When it comes to real estate transactions, understanding the difference between "active under contract" and "contingent" status can significantly impact your buying or selling strategy. Both terms indicate that a property has an accepted offer, but they represent different stages in the sales process. Let's dive into the details of each status and explore the key differences between them.
First, let's set the stage. In real estate, properties typically go through several status changes as they progress towards a closed sale. These statuses provide valuable insights into where a property stands in its journey from listing to sale. Two crucial statuses that often cause confusion are "active under contract" and "contingent."
Active Under Contract
When a property is listed as "active under contract," it means that the seller has accepted an offer from a buyer, but the transaction has not yet closed. The property is still considered active because the sale is not yet finalized, and there are still conditions that need to be met before the deal can be considered complete.
During this phase, the buyer and seller are working together to satisfy various contingencies, such as home inspections, appraisal reports, and mortgage approval. Once these conditions are met, the sale can proceed to the closing process. However, if any of these contingencies are not satisfied, the buyer may have the right to back out of the deal without losing their earnest money.
Inspections and Appraisals
One of the most critical contingencies in an active under contract status is the home inspection. During this process, a professional inspector assesses the property's condition, looking for any defects or issues that may need to be addressed. If the inspector finds significant problems, the buyer may negotiate with the seller to repair the issues or adjust the purchase price accordingly.
Another essential contingency is the appraisal process. The lender will order an appraisal to ensure that the property's value matches or exceeds the loan amount. If the appraisal comes in lower than the agreed-upon price, the buyer may need to renegotiate the terms of the sale or provide additional funds to make up the difference.
Mortgage Approval
While the property is under contract, the buyer is also working with their lender to secure financing. The lender will evaluate the buyer's financial situation, credit history, and debt-to-income ratio to determine if they qualify for a mortgage. If the buyer's financial circumstances change or the lender discovers any issues with the property that could affect its value, the mortgage approval may be delayed or denied.
If the buyer is unable to secure financing, they may be able to back out of the deal without losing their earnest money, provided that the purchase agreement includes a financing contingency. This contingency gives the buyer the right to cancel the contract if they are unable to obtain a mortgage within a specified time frame.
Contingent
When a property is listed as "contingent," it means that the seller has accepted an offer from a buyer, but the sale is still subject to certain conditions. Unlike the active under contract status, a contingent property is typically no longer shown to other potential buyers, as the seller has committed to working with the current buyer to satisfy the contingencies.
In a contingent status, the buyer and seller are typically working together to address any issues that have arisen during the inspection or appraisal process. The seller may be making repairs to the property or negotiating with the buyer to adjust the purchase price. Once these contingencies are satisfied, the sale can move forward to the closing process.
Contingency Removal
As the buyer and seller work through the contingencies, they may eventually reach a point where they are satisfied with the property's condition and the agreed-upon price. At this stage, the contingencies can be removed, and the property's status will typically change to "under contract" or "pending." This indicates that the sale is imminent, and the parties are working towards a final closing date.
Once the contingencies have been removed, the buyer and seller are typically bound to the terms of the purchase agreement. This means that the buyer is committed to purchasing the property, and the seller is committed to selling it, barring any unforeseen circumstances that may arise during the closing process.
Backup Offers
In some cases, a seller may receive multiple offers on a property, and they may choose to accept one offer while keeping a backup offer in place in case the primary offer falls through. If the primary offer is contingent upon certain conditions, such as the buyer's ability to sell their current home, the seller may want to have a backup offer in place in case the primary buyer is unable to satisfy the contingencies.
In this scenario, the property may be listed as "contingent with backup offer." This indicates that the seller has accepted an offer from a buyer, but they are also considering a backup offer from another potential buyer. If the primary offer falls through, the seller can move forward with the backup offer without having to relist the property.
Understanding the difference between "active under contract" and "contingent" status is crucial for both buyers and sellers in the real estate market. By familiarizing yourself with these terms, you can make more informed decisions throughout the buying and selling process. Whether you're a first-time homebuyer or an experienced investor, knowing the ins and outs of these statuses can help you navigate the complexities of the real estate market with confidence. So, the next time you come across a property listed as "active under contract" or "contingent," you'll have a solid understanding of where it stands in the sales process and what steps need to be taken to bring it to a successful close.