The world of real estate can be a labyrinth of terms, jargon, and processes that can leave even the most seasoned homebuyer or seller scratching their heads. One such term that often comes up in real estate transactions is “under contract.”
But what exactly does it mean to be “under contract,” and how does it impact the buying and selling of homes?
In this blog, we will demystify the “under contract” concept in real estate, explore its implications, and shed light on what happens once a property falls under this status.
Breaking Down “Under Contract”
In real estate parlance, “under contract” signifies a pivotal moment in the home buying or selling journey. It occurs when a buyer and seller have officially signed and dated a legally binding document outlining a home sale’s terms and conditions.
This document, often called the purchase contract or agreement, is the transaction’s cornerstone.
The purchase contract is a detailed written agreement encompassing critical information about the involved parties and the property.
It provides a breakdown of the purchase price, any additional costs associated with the transaction, and a timeline for the various stages of the process.
Once all parties have inked their signatures on this document, they are legally bound to adhere to the agreed-upon terms.
Now, let’s delve into an essential aspect of an “under contract” home – contingencies. Contingencies are conditions or provisions stipulated in the purchase contract that allow either party (buyer or seller) to back out of the contract if specific criteria are unmet.
These criteria act as safeguards, ensuring the transaction proceeds smoothly and fairly.
Here are some common contingencies that can impact a home that’s “under contract”:
- Inspection Contingencies:
The home inspection contingency is a crucial safeguard for buyers. Within a specified timeframe, typically ranging from three to fourteen days, the buyer can enlist the services of a professional home inspector.
This inspector thoroughly assesses the property, examining everything from its roof to its foundation. If any issues or defects are uncovered during this inspection, the buyer can negotiate with the seller to address these concerns.
Sometimes, the buyer may withdraw from the contract if the seller is unwilling to make necessary repairs.
- Appraisal Contingencies:
A home appraisal is usually required when a buyer intends to finance the purchase with a mortgage. A licensed appraiser evaluates the property to determine whether its appraised value aligns with the agreed-upon sale price.
If the appraisal value falls short, the buyer has options. They can choose to cover the difference, negotiate with the seller to lower the price, or, in extreme cases, cancel the contract.
- Mortgage Financing Contingencies:
For most buyers, securing a mortgage is a fundamental part of the home-buying process. The financing contingency outlines the type of mortgage being applied for, including its terms and conditions.
It also specifies the timeline for providing proof of loan approval. If, for any reason, the buyer’s loan falls through within the agreed-upon timeframe, they can back out of the contract without risking the loss of their earnest money.
- Home Sale Contingencies:
Buyers who sell their current home while purchasing a new one can protect themselves with a home sale contingency. This contingency allows them extra time to sell their existing property.
However, sellers may reject offers that include this contingency, especially if they seek a quick sale and don’t wish to avoid taking the current home from selling.
The Difference Between “Under Contract” and “Pending Sale”
In the realm of real estate listings, you may encounter terms such as “contingent,” “under contract,” or “pending.” While these phrases may seem interchangeable, they carry distinct meanings that can impact your home-buying decisions.
- Under Contract/Contingent:
A listing marked as “under contract” or “contingent” signifies that there is still a chance for other potential buyers. In this scenario, the current buyer and seller navigate the conditions specified in the purchase contract.
For instance, if there’s an inspection contingency, the buyer may have the option to withdraw if the inspection uncovers issues that the seller refuses to address. If the house returns to the market, it becomes an opportunity for new buyers to consider making an offer.
When a home sale is marked as “pending,” it typically indicates that the buyer has either made an offer without contingencies or has satisfied all previously outlined contingencies.
While there’s still a slim chance that the deal could fall through, especially on a financing contingency if the buyer’s mortgage application is denied, it’s less likely. As a buyer, you may need to continue your house-hunting efforts if a property is marked as “pending.”
Can a Buyer Back Out of a Contract?
Yes, buyers can back out of a real estate contract under specific circumstances, primarily if contingencies exist.
Contingencies provide buyers with a legal mechanism to cancel a contract without suffering financial consequences. Here are some scenarios in which a buyer can exit a purchase contract:
- Attorney Review Clause:
In some locations, buyers can add an attorney review clause to the contract. This clause allows them to cancel the contract within a specified period, often three business days, after a real estate attorney has reviewed it.
- Title Issues:
If a title search uncovers problems that could jeopardize the buyer’s property ownership, such as unpaid contractor liens or outstanding property tax bills, the sale could be canceled unless the seller provides a clear title.
While contingencies offer protection for buyers, it’s essential to note that breaching a real estate contract can have legal consequences.
In such cases, either party could be subject to a breach of contract lawsuit, resulting in potential monetary damages, the return of the buyer’s earnest money, or even a court-ordered sale of the property.
Navigating the World of Real Estate with Confidence
Understanding “under contract” and its associated contingencies is vital for anyone embarking on a real estate journey.
Whether you’re a buyer or a seller, having a grasp of these terms and processes empowers you to confidently make informed decisions and navigate the complexities of real estate transactions.
Effective communication with your real estate agent, inspector, appraiser, and lender further enhances the efficiency of the process, ultimately leading to the realization of your homeownership dreams.
So, whether you’re currently under contract, considering making an offer, or planning to list your property, you now possess valuable insights to guide you on your real estate adventure.