What Does Under Contract Mean in Real Estate?

Whether you’re new to real estate investing or you have a few deals under your belt, it’s important to understand real estate vocabulary — and not carry assumptions that can lead to a mistake in a transaction. 

One of these terms is “under contract”. 
Under contract signifies that a property has entered into a contractual agreement between the buyer and seller. 

What are the roles of buyers and sellers when under contract? 
Does under contract mean that the deal is about to go through?

At what point of the transaction is the term “under contract” used?

In this article, we’ll answer these questions and more. 

Let’s get started!

Under Contract in Real Estate 

So, how does a property go from being on the market to under contract?

Let's examine the steps involved in this process.
When a buyer, such as a real estate investor, finds a property they are interested in, they submit an offer to the seller. 

The offer includes the proposed purchase price and any contingencies. 

If the seller accepts the offer, the property becomes under contract. 

However, it is important to note that multiple offers may be received, and the seller has the freedom to choose the most favorable one.

How A Property Becomes Under Contract in Real Estate

Once a property is under contract, certain responsibilities and obligations arise for both the buyer and seller.

When a buyer decides to make an offer on a property, their real estate agent — or the real estate investor themselves — typically submits paperwork, including an offer price, contingencies, and any additional terms or conditions. 

The contingencies may include items such as:

• a home inspection 
• appraisal 
• financing approval

Once the offer is prepared, the buyer will review and sign the paperwork. The agent or real estate agent will then submit the offer to the seller's agent, who will present it to the seller for consideration.

Upon receiving the offer, the seller has the option to accept, reject, or counter the offer. 

If the seller accepts the offer as presented, the property is considered under contract. 

However, if the seller counters the offer, negotiations may ensue until both parties reach an agreement.

During the negotiation process, the buyer and seller may go back and forth, making counteroffers and discussing terms until they come to a mutual agreement. Once both parties have agreed to the terms, the property officially goes under contract.

What Happens After a Property Goes Under Contract

Once a property is under contract, certain responsibilities and obligations arise for both the buyer and seller.

Let’s start with the buyer. For the buyer, one of the first steps is to submit what’s called an earnest money deposit, which is around 1-3% of the purchase price that demonstrates their serious intent to purchase the property. 

This deposit is typically held in an escrow account until closing and is applied towards the purchase price.

The buyer will also need to schedule and complete any inspections outlined in the contract. This may include a general home inspection, termite inspection, radon test, or any other inspections deemed necessary. The results of these inspections may lead to further negotiations or requests for repairs.

Simultaneously, the buyer will be working with their lender to secure financing for the property. This involves submitting documentation, such as income verification, bank statements, and credit reports, to the lender for review. The lender will then determine the buyer's eligibility for a loan and provide a loan commitment letter. If the buyer is using a private money loan, this step can be much quicker. 

On the seller's side, they will need to provide the necessary disclosures and documents required by law. This may include a seller's disclosure statement, which outlines any known defects or issues with the property.

How Long is A House Under Contract?

The contract period can vary depending on the agreed-upon terms. Typically, it ranges from 30 to 60 days, allowing sufficient time for inspections, financing, and any other necessary steps.

If one of these inspections discovers a flaw, or other conditions aren’t met, the buyer can back out of the deal — what’s known as the deal falling through.

If all the contingencies are been satisfied, and both parties have fulfilled their obligations, the property is ready for closing. 

At the closing, the buyer will sign the final paperwork, pay any remaining funds due, and receive the keys to their new property.

The Bottom Line: Under Contract

Under contract in real estate is another term that may be simple initially, but there are certain situations that are tied to it. 

Use this guide to fully understand the term under contract so that you can be prepared for your next real estate transaction. 

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