The Facts – What Under Contract Means for Buyers and Sellers

December 31, 2024

Introduction: Understanding the Real Estate Process

In real estate transactions, the term “under contract” marks a crucial point in the buying and selling process. It signifies that the buyer and seller have agreed on the terms of the sale, and both parties have signed a contract. However, while the property is technically “sold” on paper, the transaction is not yet final. This phase involves key steps such as inspections, appraisals, and securing financing, with several conditions that need to be met before closing. A real estate agent in Houston can help guide both parties through this important phase, ensuring that all conditions are met and that the transaction moves forward smoothly.

Understanding what “under contract” means is essential for both buyers and sellers, as it carries significant implications for each party. For buyers, it indicates that the property is in progress but not fully theirs yet, with opportunities for renegotiation or cancellation depending on contingencies like inspection results or financing approval. A real estate agent in Houston can assist buyers in evaluating these contingencies and making informed decisions. For sellers, it means they are closer to completing the sale but still face potential risks, such as the buyer backing out or issues arising during the inspection.

This article explores the importance of the “under contract” stage, highlighting the rights and responsibilities of both buyers and sellers. By grasping the nuances of this phase, with the help of a real estate agent in Houston, both parties can navigate the process more effectively, leading to a smoother and more successful real estate transaction.

1. What Does “Under Contract” Mean in Real Estate? 

“Under contract” in real estate refers to the stage when the buyer and seller have agreed on the terms of the sale and both have signed a purchase agreement. This contract legally binds both parties to the terms outlined, though the deal is not yet finalized. While the property is considered “sold” on paper, the transaction is not complete until several additional steps are carried out.

This phase typically occurs after an offer has been accepted and negotiations are concluded. Despite the agreement, the property is still technically in limbo, with the contract subject to further contingencies. This period is often called the “escrow period” or “pending sale” phase. During this time, various procedures are completed to ensure the sale proceeds smoothly.

Key steps during the “under contract” phase include home inspections, appraisals, securing financing, and the buyer’s due diligence. The home inspection ensures there are no hidden issues with the property, and the appraisal confirms its value. If the buyer is securing a mortgage, financing must be finalized before moving forward. Additionally, buyers often conduct further research on the property and review legal documents to ensure there are no potential problems.

The “under contract” phase is crucial because both parties must meet specific conditions before the sale can close. If all conditions in the contract are met, the deal progresses to the closing stage, where ownership is officially transferred from the seller to the buyer. However, if any issues arise during this phase, either party may have the right to cancel the contract or renegotiate the terms, leading to potential delays or termination of the deal.

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2. The Process Leading Up to “Under Contract”

Understanding the journey leading up to the “under contract” phase is crucial for both buyers and sellers, as it sheds light on the significance of this stage in the real estate transaction process.

For Buyers:

Offer Submission: The process begins when a buyer submits an offer to purchase a property. This offer includes important details such as the proposed price, contingencies (such as financing or inspection), the desired closing date, and any other specific terms or conditions.

Negotiations: After submitting the offer, negotiations often take place. The seller may counter the offer, and the buyer can either accept, reject, or make adjustments to the terms. This back-and-forth negotiation continues until both parties reach a mutually agreeable deal.

Offer Acceptance: Once the terms are agreed upon, both the buyer and seller sign the purchase agreement. This marks the official start of the “under contract” phase, indicating that both parties are legally bound to the agreement, though the deal is not yet finalized.

For Sellers:

Listing the Property: Sellers begin the process by listing their property for sale, often with the help of a real estate agent. They provide important information about the property, such as the asking price, its condition, and availability for showings, to attract potential buyers.

Reviewing Offers: Once offers start coming in, the seller reviews each one carefully. The offer price, contingencies, and the buyer’s financial qualifications are key factors in determining which offer best meets the seller’s needs and goals.

Accepting the Offer: After evaluating the offers, the seller selects the one that is most suitable and signs the purchase agreement. This officially transitions the property to the “under contract” status.

While the “under contract” phase does not mean the deal is final, it signifies that the property is progressing through the necessary legal and procedural steps required for the sale to be completed successfully.

3. Buyer’s Perspective: What Does “Under Contract” Mean for Buyers?

For buyers, seeing a property marked as “under contract” can have both positive and negative connotations. It’s crucial to understand the implications and how it affects your position in the transaction.

Buyer’s Rights and Obligations:

• Contingencies:Buyers typically have certain contingencies built into the contract, such as inspection, financing, and appraisal contingencies. These give the buyer the right to walk away or renegotiate the terms of the agreement if issues arise during these phases.
• Inspection and Appraisal:During the “under contract” phase, buyers can conduct home inspections and secure financing. If the property fails inspection or the buyer’s financing falls through, the contract may be voided.
• Time Pressure:Once under contract, buyers must meet specific deadlines for the closing process. Delays in obtaining financing or addressing contingencies can cause the contract to fall through.

Risks for Buyers:

• Competing Offers:In a competitive real estate market, even if a property is under contract, buyers can still submit backup offers. If the current deal falls through for any reason, a backup offer may be considered.
• Disappointment:If the contract ultimately falls apart, buyers may face frustration, especially if they’ve already mentally or financially prepared for the home.

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4. Seller’s Perspective: What Does “Under Contract” Mean for Sellers?

For sellers, the “under contract” phase represents significant progress, but it also carries potential risks. While the deal isn’t final, it’s important for sellers to understand their rights, obligations, and the risks involved during this stage.

Seller’s Rights and Obligations

Disclosure: Sellers are required to disclose any known defects or issues with the property. This transparency ensures that the buyer can make an informed decision. Failure to disclose issues can lead to legal consequences or derail the sale if discovered later.

Inspection Cooperation: Sellers must make their property available for inspections, appraisals, and other required assessments during the “under contract” phase. This includes accommodating the buyer’s request for property inspections and any necessary repairs.

Contingency Clauses: Most contracts include contingencies that allow the buyer to back out under specific circumstances, such as the failure of the home inspection or the appraisal coming in lower than the offer price. Sellers should be prepared for the possibility that the deal might fall through if these contingencies are not met.

Risks for Sellers

Financing Issues: If the buyer encounters difficulties securing financing or if their mortgage falls through, the contract could be voided. Sellers can minimize this risk by requesting a pre-qualification letter from the buyer, ensuring they are financially capable of following through with the purchase.

Inspection and Appraisal Failures: Inspections might reveal issues that prompt the buyer to request repairs, a price reduction, or even back out of the contract entirely. Sellers may need to negotiate with the buyer, make repairs, or adjust the price to keep the deal moving forward.

Backup Offers: Even when a property is under contract, other potential buyers may still show interest. A strong backup offer can encourage the seller to reconsider or prompt the original buyer to act more decisively to finalize the deal.

Understanding these risks can help sellers manage expectations and ensure a smoother transaction process.

5. Key Factors That Can Cause a Contract to Fall Through

Although a contract under real estate is considered legally binding, there are several factors that can lead to the deal falling through before closing. Both buyers and sellers need to be aware of the potential issues that can arise during the “under contract” phase.

Buyer’s Issues:

• Financing Problems:If the buyer cannot secure financing or their loan is denied, the contract could be voided.
• Failed Inspections:If the home inspection reveals major issues (e.g., structural problems, plumbing issues, mold), the buyer may decide to back out or request repairs, which could lead to a renegotiation or contract cancellation.
• Appraisal Issues:If the appraisal comes in lower than the agreed purchase price, the buyer may be unable to get financing for the full amount, leading to a potential contract breakdown.

Seller’s Issues:

• Title Issues:If a problem arises with the property title (e.g., unresolved liens, ownership disputes), the seller may not be able to proceed with the transaction.
• Property Condition:If the seller is unable to make repairs or address issues that arise during the inspection, the buyer may cancel the deal.
• Failure to Meet Contingencies:If the seller does not meet the terms specified in the agreement (e.g., removing personal property or completing repairs), the buyer may have legal grounds to back out of the deal.

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6. The Closing Process: From “Under Contract” to Closed Deal

Once a property is under contract, both buyers and sellers must complete various steps to ensure the transaction progresses smoothly and all terms of the agreement are met. This phase, often referred to as the “escrow” or “pending sale” period, involves careful coordination between both parties and their representatives to finalize details before closing. Here’s a breakdown of the key tasks for both buyers and sellers.

For Buyers:

Finalizing Financing: One of the most crucial tasks for buyers is securing final mortgage approval. After the offer has been accepted and the property is under contract, the buyer must work closely with their lender to finalize the loan details. This includes submitting any remaining documentation required by the lender, such as proof of income, tax returns, and updated bank statements. The lender will also order the final appraisal to confirm the property’s value aligns with the loan amount. If financing is not finalized before the closing date, the deal could fall through, so meeting this requirement is vital.

Home Inspection: Buyers should schedule a home inspection shortly after the property goes under contract. A thorough inspection helps identify any issues with the property, such as structural problems, electrical or plumbing concerns, or safety hazards. If the inspection reveals significant defects, the buyer can request that the seller make repairs, offer a price reduction, or, in some cases, walk away from the deal altogether. Buyers should ensure they’ve reviewed the inspection report carefully and discussed any potential concerns with their real estate agent before proceeding.

Reviewing Title and Documents: The buyer’s attorney or title company will conduct a title search to ensure the property is free from any legal issues or claims, such as liens or ownership disputes. This is an essential part of due diligence, as any existing issues with the title could prevent the sale from proceeding. The buyer should also review the contract and other relevant documents to ensure all terms and contingencies are met before the closing date. Addressing any issues early on can prevent delays in the closing process.

For Sellers:

Finalizing Repairs: If the buyer requested repairs during the negotiation process or after the home inspection, the seller must ensure that these repairs are completed before the closing. Sellers are responsible for fulfilling any agreements made regarding repairs or maintenance, as failure to do so could delay the closing or even cause the deal to fall apart. It’s important that the seller provides receipts or evidence of completed repairs to show the buyer that all agreed-upon work has been done.

Clearing the Property: Sellers must ensure the property is fully cleared of personal items before closing. This includes removing furniture, appliances, and any other personal belongings unless otherwise specified in the contract. Sellers should also ensure the property is clean and in the condition agreed upon in the contract. If there are any remaining items or debris on the property at the time of closing, it could cause delays or result in additional negotiations with the buyer.

Coordinating with the Buyer’s Timeline: The seller must coordinate closely with the buyer to ensure the closing process goes smoothly. This includes working with the buyer’s real estate agent, the title company, and any other parties involved in the transaction to ensure all documents are signed and necessary payments are made. The seller should also ensure that the buyer has access to the property for final walkthroughs or inspections, if applicable. Communication is key during this stage to ensure that everything aligns with the agreed-upon timeline and closing date.

The Closing Process

Once both parties have completed their respective tasks and all conditions outlined in the contract have been satisfied, the transaction moves toward the closing table. At this point, the buyer and seller will meet with their agents, attorneys (if applicable), and the title company to finalize the paperwork and transfer ownership. The buyer will provide the necessary funds, often in the form of a cashier’s check or wire transfer, and the seller will sign over the title to the property. After all documents are signed, the transaction is officially complete, and the property changes hands.

7. Conclusion: Why Understanding “Under Contract” Is Crucial for Both Parties

The “under contract” phase in real estate is an exciting yet sometimes stressful time for both buyers and sellers. For buyers, it signals the possibility of homeownership, but it also comes with risks and responsibilities. They must navigate inspections, appraisals, and securing financing, all while meeting deadlines and contingencies. For sellers, being “under contract” means they’re closer to completing the sale, but it doesn’t guarantee a final transaction. Sellers must stay vigilant about repairs, disclosures, and potential complications that could arise during this phase, such as financing issues or inspection failures.

Understanding what “under contract” means is essential for both buyers and sellers. It equips them to handle the challenges, make informed decisions, and manage any issues that might arise before the deal is closed. By knowing their rights, obligations, and risks, both parties can ensure they’re prepared to handle contingencies, work through negotiations, and keep the transaction on track. With careful planning and communication, the under contract phase can progress smoothly toward a successful closing, marking the final step in a property transaction.