A real estate contract is a legally binding agreement between two or more parties known as buyers and sellers. Both parties must perform according to the terms of the real estate contract. If either party doesn't comply with the terms of the deal, they are in "breach." Breach of contract is a break in terms of the agreement by one of the parties. If you breach a contract, the other party may sue you in court and make you responsible for damages, attorney fees, and other expenses they have incurred.
Whether buying or selling a home, a contract between buyer and seller helps ensure all parties know exactly what they're getting, when they're getting it, and for what price. Once both buyer and seller sign the purchase agreement, the contract is legally binding. In many cases, however, the contract has contingencies or certain conditions that must be met in order for the sale to go through.
Defining Real Estate Under Contract
In real estate, the words “under contract” mean that a binding agreement exists between a buyer and a seller involving property. The buyer and the seller have agreed on a price and any other relevant terms. When a property is under contract, the seller may not enter into a contract with any other buyer. This is because the buyer is under obligation to purchase the property from the seller. The term “under contract” even applies to a real estate contract containing contingencies.
A "contingency" is a condition or circumstance that must happen for the contract to stand. A sale might, for instance, depend on the buyer selling their current home or the home in question appraising for the proposed sale amount. In this case, the contract would become void if the buyer's current home failed to sell or if the bank valued the house for less than the purchase price. Many real estate contracts contain contingencies. If they aren't met, the contract becomes invalid, and the parties may agree to modify the agreement or walk away from the deal.
Requirements to be Under Contract
A property is technically under contract when a buyer makes an offer and the seller accepts it. Contracts aren't enforceable until someone puts them in writing, however, so most people consider a home under contract only when the last party to the agreement has signed on the dotted line. Additionally, the buyer must give the seller something of value to make the contract valid. In most home sale transactions, the buyer places "earnest money" in escrow to meet this requirement.
In Missouri, buyers typically provide earnest money of about 1% to 3% of the home's purchase price. If the deal goes through, the earnest money goes toward the home's purchase price. If the buyer violates the home contract, the seller usually gets to keep the earnest money. If the seller breaches the contract or the deal fails for a faultless reason, the buyer's earnest money goes back to them.