When a listing is “under contract,” it means that the seller has accepted an offer from a buyer. But the sale is not yet final because the deal has not officially “closed.” While the sale is pending, both parties must meet any contingencies included in the contract—for instance, the buyer must secure financing, and the home inspection must resolve satisfactorily.
If either party fails to meet any of the conditions set forth in the contract, then it is breached and they can back out of the sale.
Here’s how the chronology works. When a homeowner is ready to sell, they’ll (typically) connect with a listing agent to put the house on the market. The real estate agent will list the home on the multiple listing service (MLS), and market it for sale through various other channels such as websites and mailers. The agent will host open houses (or schedule appointments or virtual showings, in the time of COVID).
When a buyer is interested, they’ll work with the agent on their side to make an offer.
Among the components of an offer is the contingencies. Common contingencies include:
- Financial contingencies: Allow the buyer to back out without penalty if not approved for a loan
- Appraisal contingencies: These state that the home must be appraised at least at the purchase price
- Inspection contingencies: Give buyers the chance to negotiate or cancel the real estate contract if a home inspector finds issues that need fixing
- Sales contingencies: Allow the buyer to cancel the transaction if they cannot successfully sell their own home.
The seller will either approve the offer, negotiate it, or flatly reject it. If and when the buyer and seller agree on the offer, the house moves to “under contract” status—but it is not yet officially sold. And things can still change if those contingencies aren’t met.
During this sale pending period, home inspectors and appraisers assess the property. The seller may do any needed repairs. There will also be a title check and a land survey. The buyer may need to secure financing, and wrap up selling their current home.
If all contingencies cannot be met, the buyer can request an extension—such as if they need more time to secure a mortgage from their lender.
If and when all contingencies are met and all negotiations finalized, the buyer will sign the closing documents and officially close on the house.
When a property is under contract, it’s not officially sold—and the pending transaction can still fall through.
That means another interested buyer can still put in an offer. This is called a backup offer. It works just like any other offer: Both parties will negotiate until they settle on terms. Then, if the original buyer’s offer falls through, the backup offer is next in line.
This backup arrangement can be a plus for both parties. Having a backup provides the seller with peace of mind that the house will close successfully, one way or the other. And having two offers on the table gives the seller some added leverage.
For the buyer, a backup places their offer in the queue so that if the original offer falls through, the home will not go right back on the market, where it could garner additional new offers and spark a bidding war, driving up the home price.
It’s not without some risk, however: The existence of a backup offer might encourage the first buyer to close as fast as possible, even accepting small issues that would have otherwise been sticking points, so as not to risk losing the home to the buyer lined up right behind.
Learn more on BiggerPockets:
- 8 Simple Steps to Close Real Estate Deals Like a Rockstar
- What Is A Double Closing? A Real Estate Wholesaling How To
When a home is under contract, it’s statistically likely to close. Overwhelmingly so, in fact. That said, properties fall out of contract often enough that neither party should assume the deal is done before it’s actually done. The number of terminated contracts peaked at 12% at the beginning of the pandemic, in April 2020, according to research from the National Association of Realtors. (The reason was largely related to buyer job loss.)
With jobs recovering, that figure declined steadily to 9% in May, and then 7% in June. Prior to the impact of COVID-19 on the housing market, the contract termination rate was 5%, according to NAR’s statistics.
In addition to job loss, other common reasons contracts fall through include a buyer’s failure to secure financing, issues discovered in home inspection, and failing to resolve other contingencies in the contract.
To help mitigate the risk that the offer falls through, a buyer can button up financing in advance by getting preapproved for a mortgage. Many sellers prioritize buyers who are preapproved, especially in competitive markets.
On the seller side, sellers can opt to get a pre-listing inspection, which can help make them aware of any issues with the home so they can repair or disclose them before going under contract with a buyer.
A seller should also work with their agent to price their home appropriately so that its appraised market value matches up with the listing price. Likewise, buyers should keep cool heads in a multiple-offer situation so as not to drive up the price of a home way over its appraised value, triggering issues with the appraisal contingency.