What does under contract mean in real estate?

From buyers submitting offers to the signing of the purchase and sale agreement, the process of buying and selling a home has a lot of moving parts for everyone involved. While some parts of real estate transactions might be a little easier to understand, others might be a little harder, such as the term “going under contract.”

What does “under contract” mean?

• Basic details about the buyer, the seller, and the property 
• The offer price 
• The deposit amount (also known as earnest money) 
• The proposed closing date and possession date 
• A deadline for accepting the offer 
• Any conditions (or contingencies) that must be met before the sale can be finalized

Once the buyer and seller both accept and sign the offer form, it becomes a legally binding contract, and both parties begin working to meet all the terms and conditions it outlines.²

Earnest money 

Earnest money is a payment the buyer makes as a show of good faith at the signing of the contract. It’s part of the buyer’s down payment that they pay when the house goes under contract instead of at closing, and the amount can be negotiated between the buyer and seller.

Earnest money amounts differ depending on the price and area of the home, but usually range from 1% to 3% of the offer.³ Some buyers may offer larger earnest money deposits as a way to show their financial health and ability to close on the home. 

Contingencies 

Contingencies refer to the conditions listed in the offer that must be met before closing, or else the buyer can back out of the contract without penalty.² Common conditions include:¹

• A property appraisal. This values the property to help ensure the buyer isn't paying significantly more than the property is worth 
• A title search. This verifies that the property has no liens against it and uncovers any other ownership issues 
• A home inspection. This lets the buyer know if the property has any serious damage or defects 
• A disclosure form. This highlights recent renovations, past pest problems, lead paint, or other issues 
• A sale contingency. This says the buyer must sell their existing home before purchase is completed 
• A mortgage contingency. This requires that the buyer receives a mortgage approval before the sale 
• Repairs and upgrades. These can be specific action items, such as painting, cleaning, or repairs

Common contingencies may vary in different regions and in buyer’s or seller’s market, and buyers sometimes offer to waive certain contingencies to make their offer more appealing to the seller.

Escrow 

Escrow involves a neutral third party holding the buyer’s money until the deal is closed and the home officially changes hands.⁴ Holding money in escrow provides a safety net for the seller, guaranteeing that the buyer has the money for the purchase, and that the money will be handed over once the title is transferred. It also helps protect the buyer from a fraudulent seller who may hold no actual claim to a title. The escrow holder is usually someone from the closing company, an attorney, or a title company agent. 

Closing and possession dates 

The closing date, also called the settlement date, is the day the buyer and seller agree to make the sale official. This is the deadline both parties work toward to meet all requirements laid out in the purchase and sale agreement. The buyer must have funding lined up and ready, while the seller must make sure to meet all agreed upon conditions. 

The possession date is the day both parties agree the buyer can move into their new home. The closing and possession dates are often the same day, but not in all cases. Sometimes, a buyer will agree to allow the seller additional time to stay in the house after closing, usually in a rent-back situation, with the seller paying rent to the buyer until they’re able to move. Buyers may offer flexible closing and possession dates to make an offer more appealing to sellers. 

The purchase and sale agreement 

The purchase and sale agreement, also called the P&S or purchase agreement, is the legally binding contract outlining all details of the home sale transaction, including key dates, conditions, and other terms. Negotiations on terms kick in immediately following the home inspection, or sooner, if there’s no inspection. The buyer’s agent or lawyer usually provides the initial draft of the contract, which often becomes an evolving document that goes through several rounds during negotiations. Both parties usually sign the P&S agreement 10 to 14 days after the offer is accepted.⁵