You might have seen properties listed as “under contract” on many real estate websites. But what does under contract mean? Does it mean sold? Or is the house still open for sale? Whether you are a first-time home seller or an experienced investor, it is essential to understand the commonly-used terms in the real estate industry.
What does under contract mean?
After an offer has been accepted by the seller, there is a contract that both the buyer and seller need to sign. Once signed, there is a legally binding agreement between the buyer and seller. Each party then receives a copy of the other’s signed contract either electronically or as a hard copy. This is called the exchange of contracts, and the property is now described as “under contract”.
When a house is “under contract”, It is important to understand that the sale of the house is not yet completed. Properties under contract could fall through anytime during what is called the “cooling-off period” or if the conditions stated in the contract have not been met. Let’s understand these two scenarios below.
Under offer vs. under contract
These two terms can often be confused, but they have very different meanings.
Under offer
Under offer indicates that a buyer/buyers have made an offer on a property, but it is yet to be accepted by the seller. If a property is under offer, it is still on the market, and buyers can continue to make offers as the seller may be seeking a higher offer.
Under contract
A property is under contract when the buyer and seller have exchanged contracts. This is a legally-binding agreement, and both parties must adhere to it until a settlement has been reached.
In summary, when you see a property listed as “under contract”, this means that both parties (buyer and seller) have exchanged contracts and are legally bound to the agreement. It does not necessarily mean that it is sold and there is a change of the contract falling, as there could still be conditions or a cooling-off period that need to be met before the sale is finalised.
Cooling-off periods
The cooling-off period gives the buyers three to five business days to reconsider their purchase and conduct further inspections of the property, such as building and pest inspections. This gives buyers a chance to withdraw from the contract of sale by paying a penalty amount if they change their minds.
During the cooling-off period, buyers pay the property deposit amount, generally 10% of the total purchase price, unless the contract falls.
The amount of penalty deducted and the rules regarding the cooling-off period in Australia vary between states and territories. It should be noted that the cooling-off period doesn’t apply to properties sold at auctions.
Conditional offers
In a private sale, the buyer can request the seller to make the sale subject to certain conditions. This can be done by adding certain ‘subject to’ clauses in the contract. The conditions could be getting approval for a loan (‘subject to finance’), the sale of an existing property, the successful completion of a building pest inspection, etc. When all these conditions are met, the sale goes unconditional, and the property is considered ‘sold’. But if these conditions are not met, the buyer can still back out of the contract.
So, why are “under contract” real estate properties still listed on real estate websites?
You will see properties under contract still being advertised for sale on real estate websites. This is because the current contract could fall through anytime under various situations, as explained above. If that happens, the property could still be back on the market for sale.
Generally, a real estate agent will continue to accept inquiries on the property when it is under contract. They may also hold inspections of the property as it’s not “officially sold”. Listing a property when it is under contract makes it safer for the real estate agent and the seller by having additional interested buyers in case the first contract falls through.
What’s next?
While doing any type of real estate transaction, it is crucial to understand the important real estate terms used in various situations. It’s always a good idea to consult a knowledgeable real estate agent to get yourself familiarised with the common real estate terms. This will help you avoid any confusion later. Use our online comparison platform to find the top-performing real estate agents in your area and compare them based on reviews from homeowners, sales history, commission rates, fees, marketing strategy and much more.
FAQs:
What is a cooling-off period?
Depending on your state or territory, cooling-off periods give the buyers three to five business days to reconsider their purchase and conduct further inspections of the property, such as building and pest inspections. This gives buyers a chance to withdraw from the contract of sale by paying a penalty amount if they change their minds.
What is a conditional offer?
In a private sale, the buyer can request the seller to make the sale subject to certain circumstances and conditions. This can be done by adding certain ‘subject to’ clauses in the contract. The conditions could be getting approval for a mortgage loan (‘subject to finance’), the sale of an existing property, the successful completion of a building pest inspection, etc.
What if a current contract falls through?
If a current contract falls through, the property could still be back in the market for sale. Generally, a real estate agent will continue to accept inquiries on the property when it is under contract and may also hold inspections of the property as it’s not “officially sold”.
Listing a property when it is under contract makes it safer for the seller’s agent and the seller by having a backup offer and additional interested buyers in case the first contract falls through.
What is settlement day?
Settlement day is the day when the buyer pays the balance of their asking price, and the seller transfers ownership to them. The buyer must have cleared home loans available in order to make this payment.