Just because a property is under contract doesn’t mean that the sale has been finalised. In fact, there’s still a chance the contract could fall through and the property could be back on the market within hours. So let’s take a closer look at the definition for this real estate phrase.
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What exactly does under contract mean?
If a property is described as being under contract, it means that the vendor and the buyer have agreed on a price for the property and signed a contract. But that contract is still subject to conditions and could fall through before the sale is completed.
A property can only be listed as “sold” once all the conditions of the contract have been satisfied. Until then, it is either “under contract” or “for sale”.
Even if you have a verbal agreement in place to buy a property, it is not officially “off the market” until contracts have been signed and exchanged by both the vendor and buyer. So before this happens, there is the risk of another buyer coming along and putting in a higher bid - this is known as “gazumping”.
There are several steps you can take to avoid being gazumped, such as getting loan pre-approval and organising building inspections during the cooling-off period. You can read more about these strategies in our gazumping guide.
What should a contract of sale contain?
When you are buying a property and the time comes to sign the contract of sale and make your dream house a reality, be sure you know what to look for. Aside from making sure that it is drawn to your name, your home purchase contract of sale should include the following.
- Names and addresses of both the seller and the buyer
- A description of the property you are going to buy which includes the complete address and the exact measurement of the property.
- Things that are included or excluded in the sale such as furniture and lighting fixture.
- The total purchase price which includes the deposit
- The amount of the mortgage to finance the house
- Inspection reports and necessary inspections performed by the buyer before closing the deal.
- Property taxes and other adjustments
- Details of the settlement
Your home purchase contract of sale should also include contingencies which protect your rights as a buyer. This contingency contract gives the provision that you and the other party are legally obligated to the contract if such events stated in the contract happen. The situations stated in the contingency contract are usually categorised under 'subject to' clauses. A good solicitor will be able to draw up a contingent contract that will maximise your rights and protection as a buyer.
Subject to inspections
A subject to inspection clause is put in place when a buyer tells a vendor they want to buy a property subject to building and pest inspections. However, unless the property is likely to fall apart because of a major defect, this clause won’t be enough to allow the purchaser to get out of the contract.
Subject to finance
You should also be careful about any finance conditions included in the contract. If you’re buying subject to finance, you should read the general condition 14 of the standard form contract. Buyers often think that they can sign a contract subject to finance and then if they encounter difficulties or if they change their mind, they can simply cancel the contract based on the fact that they don’t have finance approved-- however this is not always the case.
Contracts offer a protection to both parties, whether you are the seller or the buyer. Besides protecting both parties, contracts can also legally bind you, which means you can incur legal penalties for breaching the terms of the contract. Therefore, be very sure that you understand all the legalities and procedures before affixing your signature.
Stages of a contract of sale
Before you formally enter into a contract of sale, you're likely to go through a few stages.
- Contract vs agreement - To put it briefly, a contract is an agreement between two parties, namely the seller and the buyer, which is enforceable by law. An agreement, on the other hand, is similar to a contract except that it is not enforceable by law.
- Offer and acceptance – In legal terms, an offer is an expression of a person to another party of his willingness to do something under specified terms. An offer also includes the provision that if the offer is accepted, the person who made the offer is legally bound to it. In contrast, an acceptance is the agreement of the other party to the offer made.
Before a contract is ever drawn, it undergoes certain stages, the first two of which are the offer and the acceptance. After an offer and an acceptance are made, a counter offer and a request for information follow. A counter offer is made if the seller requests certain modifications or amendments to the original offer; while a request for information is made when the seller wants to clarify some things about the offer made.
After this, there is a consideration stage where both parties should receive something in return when they bind themselves to the contract. Once all of these have been fulfilled, a written contract is drawn and signed by both parties. The contract becomes binding once it is signed by one of the parties. While it will not be final until signed by both, even if the buyer has signed but the vendor has not the contract is still legally binding.
When a contract of sale isn't final
Once you have signed the contract of sale, many states provide what's known as a "cooling off period". The cooling off period is simply the period provided where you can cancel an agreement if you change your mind; otherwise, you are bound by the contract after that.
The cooling off period starts after the purchaser has signed the contract. This is usually 5 business days long, which means Sundays and public holidays are excluded; thus, if you received the contract on a Wednesday, your cooling off period will end at 5PM on Monday. The cooling off period, however, can be reduced or extended as per the seller's agreement.
It should also be noted that the cooling off periods are not the same in all states or territories; nor does it apply to properties sold at auctions.
A state-by-state guide to cooling off periods
Why are under contract properties still listed?
Under contract properties are still featured in online property listings because sale contracts can and do fall through all the time. From home loan rejections to simple changes of mind, there are plenty of reasons why a buyer may pull out of a property deal, so keeping an active listing offers a form of protection for the vendor (and the real estate agent).
If the conditions of the current contract aren’t met, the real estate agent will need to find a new buyer. Maintaining a listing on popular property websites and continuing to hold open-house inspections makes it much easier for the agent to track down another buyer if the first contract falls through.
Buying a property when a contract falls through
In certain circumstances, a previous contract falling over may increase your bargaining power when it comes to making an offer, such as when the vendors are keen to sell as quickly as possible. However, keep in mind that the real estate agent does not have any obligation to tell you why the previous contract was cancelled. So if there was something in the building and pest inspection that scared the first buyers off, you’ll have to arrange your own inspection to find out what that was.
Even if a property is listed as under contract, it’s still a good idea to attend an inspection and let the real estate agent know you’re interested. Not only will this action help you form a clearer picture of what’s available in your price range, but you’ll also be one of the first people the agent calls if the current contract falls apart.
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