How Do You Explain What Under Contract Means in Real Estate to Your Clients?

Written by Timothy Ware

Would-be homebuyers come to you with a long list of demands. The home must have three baths, main floor laundry, be in a good school district, have enough space in the yard for the kids to play, no HOA, and so on. You’ve spent weeks showing homes to them, and now you have finally found the perfect home.

After a few days, they finally get back to you with their desire to put in an offer. The only problem is that it is now under contract! You know that under contract means that the seller has accepted an offer, but the deal is by no means done. How do you explain that to your clients? Should you encourage them to put in a backup offer?

This can be a demoralizing situation for buyers—I know as it happened to me the last time I bought a home. But giving your clients a simple explanation of what “under contract” means in real estate, when they should consider a backup offer, and their odds of getting the home can go a long way in keeping your clients excited about the home buying experience.

Whatever contract you are drawing up with your clients, SignTime has you covered with this recent article detailing everything you need to know to draft your own real estate contracts as well as links to helpful templates for use in every state.

What does under contract mean in real estate?

Under contract in real estate simply means that the seller has accepted another offer on their property. When discussing a home that is under contract with your buyer clients, you should be able to give them a short answer about how long a home is typically under contract before an offer either falls through or firms up, why homes remain under contract, and whether it is worth putting in a backup offer.

Let’s take a look at each of these.

How long does a house stay under contract?

This isn’t an easy answer. Typically, it can take a month or two for a purchase contract to firm up, but that depends on the jurisdiction, market conditions, and types of contingencies in the purchase offer.

Some jurisdictions have much quicker closing windows. A hot market is likely to see way fewer sales fall through, and some contingencies are a lot more likely to clear than others.

All this means that a home could firm up in hours, days, weeks, or months, but you’ll probably have a better understanding of which is true for your local market.

What does contingent mean in real estate?

Real estate contingencies are conditions that must be met for a purchase agreement under contract to become solid. When a property is marked as contingent, it means that the sale is pending certain specific conditions being met.

Here are some of the most common contingencies found in real estate contracts:

• Home inspection contingency: Licensed home inspectors are a part of home purchases almost everywhere. Inspectors give the buyers a firm understanding of the current condition of the home, including the likelihood that major repairs or expensive maintenance are likely to occur in the near future.
• Mortgage contingency: Any buyer who is financing their home will place some sort of financial contingency on the purchase agreement. That way they are not on the hook if they cannot find financing or are not forced to accept unfavorable mortgage terms.
• Appraisal contingency: Some banks will require a third-party appraiser to assess the value of the home before committing to take on a mortgage.
• Home sale contingency: Some buyers will make the purchase of a home contingent on selling their current home. Homes under contract with a home sale contingency tend to take a longer time to firm up and are more likely to fall through.

Should your client put in a backup offer?

It is important to be honest with your client about the odds that their backup offer will work out. If you have a relationship with the selling agent, now is a good time to call them up and fish for any details that might help inform you when calculating those chances.

If it is unlikely that the deal will fall through, or you think that it could be several weeks before you know, then it might be better for your clients to keep looking and hold off on making a backup offer. If the contract does end up being canceled before they purchase a different property, you can always let them know in case they want to make an offer then.

However, if inventory is low or you think there’s a good chance that the offer will not go through, then it might be the right time to advise your buyers to make a backup offer.

The biggest risk in advising your clients to put in a backup offer is dashing their hopes if the deal firms up. Be honest with your clients about their chances when explaining what under contract means in real estate.

What does pending mean in real estate?

Pending contracts have met all defined contingencies and been executed. They are nearly complete and unlikely to fall through. If a pending deal falls through, it is often a major red flag, for example it may have failed the home inspection.

What happens if the contract is canceled?

When a buyer fails to meet their obligations under a purchase contract, the contract is canceled. Before advising your clients to seize on the opportunity and put in their offer, find out why the contract was canceled.

If it was a failed home inspection or under-valued appraisal, then that might be a good reason to keep hunting for that perfect home, or at least dropping the offer value.

Homes under contract are not done deals

Not every home under contract ends up in a sale. Use your expertise to explain to your client what under contract means in real estate and how likely the offer is to firm up. Then, advise them on whether it is worth putting in a backup offer.

When it comes time to sign that backup offer, or any other contract, SignTime is there to help. With convenient e-signature capabilities, you’ll get signed contracts back from your clients in record time.

With an easy-to-access and organized online contract repository, never search for important paperwork again.