What It Means to Be "Active Under Contract"
‘Active under contract’ is a slightly misleading term in real estate. It implies that the property has fallen off the market entirely – but this is not the case. Instead, the phrase refers to a home that stands in a unique location within the transaction process: it is no longer available for purchase, but the sale has not yet closed. Active under contract applies to any transaction that is under formal agreement. While the buyer and seller have already committed to the deal, the process of closing is still underway . The list will probably remain active on the real estate website until the transaction is finished. Only at that point does it become truly unavailable. Recognizing the difference between active and active under contract is important to buyers. As soon as a seller accepts an offer, the property becomes less likely to sell. Therefore, the chances that offers are accepted on the property are slim. An active listing has a much better chance of generating interest.
The Distinction Between "Active Under Contract" and a "Pending" Status
The different meanings of "active under contract" and "pending" in real estate contracts is fairly simple once you know them, however these terms are not readily known by the general public nor understood by real estate agents. "Active Under Contract" (also known as "AUC") means that there is a signed contract for the purchase of the home where all of the contingencies (such as loan or appraisal) are still in play. This means that the obligation to buy is contingent on an appraisal coming in at the sales price, or the mortgage being approved. The property is still actively being marketed for sale. If any contingencies fall through, the property will most likely make it back to the active listings. An example of a contingency would be that the loan didn’t come through, or the appraisal came in too low.
Where "Active Under Contract" is a legal term meaning that the buyer and seller signed a contract but the contract isn’t fully legally binding because they are still operating under contingencies. In other words, the buyers still have the right to terminate the contract for reasons set forth in the contract, such as an appraisal that comes in below selling price or a failure to obtain financing. AUC means that the property is still actively being marketed for sale while the buyers are under contract, although sometimes may be considered "off the market" for purposes of search tools from an MLS (which means buyers would not see the property unless they contacted their agent directly).
Where as "Pending" is more of a colloquial term that Real Estate agents use to indicate that the contingencies which are generally found in the contract are no longer in play. So once the agreement is binding between the parties, and all contingencies have been satisfied (or waived), the property is considered "pending" from this point forward until closing. Most buyers would not be able to make an offer on a pending property because it is now in a legally binding contract, with seller’s currently under contract to sell that property to that buyer. Some contracts may allow for "back up offers" however, those are uncommon and will not be detailed in this article.
Steps to Take When a Property is "Active Under Contract"
When a property is marked as "active under contract," it means that a seller has signed a contract with a buyer but that the purchase (which is usually subject to inspections, financing, and other contingencies), has not yet closed. In other words, buyers have a joint sales contract that will usually come with set perimeters or contingencies within which they will be purchasing the property.
A property listed as "active under contract" is usual when a buyer and seller are in a real estate transaction where money has not yet changed hands and the title has not yet changed hands, but the parties have agreed upon a contract.
The period of time that a property is actively under contract rather than listed for sale varies and is completely dependent on the buyer and seller.
During the "active under contract" period, a buyer usually performs things like obtaining a home inspection, a financing commitment, a radon test, etc. What the buyer chooses to do depends on what was agreed upon in the purchase agreement. It also may depend on what a lender requires as well as what is in the buyer’s best interests.
Because there are usually several contingencies associated with the contract, this can sometimes take a while to get everything done. Consequently, a property can sometimes be "active under contract" for quite some time.
There is not a great amount of risk for a buyer when a property is marked "active under contract." If contingencies are not met for her and something is wrong with the house, for example, she will simply decide not to go through with the transaction, the contract will be terminated, and her earnest money will be returned.
A seller, however, may experience more risk during this time. A seller still has a vested interest in the property until a transaction closes.
If she accepts a new offer from another buyer while the contract is in place and is then forced to turn the offer down, the property can end up sitting on the market longer while the buyer completing the first contract performs his due diligence.
This can create a lot of stress for the first buyer if he is trying to meet his deadlines to obtain financing and complete his inspections and has a limited window of opportunity before the seller gets the new offer.
The best way to avoid such scenarios is to agree upon a specific timeline in the purchase agreement and do all you can to meet those deadlines as soon as possible.
In addition to explaining your rights during the "active under contract" period, an attorney can ensure that all appropriate due diligence dates and requirements are agreed upon in the contract. Not following the agreed-upon timelines and obligations can result in lost deposits, and there always seems to be the frustration of another buyer potentially moving in.
Implications of Being "Active Under Contract" for Buyers
Buyers should take note of a property marked as "active under contract." While the seller has accepted an offer, the transaction is contingent upon certain conditions being met. The potential buyer can still pursue the property by submitting a backup offer. The seller may agree to this if it is friendly to him.
Known as a secondary, backup, or first right of refusal offer, it implies to the seller that, should the existing agreement fall through, the backup buyer would be next in line to purchase the property. It is important for a backup buyer to have their offer, terms, and even their financing lined up in advance. Having an agent who is experienced at securing backup offers can be of great benefit.
Implications of Being "Active Under Contract" for Sellers
It is not uncommon for a seller, in an effort to get under contract quickly, to consider allowing a property to go into an "active under contract" status under the Multiple Listing Service ("MLS"). This status allows the broker to continue to show the property, to entertain other offers from potential buyers, and to seek back-up offers as well.
The seller must be aware that by permitting "active under contract" status, this does not make the property an active listing; the status under the MLS will still be "for sale"; and the property will be advertised under the "active" status.
The seller also understands that under Florida International Realty Group listing and selling agreements, there is no post-acceptance period where the seller is obligated to continue to show the property to prospects where the seller and buyer have executed and delivered a contract. The listing agreement does not contain provisions for "active under contract" status. Under an "active under contract" status, the seller is not legally obligated to take time out to show the property to prospects who know the property has been under contract. The showing is an option, not an absolute obligation.
Of course, a full-time seller, who is adamant on selling the property under contract, may want the property shown for back-up offers. For that reason, the seller may choose to limit the times to show the property by offering times when the seller is available during the day or evening, on weekdays or weekends.
One obvious downside to "active under contract" status is that if the sale is not consummated, the property will likely have to be reintroduced into the market. The seller may be required to give the existing buyer notice that the sale will not occur, typically governed by the contract. The seller is not legally obligated to give notice, but the Commission is of the belief that the seller should give the notice if the buyer is entitled to it under the contract.
Unless a current buyer has the right to continue with an existing contract, the seller will advise the MLS listing broker that the property should revert back to an "active" status (or "back-up", as applicable). Often it may be the case that the buyer(s) were not introduced to other properties, while under contract and, if they are entitled to their deposit refund, would move forward expeditiously to see and execute on another property.
Offering Instructions When a Property is "Active Under Contract"
So how does one make an offer on a property that is already Active Under Contract, or AUC for short? It seems like these days, especially in the greater Denver area, we see more and more homes with this status and very little inventory. Often buyers are frustrated because they think if a home is under contract it is sold, but this is not always true! So as a buyer, you should be aware of the options and how you can still get in to view these homes.
First of all, the home that is active under contract means that the seller has accepted an offer and they are under contract with a buyer, but they are allowing other buyers to view the home and place backup offers. Why would a seller allow that? Well, because they may have a contingency or they may want to continue to market their home in case the sale doesn’t happen or they want to get multiple offers and drive up the price, or they are worried the buyer is going to back out of the deal so they want to keep looking at offers. Often times it is because they don’t absolutely have to sell their home, so they are OK to let it remain in AUC status. Again, AUC listings are typically homes that have either contingencies in place that have to be satisfied before closing, or for some reason the seller is looking at backup offers, usually because they basically want to monetize interest in the property or keep the proverbial fire lit (so to speak) in case the first offer falls through. So if you are a buyer and your agent sees an AUC listing in the multiple listing service, you should be able to get in and view the property.
Typically , sellers don’t allow for a second showing on those properties, and you should assume that if they are not responding to your offer quickly, it is because they are waiting to see if a sale will go through on the first contract. Attention buyers, you should be ready to make decisions quickly on the AUC listings you want to pursue, but you also should not get your hopes up unreasonably, as this strategy does not guarantee an offer will be accepted on the affected property. Also, don’t try and outsmart other buyers by making your offer contingent upon the sale of your home—this will make your offer much less competitive.
So how do you craft that offer to get it noticed by the seller? First, make it a clean offer. Write down appropriate contingencies, close dates and the items that you would want repaired versus the things you don’t mind if the seller does not address. Your offer should not sell the seller on your ability to buy the property, that is something that the lender and your agent should do before making an offer, but rather you should show them why they want to take your offer. Using comparables carefully to estimate the current value of a property is a good way to show the seller why you decided upon the offer price you did. Also consider including an offer letter, even if it is just a bullet point list that says "We love your home because…" and "we are willing to pay you $X because…". Put yourself in the seller’s shoes and ask how I can compete against the other offers out there—what else can I offer and what can make my offer stand out?
Legal Aspects of Being “Active Under Contract”
The acceptance of an offer can be a legally complicated matter. In addition to acceptance or rejection, there is also consideration, which concerns the terms of the deal. If there is a counteroffer, the party making the counteroffer must agree to all terms of the return offer; if the counteroffer is rejected, the initial offer stays on the table for acceptance. And in some cases, an agreement to consider an offer can be treated as a legally binding agreement. Be sure the circumstances of the acceptance, counteroffer, or agreement to consider are clearly defined in the offer, so no misunderstandings occur. The property being offered must be sufficiently identified, and the contract must be signed by both parties. An offer not signed by both parties is not valid according to contract law because of the lack of consideration. Any term of the offer that is not met, such as a lease, rent-back, or incidental charges, can allow the other party to back out of the agreement. After the acceptance is completed, an accepted offer becomes a binding agreement (contract) and the seller may not continue to show the home, solicit, accept, or maintain any other offers until the first contract has been canceled. If it appears that the contract of sale may not be completed because of financing conditions, major repairs, or other problems, the seller and buyer can usually negotiate to amend the contract to readjust the closing date or to do some repairs, etc. struggling through a troubled relationship often proves less beneficial than straightening out the problems so the deal can move forward. If the seller breaches the contract, the buyer’s remedies generally include rescission of the contract, specific performance, compensatory damages, and liquidated damages.
Clearing Up Misunderstandings About Being “Active Under Contract”
There are a few other common misconceptions about the "active under contract" status. Some people think that an "active under contract" property is under contract to sell and can’t be sold. Not true! A contract is a two-way street and both the buyer and the seller can walk away from it any time for just about any reason or no reason at all. If either party terminates the contract and the seller no longer wishes to proceed with the sale then the property is back on the market as "active". Some think that all offers made after a house is listed as "active under contract" are presented at some particular point in time. Not true! Some sellers and their agents have this policy that all offers made on the property after it went "under contract" are held until the first set closing date, if the first contract does not close, a second set of offers are submitted back to the sellers until they have a contract they want to work with to close the sale. I’ve seen this set up work the vast majority of the time when there are more than one offer at play on a property. It’s even worked out all the way to several rounds of bidders…but it’s not without its fatalities. If someone jumps in the process at the wrong time with the right offer, that seller will require you to wrap things up under some pretty strict terms. If you don’t, you’re out of the running and the property goes to the offer that was good enough only a moment ago…it would still be active under contract but closed and sold to that "new" buyer with the same terms as your offer because they "won" by being the last one standing. I’ve also seen this set up not work very well at all when there are no other offers involved and the first one in, is the only one on the table. But they aren’t very good as they may be below the asking price or have some other downside. That seller may decide that the first offer is not a good enough offer to accept and counter. Now the property is listed as "active under contract" and you have no idea what will come in next. However, you’ve had no contact with your agent since the property went "active under contract" so you haven’t had a chance to counter your offer and meet that seller’s terms. The seller can’t counter your offer because they are already under contract to sell to you based upon the terms of your offer…that means the property is marked as "active under contract".
Key Takeaways Regarding Being "Active Under Contract"
As you can see, the days of active under contract are not as clear-cut as they once may have seemed. As we mentioned earlier, this term is often used to indicate ongoing negotiations with the home pending a sale; however , some professionals are also using the term to mean that the sale may have already gone through its closing process. The most important thing to remember is that there isn’t a universal rule of what "active under contact" means. The meaning of these words can mean different things to different people and there are a variety of definitions being used in the industry. The meaning of the term will also change based on the specific market a real estate agent and his or her clients are working in. There is one given, however, that all professionals in the industry can agree on—once the house is officially sold, it can no longer be considered active under contract.