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What does “Active Under Contract” Mean?

Posted on: April 1, 2020 at 4:00 pm

For sale sign in yard of house

Imagine this. You’re shopping for a new home in the Beach Cities. You’re actively looking for homes for sale in Manhattan Beach and Redondo Beach, scouring listings online and driving through neighborhoods you like. Finally, you find a couple of houses worth looking into and you’re extremely hopeful. As you’re about to contact the realtor or knock on the door to make inquiries for the house you like the best, you’re greeted with a sign that says “under contract.” You feel your chest tighten.

What does it mean? Should you be concerned? Should you just resume looking for houses and set your sights on other properties?

Relax. It’s not the end. You still have a chance on this house you like even if it’s labeled “under contract.” But before you make your move, let’s first break down what the phrase “active under contract” means, then look at different scenarios so you’ll know what to expect should you decide to still pursue this property.

Ready? Let’s get started.


Active under contract: what does it mean?

When your dream home has a sign that says it’s active under contract, there is no need to fret. Basically, it’s there to let other interested home buyers know that an offer has been made and the seller accepted it. That said, the sale isn’t final and unless there’s a clause in their contract, the house is still in the market, open for other offers.

Think of it as insurance for the seller. In case the first offer they accepted doesn’t push through, they have back-up offers to consider. All hope is not lost for them as well as for other interested buyers like you.

Where does it fall in the home buying process?

The best way to understand this situation is to get acquainted once again with the entire home buying process (not including the pre-buying preparations).

First, you look for a house you’re interested in. When you find it, you move on to the second step, which is to make a formal offer. The third step depends on the seller,  who might accept or ultimately decline your offer.

If the seller accepts your offer, you move on to the fourth step: sign a sales agreement or contract. In this document, expectations and obligations for both buyer and seller will be outlined. This includes contingencies such as home inspections and, for your end, finalizing your mortgage application.

Once the sales contract is signed by both parties, the property is considered active under contract. As you and the seller fulfill the contingencies,  the seller’s agent might still entertain offers and show the property to interested buyers. This isn’t always the case, however, as you and the seller can agree to take it off the market while contingencies are met.

Now, let’s say all of the contingencies were removed and requirements are done. You give your earnest money, which will then be deposited into the escrow account. At this stage, the house is no longer active under contract. The sign will be switched to sales pending. The seller is now less likely to accept back-up offers, but it really depends on what has been agreed between them and the buyer.

Frequently asked questions

Can the seller still show a house that is under contract?

Yes. The seller is under no obligation to stop showing their house to interested buyers or from entertaining other offers.

It only becomes an obligation if the seller and buyer agrees to shop showing the property while it’s under contract.

Furthermore, although the seller can entertain backup offers while the property is under contract, they cannot enter another contract with a different buyer.

Can I make an offer on a house under contract?

Yes! There are many ways a real estate transaction can fall through, so don’t give up on your dream home just because it’s under contract.

Of course, there is no guarantee that the first accepted offer will fall through. There is also no guarantee your offer will be accepted if such a thing happens. All that said, making an offer on a house you love that is under contract is still worth a try.

How long can a house be under contract?

Once a sales contract has been signed by both the buyer and seller, they start to work their way towards closing. It’s a specific time frame where both parties have to fulfill their ends of the bargain. For instance, the seller has to subject the property to several types of inspections. Meanwhile, the buyer has to finalize their loan.

This process can take anywhere between four to six weeks. Sometimes, the buyer or the seller asks for more time to remove certain contingencies. After all, some tasks do take time. But usually, a house can be under contract for a month, give or take a week or two.

Can a home seller back out of an accepted offer / sales agreement?

They can for a variety of reasons, but most usually it’s because one party or the other wasn’t able to fulfill or remove contingencies. Either the buyer has failed to secure proper financing, or the seller can no longer finance the sale and the eventual move.

Sellers can also back out of a contract because of the following:

  • The house appraised for far more than the buyer’s offer
  • Another buyer made a better offer
  • The seller has trouble finding or moving to a new home
  • An emergency occurred (i.e. death in the family) that renders them unable to move
  • There is conflict within the family about the sale

Are there consequences for sellers who back out of their respective sales contracts? Yes. Buyers can take this to court and sue them for breach of contract. Sellers may also be required to return the earnest money deposit (plus interest), reimburse the buyers for contingency-related expenses, and also reimburse the listing agent for services rendered.

Why keep the house on the market after the first offer? Why not just remove it from the MLS?

As we keep mentioning earlier, transactions don’t always push through. It will be stressful, not to mention possibly expensive, for the seller and their agent to list the property and market it once again.

For the seller, one of the best and practical ways to still ensure a successful sale is to keep their property on the MLS until the sale is finalized.

Related terms to get acquainted with

It’s highly likely you’ll come across the phrase “active under contract” with other related terms, most often “active,” “pending,” and “sold.” At first glance they seem easy enough to understand, but sometimes, they are more than meets the eye. Let’s take a closer look at each word to understand their respective intricacies.

“Active”

If you come across a house you like that is also listed as “active,” it means that it’s 100 hundred percent available for sale. That said, there are different types of “active,” and what they mean also depends on the local real estate market.

Fortunately, some types of “active” status are more commonly used than others. Here are a couple that regularly make the rounds, plus their widely accepted definitions:

  • Active Contingent

    A house listed as “active contingent” means an offer has been made and the seller has accepted it. Sounds similar? It’s because a house listed as “active contingent” is also under contract.

    Think of this status as an added layer. With the house marked “active contingent,” a condition or two must be fulfilled within a set period of time in order for the sale to proceed. If that contingent is not met, the deal will fall through. No ifs or buts.

    You can make an offer on a house that is “active contingent.” If it is accepted, it will take precedence over the initial offer if that transaction doesn’t proceed.

  • Active – First Right

    A house marked as “active – first right” is similar to under contract and active contingent in that the seller has accepted an offer and signed an agreement with the buyer. The seller can still entertain other offers, but the first accepted offer takes precedence. The buyer who made that offer is given the chance to match the following offers or simply improve their offer.

  • Active Kick-out

    A house with the “active kick-out” status has, more or less, the same ingredients as a property that is active in that the contingent is this: the buyer must sell their current home first within a specified timeframe. Once this contingent is removed can the transaction only proceed.

    Another element of the “active kick-out” status is the seller’s ability to effectively kick the first buyer out when another qualified buyer makes an offer and meets the requirement.

    Of course, the seller can’t just kick out the first buyer. For a house to be marked as “active kick-out,” the sales contract must include the kick-out clause. This is the same with other active status types— they must be agreed upon by both parties.

  • Active – No Show

    Remember when we said that houses that are active under contract can be closed from showings? These properties are marked as “active – no show.” In such cases, the buyer and the seller have both agreed that the house can’t be toured. This can be during the entire duration of the deal or only during specific periods.

    Although the house is not open for showings, note that they are still on the market and for sale.

“Pending”

A “pending” status on a property for sale means it’s further down the home buying process. The seller has accepted an offer and the contingencies have been met. In some cases, the transaction has no contingencies whatsoever.

If a house under contract is inching closer towards closing, a house that is listed as “sales pending” is already in the escrow period of the buying process. This is when the final paperwork is reviewed and signed, and payments as well as disbursements are made.

Although it’s only a couple of steps towards closing, it’s still possible for the deal to fall through. This is why you might encounter some sellers who still entertain offers during this point in time.

  • Pending, showing for backup

    You’ll see this sign on a listing if a property’s sale is pending, but the seller has chosen to continue showing it to prospective buyers. The seller can also accept backup offers, just in case.

  • Pending, subject to lender approval

    If you see this sign or mark on a listing, it means that the sale is dependent on lender approval. Basically, the seller has accepted the offer, the property is under contract, and the deal will most likely push through if the buyer’s preferred lender agrees to the transaction.

    What happens if the buyer’s bank rejects the proposition? The deal will fall through and the property winds up back on the market as an active listing.

“Sold”

Sold homes are exactly that— sold and off the market. Sometimes, instead of “sold,” you’ll see a sign or mark that says “closed” on the listing.

Making an offer on these properties are moot, but they can still be of some use to you. As you set a price range for houses for sale in Manhattan Beach and Redondo Beach, you should take a look at recently sold properties in the area to give you a ballpark.

Later on, when it’s your time to sell a house, you can also check out the sold properties in your area to help you determine the best listing price. Sold homes in the neighborhood are usually reviewed for a comparative market analysis.

What have we learned today?

Next time you see a potential dream house that’s been marked as under contract, don’t lose hope. Consult your real estate agent about the next steps you can take. In addition, get in touch with the seller’s agent to learn the status of the sale to see if making an offer is still worth it.

But before that, it’s best to explore all your real estate options first. Discover Manhattan Beach waterfront homes for sale and homes for sale in Redondo Beach, CA with me, Marco De Longeville. Browse my website to view the latest active listings in the area, or connect with me at 213.675.0197 or marco(dotted)delongeville(at)vistasir(dotted)com today.