When it comes to real estate contracts, you might come across two common phrases: "active under contract" and "contingent". Both terms indicate that a property is not available for further offers, but they have distinct meanings and implications. Let's delve into these terms to help you understand the nuances and make informed decisions in your property journey.
Before we explore these terms, let's briefly understand the typical real estate transaction process. When a buyer makes an offer on a property, the seller can accept, reject, or counter the offer. Once the seller accepts the offer, the property goes into a "pending" status, which is when the "active under contract" or "contingent" statuses come into play.
Active Under Contract
When a property is "active under contract", it means that the seller has accepted the buyer's offer, and the transaction is moving forward. The contract is binding, and both parties are committed to the deal. However, the property is still considered "active" in the Multiple Listing Service (MLS) database, indicating that the transaction is not yet closed.
During this period, the property is typically taken off the market, and the seller will not entertain any new offers. However, the deal is not yet final, and certain conditions must be met before the transaction can be considered complete. These conditions, known as contingencies, are crucial to protect both the buyer and the seller's interests.
Contingencies in an Active Under Contract Status
Contingencies are clauses in the contract that allow the buyer or seller to back out of the deal under specific circumstances. Common contingencies include:
- Financing Contingency: The buyer can cancel the contract if they are unable to secure financing for the property.
- Inspection Contingency: The buyer can cancel the contract if the property inspection reveals significant issues that the seller is unwilling to address.
- Appraisal Contingency: The buyer can cancel the contract if the property does not appraise at the agreed-upon price.
These contingencies give buyers a chance to reassess their decision and protect their investment. If any of these contingencies are not met, the buyer can walk away from the deal without facing penalties.
What Happens When Contingencies Are Met?
Once all contingencies are met, the property moves into a "pending" status, and the deal becomes more solid. The parties involved can then proceed with the closing process, which typically involves finalizing paperwork, conducting a final walkthrough, and transferring ownership.
However, even in a "pending" status, unexpected events can still occur, such as a change in the buyer's financial situation or a dispute between the parties. In such cases, the contract can be renegotiated or terminated, depending on the terms agreed upon by both parties.
Contingent Status
A "contingent" status is similar to an "active under contract" status, but with a crucial difference. When a property is contingent, it means that the seller has accepted the buyer's offer, but the contract is subject to certain conditions that must be met before the deal can be considered final.
In a contingent status, the property may still be listed as "active" in the MLS, indicating that the seller is willing to entertain backup offers from other buyers. This can happen when the original offer is subject to contingencies that may not be met, such as a financing contingency. In such cases, the seller may want to have a backup plan in case the original deal falls through.
Backup Offers and Contingent Status
When a property is in a contingent status, other buyers can submit backup offers. If the original deal falls through due to unmet contingencies, the seller can then choose to accept one of the backup offers. This can create a competitive situation, as other buyers may be eager to secure the property if the original deal does not go through.
However, it's essential to note that accepting a backup offer can have legal implications. If the original buyer's contingencies are met, and they are still willing to proceed with the deal, the seller may be legally obligated to honor the original contract. Therefore, it's crucial for sellers to consult with their real estate agent and legal counsel before accepting backup offers.
Contingent Status and Multiple Offers
In a hot real estate market, it's not uncommon for a property to receive multiple offers, even if it's in a contingent status. In such cases, the seller may choose to accept the best offer, even if it's a backup offer. However, this can create a complex situation, as the original buyer may still be working towards meeting their contingencies.
To navigate this situation, sellers and their real estate agents may use strategies such as setting a deadline for backup offers or requiring backup offers to be subject to the same contingencies as the original offer. These strategies can help create a more predictable and manageable situation for all parties involved.
Understanding the differences between "active under contract" and "contingent" statuses is crucial for buyers and sellers alike. Both terms indicate that a property is not available for further offers, but they have distinct implications for the transaction's progress and the parties' obligations. By familiarizing yourself with these terms, you can make more informed decisions and navigate the real estate market with greater confidence.