Under Contract vs Pending: Simplifying the Homebuying Process
If you’ve ever perused the internet looking at houses, whether you’re ready to buy, or just dreaming, you have come across the terms: “Under Contract” vs “Pending” and wondered–what is the difference between these two statuses? Don’t they sound the same? Today, we’ll cover this topic in detail and make sure you understand the difference between pending and under contract.
Under Contract vs Pending: The Quick Definition
Without going into all the details (although you really should understand how a real estate transaction works), the short answer for the difference between pending and under contract is this:
Pending means the house you are looking at has an accepted offer, and contingencies have been removed. This means this house is closer to being finalized and closed (sold).
Under contract means the house you are looking at has an accepted offer, but contingencies have not been removed. This means that while an offer has been accepted, it is not as far as long as the Pending status–there are still things that could potentially be discovered and cause the deal to fall through.
To summarize the stages of a real estate transaction, we’ve created a simple graphic for you:
Stages of a real estate transaction, simplified.
What happens in a real estate transaction actually?
For first time homebuyers, the house buying process and real estate transactions can seem overwhelming and the truth is–it is! There are many parties involved in a real estate transaction, including:
Yourself, the buyer or seller
The counterparty (also buyer or seller)
A real estate agent, or multiple agents. Although many people think real estate agents are a scam, or don’t do much, agents actually help buyers or sellers navigate through paperwork, provide market data about appropriate price or offers, secure financing with a bank or lender, converse with all the parties below to make sure the property is clean, to name a few
A bank or lender for borrowing money. Banks or direct lenders underwrite give buyers money to finance the purchase of a home that the buyer then pays back over a long time, like 30 years
An escrow company. Escrow companies act as a “middleman” for the buyer and seller, so that funds do not get inappropriately placed, and to avoid fraud
A title company. Title companies perform important checks on the literal “ownership” of a property to make sure that there isn’t some unknown defect. For example, does the seller actually have the full ownership rights to the property you’re buying? This is not always the case…
Home warranty company. Home warranty companies sell protection for damage that is discovered in a home, could be useful for a buyer
Termite inspection company. Termite inspections are extremely important, as damage from termites can cause structural damage and jeopardize the integrity of an entire home.
Home inspection company. Home inspections are extremely important as well, as these professionals know how to look for damage or hazards that may otherwise appear OK.
You can learn more about how to buy a house in California linked here.
So how do all these parties come together? Here is the typical process for both buyer and seller in a real estate transaction:
Both buyer and seller have their own real estate agent. The seller’s agent helps the seller try to sell their home by marketing it. The buyer’s agent helps the buyer find a home by showing them homes and informing them of market conditions and also helping the buyer secure a loan
If a loan is needed, the buyer gets pre-approved by the bank or lender
If buyer and seller can agree on a price (accepted offer), the property then enters “escrow”, or is labeled as “in escrow”, or “under contract”
The escrow company helps manage the funds that are exchanged between buyer and seller to pay for things like an initial deposit, the termite inspection, the home inspection, needed repairs, property taxes, appraisal, etc. It’s important to have an escrow company, as they act as a third party to prevent agents, buyers, or sellers from mixing funds, making mistakes, or committing fraud
Other items, often called “contingencies”, are flushed out–like home inspections, termite inspections, buyer’s final loan approval, final repairs, etc.
Funds from the loan and other items are transferred to the escrow company, and the escrow company “reconciles” all items against each other
The transaction closes with the seller receiving net proceeds from the escrow company (net of agent’s commissions, inspections, property taxes, repairs, loan costs, etc.). The buyer receives title (ownership) of the home and then has to pay off the loan (if applicable) over time.
Now, let’s talk about these things in detail:
What does Under Contract mean?
Under contract simply means that the property in question has an accepted offer. Some services or websites may also refer to this status as “contingent”, or “contingent sale”. While this usually means the deal is likely to close, it isn’t always the case. A lot of things can go wrong in a real estate transaction, an accepted offer and price agreement is not the only thing needed for a transaction to close. For example, a buyer could ultimately not be able to secure the necessary loan amount in order to purchase the property. In this case, the deal could fall through, because there is not enough money from the buyer to buy the home.
Can you make an offer on a house that is under contract or pending?
Yes–you can make offers on a house that is either under contract, or pending. Generally, you will be making what’s called a “back up offer”, because if nothing goes wrong, the transaction should close with the original accepted offer. It’s worth noting that Pending transactions are less likely to fall through, as contingencies have been removed.
What does Pending Mean?
Pending is similar to Under Contract, but further along the process. Some websites and services also call this “Pending Sale”. At this stage of the transactions, contingencies have also been removed and it is very likely that the transaction will close.
What are Contingencies?
Contingencies are basically “deal breakers” that both the buyer or the seller can have, to protect themselves. If a contingency is stated and is not met, then that party may back out of the transaction. In most states, there are standard contingencies that are part of your written offer form. If you’re working with a real estate agent, they should explain to you in detail what each contingency is and what’s included as part of your offer. For example, as a buyer, some standard contingencies that are a part of your written offer are things like:
Inspection contingency–condition that upon inspection of the home, there is nothing catastrophically wrong with the property. If there is, the buyer can back out
Loan contingency–condition that if the buyer cannot secure the loan, then the buyer can back out. For example, you want to buy a $500K home and need $400K in loans. As the process moves on, you find out that your bank and other lenders will only give you $300K. If you have no possible way of coming up with an additional $100K, your loan contingency allows you to back out of the deal so you’re not on the hook.
Title contingency–although one might think that the seller of a house owns the property, it’s not always the case. This is when the “title”, or “ownership rights”is clouded or has some complications on it. If this is discovered, you may back out as a buyer
How often do transactions fall through? Can you buy a home under contract or pending?
The short answer is–not that often. However, it is possible to buy a home that is Under Contract or Pending. It’s more likely for a transaction to fall through in the Under Contract phase, than Pending. Also note that it never hurts to submit a backup offer, the worst thing that can happen is the listing agent or seller says no.
FAQs:
Which is better pending or under contract?
If you’re the buyer hoping to buy a home that is under contract or pending, then under contract is better. That is because it’s more likely that the transaction will fall through in the under contract stage. Pending is generally further along the real estate transaction and much less likely to fall through. Some agents will use these terms interchangeably, so try not to get confused!
What is first under contract or pending?
A property goes into “under contract” first in the stages of a real estate transaction. When a property goes into “pending”, it is further along the process and means all contingencies, or deal breakers, have been satisfied or removed.
Can a seller accept another offer while under contract?
The laws vary by state, but if an offer is accepted by both parties and signed, a seller shouldn’t be accepting another offer. While there may be shady practices out there by sellers and real estate agents, in most states by law and integrity, an accepted and signed offer by both parties is binding.
Let Me Help You
If you feel overwhelmed and are looking for help, consider reaching out to me to act as your real estate agent.
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I’m a licensed real estate agent, business owner, and resident of Los Angeles. I grew up in Taiwan and am fluent in English and Mandarin. I have 10+ years of experience working in corporate finance and have a passion for helping others with personal finance, budgeting, and finding their dream homes.
As a first-time homeowner, I know how complicated and intimidating the home buying and selling process can be. I am eager to help and support you throughout this journey. Please reach out at wesleykang@kw.com or (626) 325-8068 because I would love to connect!
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