What Does Under Contract Mean in Real Estate?

The PropertyClub Team
Jun 28th 2020
Under contract is a term you might come across while searching for real estate online. So what does it mean, and can you still make an offer on a house that is under contract?

You’ve been searching for months for your dream home and just started to give up hope when finally you find the house that you know is the one, but it’s listed as ‘under contract.’ Viewing a home that you fall in love with but finding out that there is a pending sale can be very disappointing for a buyer. Maybe you’ve been in a similar situation, or perhaps you’re looking to buy and want to know whether or not it’s even worth viewing a house that is under contract, to begin with. Or, perhaps you have a home up for sale and want to know if you can legally continue to accept offers in the case of a pending sale. No matter your individual situation, the process of purchasing a home can be stressful, but understanding commonly used terms and what you can do legally can help to ease some of the pressure.

What does under contract mean?

A house under contract (sometimes referred to as contingent or pending) refers to a situation in which a buyer has put in an offer that has been accepted by the seller. Still, the offer is contingent upon one or more conditions being met. If those set conditions are not met within the allotted amount of time (as stated by the contract), then the deal is no longer valid, and the house will once again be up for sale. For example, a buyer may include a contingency that allows them to back out without consequences if a major repair is found during the home inspection.

These contingencies typically exist to allow both the buyer and seller a way out of the sale without legal consequence should any problems arise, or if specific issues are not taken care of. For a house to be considered officially under contract, a written agreement between buyer and seller outlining the terms of the deal must be signed.

If a seller and a buyer have entered into a written agreement, and the house is officially under contract, the seller cannot legally sell the house to any other buyer unless the terms outlined in the contract are not met, and the contract is then void. The sales purchase agreement and contract are legally binding, preventing the seller from changing their mind and choosing to sell to a different buyer. 

If you have fallen in love with a house under contract, don’t worry, all is not lost. All the terms of the contract must be met for the sale to close, and this certainly doesn’t always happen. It’s not uncommon for a deal to fall through in the under contract stage for any number of reasons. Typically, a sale may not make it to closing for reasons such as the buyer being unsatisfied with the result of a house inspection, the buyer’s financing falling through, or an appraisal that comes back considerably lower than the sales price.

Can a Seller Accept Another Offer While Under Contract?

Technically, yes, a seller can accept another offer while the home is under contract. That being said, a seller generally cannot just cancel or back out of a contract, because a higher offer has come along, as a fully executed contract is legally binding. Realistically, it depends on the terms of the contract, but in most cases, a seller would only be able to accept a backup in case the initial deal falls through. 

Buying a House Under Contract

Fortunately, even if a house is under contract, the seller can still choose to accept backup offers, and in most cases, they will, since they likely understand that sales can (and do) fall through. Although they can’t back out if they are under contract with another buyer, it doesn’t mean that they can’t continue to show and market the home.  It is up to the seller whether they will continue to show the house and accept offers. Typically speaking, it is advantageous for them to do so as a backup plan.

There are loads of reasons why a deal might fall through, so if you want to take a shot at scoring your dream home, putting in a backup offer can help you secure it before it goes back on the market. Speak to your real estate agent about the best way to enter a backup offer, you’ll want to make it attractive to the seller, but you don’t want to be so eager that you bid way over the asking price.

But if that first deal does fall through, don’t get too excited just yet. It’s a good idea to look into the reasons why that first sale never made it to closing. Since so many sales go awry because of home inspections, make sure that there wasn’t a significant repair found that could put you off buying the house. You might be excited at the chance to purchase the home, but don’t let yourself be so eager at the opportunity that you overlook potentially off-putting points. 

For example, let’s say your dream home is listed at $250,000, but it is under contract. After you tour the house, you decide to submit an offer for $255,000. A week later you get a call saying that the original deal fell through and the seller would like to accept your offer. Before accepting, you should first find out why the original contract fell through. Was there a major problem that came out of nowhere, or did the seller refuse to fix something? Once you find out, you can then make an informed decision on the house. If you decide to purchase, you should still do your due diligence and complete a home inspection and talk with your agent. 

Ultimately, if you think you’ve found your dream house but it is under contract, it is still worth putting in a backup offer. There’s actually a decent chance the original sale will fall through, and you’ll get your time to shine. But it’s advisable to continue looking at other properties while you wait to see what happens. Many buyers choose not to get their hopes up, and so won’t enter backup offers. But if you are looking at homes in a popular area, or a house that is highly sought after, it’s not a bad idea. This way, if you do get a shot, your back up offer may prevent the home from being listed again, which in turn could prevent you from having to deal with other competitive buyers and insinuate a bidding war.

For sellers, the same is true. Even though you have a house listed under contract, accepting additional offers can provide a backup plan if the deal falls through.