What Does Under Contract Mean in Real Estate

In real estate, a signed purchase agreement between a buyer and seller is the same as any binding legal contract, but it’s not a done deal until both parties have agreed to terms. Only then are the buyer, seller, and the home in question, “under contract.”

Rocketmortgage.com suggests that the purchase agreement can also be called a real estate sales contract, home purchase agreement, real estate purchase contract or house purchase agreement. The key word is purchase – because it is the buyer who proposes the conditions for the sale to take place, including the price they’ll pay for the home, how much earnest money will accompany the offer to purchase, conditions or contingencies that must be met before closing, and when and where closing will take place.

The buyer’s real estate professional draws up the contract using a boilerplate template supplied by a state-licensed attorney or a state-approved template provided by the agent’s broker. They fill in the blanks with information supplied by both the buyer and seller, who each must carefully go over every word to make sure the contract is ironclad.

The purchase offer is given to the seller, and if the seller agrees to the terms, then the other moving parts of the transaction can begin – inspections, appraisals, loan approval, etc.

A typical purchase agreement should include the following details:

• The buyers’ and sellers’ names and contact information.
• Property address and description details. Licensed surveyors are trained to provide property descriptions that meet legal standards. The same description for the same property should be consistent in the chain of title from owner to owner. 
• Purchase price: The total agreed-upon selling price for the property, including any deposits or additional costs associated with the transaction.
• Representations and warranties. A sellers’ disclosure can be used to state the facts made by the seller with regard to the condition, structure and composition of the property that is being sold. A warranty deed guarantees that the seller, also known as the grantor, has the right to sell the property and protects the buyer, or grantee, in case of problems that may arise with the title to the property.
• Financing. This section outlines how the buyer will pay for the property, whether they pay with all cash, get a mortgage, seller financing, or assume the seller’s existing mortgage.
• Fixtures and appliances: Any built-ins such as household appliances or floor, ceiling or wall-mounted fixtures are automatically included in the contract. For example, a buyer may ask the seller to include the refrigerator, an appliance that is rarely built-in.
• Title insurance. Depending on the real estate customs in the state where the transaction is taking place, either the buyer or seller can be responsible for purchasing title insurance to protect against potential claims or defects in the property. The lender’s title policy protects the lender who issues the buyer’s mortgage loan. The owner’s title policy is to protect the buyer against future claims or title defects.
• Closing costs. Closing costs are typically split between the buyer and seller. The buyer may agree to pay for the origination fees associated with their mortgage loan, while the seller pays the sales commission or fees to the buyer’s and seller’s real estate agents. Sellers also pay HOA fees, transfer taxes, the seller’s attorney fees and escrowed money to be returned to the buyer. Some lenders require that the buyer pay a year’s worth of homeowner’s insurance at closing. Closing costs may range from 3% to 6% of the home’s purchase price.
• Property taxes. Annual property taxes during the year of the sale’s closing are split between the seller the buyer. The seller pays the taxes due up to closing, and the buyer pays for the remainder of the year at closing. Buyers should be aware that the rate they’re paying is established for the seller and that the taxing authority will base the buyer’s tax rate on the purchase price of the home the next year.
• Closing date: Closing is when the official transfer of title transfers from the grantor to the grantee, as well as when the buyer will receive the keys to the property.
• Earnest money: Good faith money deposits to a neutral third party shows the seller that the buyer is serious. Earnest money can be returned to the buyer if the contract collapses through no fault of their own or at closing where the amount is added to the down payment on the home.
• Option to terminate: Some purchase agreements may include an option for the buyer to back out of the deal and terminate the contract up until a certain time before closing.
• Lead-based paint disclosure: Homes that were built before 1978 are required by law to include information regarding the dangers of lead-based paint, giving the buyer the opportunity to have an inspection performed if necessary.
• Signatures: Every purchase agreement must be finalized with the signatures of each party.
• Contingencies. Contingencies are conditions that must be met by certain dates outlined in the contract. Although an offer has been made by the buyer and accepted by the seller, on a property, the contract can list contingencies that potentially allow the buyer or the seller to walk away. If a seller refuses to make repairs requested by the buyer, the buyer and seller can renegotiate the terms or cancel the sale. 
• The most widely used contingencies are as follows:
• Inspection contingency: If a home inspection paid for the buyer reveals hidden or unknown defects, the buyer and seller can renegotiate terms or cancel the contract. Appraisal contingency: When the buyer is getting a mortgage, the lender requires a professional appraisal to make sure the home’s appraised value is equal to or higher than the purchase price.
• Financing contingency: Sometimes a lender backs out of making a mortgage loan. In this case the buyer is protected and can retrieve their earnest money.
• Title contingency: A title report, or chain of title, shows the buyer there are no known liens or other claims on the property.
• Home sale contingency: If a buyer has a home to sell, they may need for it to close before the closing date of the purchase contract.

Once the home inspection, appraisal, and other contingencies are met, the contract can be closed. If all contingencies are met, but the buyer wants to back out of the contract, they’ll likely pay a penalty; typically, their earnest money will be forfeited to the seller. Sellers who back out of a contract are at greater risk. The buyer can sue for breach of contract, demand a hefty payment, or they can agree to the seller’s request.

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