What Does Under Contract Mean?

When it comes to real estate transactions, the term “under contract” is commonly used. But what does it really mean? Understanding the concept of being under contract is crucial for both buyers and sellers, as it signifies a significant milestone in the buying or selling process. In this article, we will delve into the meaning of being under contract, its implications, and the key steps involved.

Definition of Under Contract

Being under contract refers to the stage in a real estate transaction where the buyer and seller have reached a mutual agreement on the terms and conditions of the sale. At this point, both parties have signed a legally binding contract, which outlines the agreed-upon price, contingencies, and other relevant details.

The Process of Becoming Under Contract

Let’s explore the step-by-step process of becoming under contract:

1. Offer and Acceptance

The process typically begins with the buyer submitting an offer to purchase the property. This offer includes the proposed purchase price, any contingencies, and a timeframe for the seller to respond. The seller can either accept the offer, reject it, or make a counteroffer.

2. Negotiation

If the seller makes a counteroffer, negotiations may take place until both parties reach an agreement on the terms and conditions. This negotiation process can involve multiple rounds of offers and counteroffers until a mutually acceptable agreement is reached.

3. Acceptance and Signing

Once both parties agree on the terms, the buyer and seller sign the contract. This signing indicates their acceptance of the terms and makes the contract legally binding. It is essential to carefully review the contract and seek legal advice if needed before signing.

4. Earnest Money Deposit

After signing the contract, the buyer typically provides an earnest money deposit to demonstrate their commitment to the purchase. This deposit is held in escrow and will be applied towards the purchase price at closing. If the buyer fails to fulfill their obligations under the contract, the seller may be entitled to keep the earnest money.

5. Contingency Period

Most contracts include contingency clauses that allow the buyer to perform due diligence on the property. During this contingency period, the buyer may conduct inspections, appraisals, and other necessary assessments. If any issues arise during this period, the buyer may negotiate repairs or request a reduction in the purchase price.

6. Financing and Appraisal

If the buyer is obtaining financing, they will need to secure a mortgage loan. The lender will require an appraisal to determine the property’s value and ensure it aligns with the loan amount. If the appraisal comes in lower than the agreed-upon price, the buyer may need to renegotiate with the seller or provide additional funds.

7. Clearing Contingencies

Once all contingencies have been satisfied or waived, the contract moves closer to closing. This means that all inspections, repairs, and financing requirements have been met, and the buyer is ready to proceed with the purchase.

8. Closing

The closing is the final step in the under contract process. It involves the transfer of ownership from the seller to the buyer. During the closing, the buyer pays the remaining balance of the purchase price, and all necessary documents are signed. The property’s title is transferred, and the buyer receives the keys to their new home.

Implications of Being Under Contract

Being under contract has several implications for both buyers and sellers:

1. Legal Obligations

Once under contract, both parties are legally obligated to fulfill the terms outlined in the contract. Failure to do so can result in legal consequences, such as financial penalties or even lawsuits.

2. Property Off the Market

When a property is under contract, it is typically taken off the market. Sellers are no longer allowed to entertain offers from other potential buyers, as they are bound by the contract with the current buyer.

3. Timeframe and Deadlines

The contract will specify various deadlines and timeframes for actions to be taken, such as inspections, appraisals, and financing. Both parties must adhere to these deadlines to ensure a smooth transaction.

4. Negotiation Limitations

While some negotiations can still take place during the under contract period, major changes to the terms are generally not allowed without the agreement of both parties. Any changes must be documented through an addendum to the contract.

Frequently Asked Questions

1. Can a seller back out of a contract?

While it is possible for a seller to back out of a contract, it can have legal consequences. If the seller decides to terminate the contract without a valid reason, the buyer may be entitled to damages or specific performance.

2. Can a buyer back out of a contract?

Buyers can back out of a contract under certain circumstances, typically during the contingency period. If the buyer discovers significant issues with the property or fails to secure financing, they may have the right to terminate the contract and have their earnest money returned.

3. What happens if the buyer cannot secure financing?

If the buyer cannot secure financing within the specified timeframe, they may need to terminate the contract. In this case, the buyer’s earnest money is typically returned, and the property goes back on the market.

4. Can a seller accept another offer while under contract?

No, once a property is under contract, the seller is generally not allowed to accept another offer. However, if the buyer fails to fulfill their obligations under the contract, such as securing financing, the seller may have the right to terminate the contract and consider other offers.

5. What happens if the appraisal comes in lower than the agreed-upon price?

If the appraisal comes in lower than the agreed-upon price, the buyer and seller can negotiate a new purchase price. If they cannot reach an agreement, the buyer may need to provide additional funds to cover the difference or terminate the contract.

6. Can a buyer continue to view other properties while under contract?

While it is not prohibited for a buyer to view other properties while under contract, it is generally considered unethical. Once a buyer has entered into a contract, they should focus on completing the transaction rather than pursuing other options.

Summary

Being under contract in a real estate transaction signifies that both the buyer and seller have reached a mutual agreement on the terms and conditions of the sale. It involves a series of steps, including offer and acceptance, negotiation, signing the contract,