terms with the current buyer. This could increase the odds of the current contract being terminated and your backup offer being accepted.

A number of issues can arise on a home that is under contract to jeopardize the final sale. Here are some of the most common reasons why under contract deals might fall through:

1. 1. Home inspection: A home inspection may reveal issues with the property that were not immediately apparent to the buyer, such as plumbing or structural problems. If the seller does not mitigate the issues, it may provide cause for the buyer to terminate the purchase agreement.
2. 2. Financing: If a buyer has not been pre-approved for financing, there is always a chance that their financing will fall through. When a buyer cannot secure a mortgage loan—either due to a low home appraisal, or a personal financial reason—the buyer may be forced to pull out of the agreement, putting the property back on the real estate market. Cash offers are often more attractive to sellers because there are no finance contingencies.
3. 3. Under-valuation in an appraisal: The buyer’s mortgage loan approval usually depends on a home being appraised at an amount that reflects the sales price. With a home appraisal contingency, the buyer may pull out of a deal if a home appraisal reveals that a property is valued below its listing price, because the lender may deny their loan.
4. 4. Home sale contingency: A home sale contingency means that the buyer must sell their current home in order to buy a new home. If they fail to sell their property, they can pull out of the agreement.
5. 5. Unclear title: If a title search on the property reveals that the homeowner does not have a clear title—meaning that there are ownership issues—the buyer may decide to cancel their offer and pull out of the agreement.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

All you need is a MasterClass Annual Membership and our exclusive video lessons from prolific entrepreneur Robert Reffkin, the founder and CEO of the real estate technology company Compass. With Robert’s help, you’ll learn all about the intricacies of buying a home, from securing a mortgage to hiring an agent to tips for putting your own place on the market.