What Does it Mean When a House is Under Contract?

 

What Does it Mean When a House is Under Contract?Looking for a home through the MLS will expose you to many different terms. One of the most confusing is “under contract.” This makes it sound like the home is off the market. It does not necessarily mean this, though. There are certain situations where the home may become available again. Understanding the true meaning of this term can help you determine the right choice when shopping for a home.

How a Contract Works

First, you should understand how an under contract works. There are several phases to the process. Obviously, you have to give the seller an offer. The seller must also accept the offer. All of this needs to occur in writing. You can talk about it all you want, but until it is on paper and every involved party signs it, there is no contract. Up until the closing, however, the contract is just a piece of paper. It does not become official until the seller receives money and you receive the house.

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Sales Contract Contingencies

The main reason many sales contracts fall through is the contingencies on the contract. People do not often sign a contract without a way out. They only do this if they know beyond a reasonable doubt that they will be satisfied with the home and they have secure financing. The most common contingencies on a sales contract include:

  • Inspection contingency – Buyers can look at the house as much as they want, but there are things they can easily overlook. A paid inspector goes through every minute detail of the home and reports any issues back to the buyer. With an inspection contingency, the buyer has the ability to withdraw their offer if there are issues with the home that the seller will not fix.
  • Financing contingency – Even buyers with a preapproval often add a financing contingency to the sales contract. This protects them in the event that their financing falls through. This may occur because the home’s value is not as high as the sales price or because an issue occurs with the buyer’s personal finances while in underwriting. With a financing contingency, the buyer can back out of the contract without consequences.
  • Appraisal contingency – Buyers rely on the seller’s knowledge of the area’s values. If the sales price is higher than the value of the home, the buyer would be without financing. With an appraisal contingency, the buyer has the protection of backing out of the contract if the appraisal does not come back at the value the seller assumed it would.
  • Housing contingency – Buyers who currently own a home often put a housing contingency on the contract. This states that if they are unable to secure a contract on their existing property by a specific date, then they can back out of the sales contract for their purchase.

How Contingencies Affect a House Under Contract

Now that you know the buyer can back out of a contract, the words under contract might not mean as much to you. If you are really interested in the home, you may still make an offer. It is called a backup offer. It is up to each seller whether he or she wants to accept these offers or not. Some sellers still show the home despite having a contract on the home. Sellers in a hurry to sell the home often do this to protect themselves from a buyer who backs out. You might not be the only one with a backup offer on the home, either. There could be several, as the seller does not have to disclose how many offers he holds on the home. The downside to the backup offer, however, is you have to wait to see how the current buyer’s situation pans out. This does hold you back from putting an offer on any other available home since you would have two offers out there. If you were to bid on another home, you would have to add a contingency for the backup offer you placed. If the backup offer were accepted, you would have to take that one and let the second house go.

Figuring out whether you should bid on a house under contract is tricky. The more you know about the situation, the easier the decision becomes. For example, if the seller knows the current buyer is having trouble selling his current house and he has a housing contingency on the contract, your chances of buying the home might be pretty good. However, if the seller thinks everything is going fine with the current buyer, you may waste time and escrow money waiting for a home that may not become available again.

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JMcHood

Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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