Understanding “Active Under Contract” in Real Estate: An In-Depth Guide

The phrase “active under contract” is a common term in the real estate industry, yet it often causes confusion for buyers and sellers alike. Whether you are new to real estate or an experienced participant in the market, understanding this term and its implications is essential. This guide will provide a comprehensive exploration of what “active under contract” means, its practical applications, and how to navigate the opportunities and challenges it presents.

Related: What is a Smart Contract and How It Works?

What Does “Active Under Contract” Mean?

“Active under contract” indicates that a seller has accepted an offer from a potential buyer, but the transaction is not yet complete. While the property remains technically “active,” meaning it is still being marketed, the initial buyer must satisfy specific contingencies before the deal can close. These contingencies act as checkpoints, ensuring that both parties fulfill their obligations before the property changes hands.

The term is comparable to an engagement: the commitment is there, but the marriage (or in this case, the sale) hasn’t been finalized. This transitional stage provides both parties with safeguards and options, making it an integral part of the real estate transaction process.

Why Do Homes Become “Active Under Contract”?

Properties transition to “active under contract” status because of the contingencies written into the purchase agreement. These conditions protect buyers and sellers by ensuring that all necessary steps are completed before the sale. While the buyer conducts due diligence, the property remains on the market to attract backup offers in case the initial deal falls through.

Sellers often prefer this approach to maintain flexibility. If the primary buyer cannot fulfill the contract requirements, having backup offers reduces the downtime associated with relisting the property.

Common Contingencies in Real Estate Contracts

Contingencies are specific conditions outlined in the contract that must be met before the sale is finalized. These provisions protect both parties and often dictate the timeline and complexity of the transaction. The most common contingencies include:

1. Inspection Contingency

An inspection contingency allows the buyer to hire professionals to evaluate the property’s condition. This inspection typically covers structural integrity, plumbing, electrical systems, roofing, and more. If significant issues are discovered and the seller is unwilling to address them, the buyer has the option to withdraw from the agreement without penalty.

2. Financing Contingency

Even pre-approved buyers may face challenges securing a loan. A financing contingency ensures that buyers are not penalized if their mortgage application is denied or if they fail to meet the lender’s requirements. This contingency provides a safety net for buyers and ensures they are not locked into a contract they cannot fulfill.

3. Appraisal Contingency

Lenders often require an appraisal to confirm the property’s value aligns with the purchase price. If the appraisal comes in lower than expected, the buyer can negotiate a reduced price, pay the difference, or terminate the contract without losing their earnest money deposit.

4. Home Sale Contingency

Buyers who need to sell their current home before purchasing a new one often include a home sale contingency. This clause ensures that they are not financially burdened by owning two properties simultaneously. If their existing home does not sell within the agreed timeframe, they can exit the agreement.

Challenges for Buyers Navigating “Active Under Contract” Properties

Competing Backup Offers

While the property is under contract, it remains visible to other buyers. Sellers may accept backup offers, creating competition among interested parties. These backup offers can jeopardize the primary buyer’s position, especially if unforeseen circumstances disrupt the initial agreement.

Timeline Variability

The timeline for resolving contingencies can be unpredictable. While most “active under contract” phases last 30 to 45 days, delays in inspections, appraisals, or financing approvals can prolong the process. This uncertainty can be stressful for buyers and sellers, particularly in competitive markets.

Risk of Contract Cancellation

Unmet contingencies or unexpected developments may lead to contract cancellations. For sellers, this means starting the process over with new buyers. For buyers, it represents a missed opportunity and a potential financial loss if they have invested in inspections or other due diligence activities.

How “Active Under Contract” Differs From “Sale Pending”

While both “active under contract” and “sale pending” indicate a property in the process of being sold, they represent different stages in the transaction:

• Active Under Contract: Contingencies are still being addressed, and the property remains open to backup offers.
• Sale Pending: All contingencies have been resolved, and the transaction is approaching completion. At this stage, it is less likely that the deal will fall through.

Understanding these distinctions helps buyers and sellers manage expectations and assess the likelihood of successfully closing a deal.

Can Buyers Back Out of an “Active Under Contract” Agreement?

Buyers can withdraw from a contract during the “active under contract” phase if contingencies are not met. For example, they can back out if an inspection reveals substantial issues or if they fail to secure financing. These contingencies provide legal and financial protections, allowing buyers to exit the agreement without penalties.

However, breaches of contract outside these conditions may result in legal consequences. For sellers, the inclusion of clear contingencies minimizes disputes and ensures a smoother transaction process.

What Happens When a Contract Falls Through?

When a deal collapses due to unmet contingencies, the property usually returns to the market. Sellers may revisit backup offers or relist the property to attract new buyers. For buyers who had previously shown interest, this represents an opportunity to reengage.

The process of reentering the market can be time-consuming for sellers and disheartening for buyers who hoped to secure the property. However, it also underscores the importance of carefully crafted contracts and contingency planning.

Should Buyers Make Offers on “Active Under Contract” Properties?

Submitting a backup offer on an “active under contract” property can be a strategic move. While there is no guarantee the original deal will fail, being prepared positions you as the next in line if it does. When considering this approach, ensure that your offer is competitive and aligns with your financial capacity.

Backup offers are particularly advantageous in competitive markets where inventory is limited. Sellers appreciate having alternative options, and buyers benefit from increased chances of securing a property.

From “Active” to “Sold”: The Journey of a Real Estate Listing

The progression of a real estate listing involves several stages, each marked by specific milestones:

1. Active: The property is available for purchase, and offers are welcomed.
2. Active Under Contract: An offer has been accepted, and contingencies are being addressed.
3. Sale Pending: Contingencies have been resolved, and the transaction is nearing completion.
4. Sold: The transaction is finalized, and ownership transfers to the buyer.

Understanding these stages helps buyers and sellers navigate the process with greater clarity and confidence.

Final Thoughts: Making Informed Decisions in Real Estate

The “active under contract” status is a nuanced phase in real estate transactions that offers opportunities and challenges for both buyers and sellers. For buyers, it represents a chance to submit backup offers and stay engaged with properties they desire. For sellers, it provides flexibility and security while ensuring that all contingencies are addressed.

By understanding the implications of “active under contract” and the contingencies that influence the process, you can approach the real estate market with greater confidence. Whether you’re buying your first home or managing multiple properties, knowledge of these intricacies is an invaluable asset in achieving your goals.