What Does "Under Contract" Mean in New York Real Estate?

You found a condo or co-op in New York City that’s just perfect for you and your significant other.

Your mortgage lender's underwriter will help to decide if loaning you money is a risk or not.

Typically, the underwriter is assessing whether you can be able to afford the monthly mortgage payments.

When your underwriter approves your loan, you’re basically set, right?

Not really. There are more steps that lead up to the contract phase.

You'll want to familiarize yourself with the terms contingent, pending, and under contract, among other things that relate to the closing of an apartment.

You and the buyer don’t just agree on a price and then you start to box up all your home items and are ready to move in.

To get to the closing process, there are quite a few more steps.

What Does Under Contract Mean?

• Under contract signals that a purchase agreement has been made and both parties have signed the agreement and earnest money has been put down.
• If the purchase agreement has contingencies, the "under contract" period is the time frame in which all of them must be addressed and met.
• Some examples of contingencies are inspection, appraisal, repairs or renovation, securing a mortgage, or a buyer being able to sell their home to purchase the property in question.
• The term "pending" connotates that all such contingencies have been fulfilled and the deal is ready to go to the closing table.
• Once the contract is pending, a closing date and the final walk-through can be set.
• Home insurance should be purchased and utilities should be transferred prior to closing.

What is Under Contract?

Under contract happens when a buyer makes an offer on a house (a townhouse, a co-op, a condo in New York) and the seller has accepted your offer and together you have signed a sales contract, but the deal has not yet closed and is in an early—and perhaps precarious—stage.

This means that the transaction may not come to fruition and another buyer can still make an offer even if the property is under contract.

Both parties are in agreement in regard to the cost of the seller’s home, and the apartment has to go under contract through various phases that are essential to the buying process and which must be met prior to closing.

In this phase, you and the seller will sign a legally binding purchase agreement confirming that you’ll buy the home at a specific price if all conditions as stated in the purchase agreement are met.

Learn more: What You Need to Know Before You Buy Property in New York

What is a Purchase Agreement?

The purchase agreement--or sales contract-- is the document that states the conditions that both buyer and seller agree to, including the purchase price.

Since the buyer needs assurance that the home transaction will proceed in good terms, the legally binding purchase agreement will contain items that need to be repaired by the seller.

This includes updating outdated electrical wires, any leaks from the apartment above, and an inspection of the entire house to see what else needs work.

The agreement will also include what items are to be considered as part of the purchase price, such as lighting fixtures or appliances like refrigerators, to name a few.

The MLS Status Change

As soon as the offer is mutually accepted, your real estate broker will usually alter the wording or listing status of your apartment in the local MLS.

The home, which starts as “active,” i.e. the property is available to purchase, changes to “under contract.”

In between those two real estate terms, there’s also “contingent” and “pending,” which we’ll go over.

Important Sales Terms to Know

You’ve probably searched for a condo in New York City online through the popular Zillow site, or maybe you've searched for homes through your local multiple listing service.

If you have, this is the point where many potential home buyers get confused. A home may simply say, “for sale” next to its price.

Then you come across a home that says “contingent,” “pending,” and “under contract.”

What do all of these terms mean?

What does "Contingent" mean in a sales contract or offer?

A purchase agreement is marked as contingent or may contain the word "contingent" after you have made an offer and the seller has agreed on the terms, but the transaction is conditional upon certain things.

The closing won’t take place until these contingencies are met.

If they aren’t met, the buyer is allowed to cancel the sale without penalty, and the seller also can do the same.

What does it "Pending" mean on a listing?

Pending, or “sale pending,” is when a home is under contract and all contingency requirements have been met.

This is the time when the house is inspected and appraised, the former for the buyer’s sake, the latter for the lender’s sake.

The difference between pending and under contract is simply how far along the transaction is in the arrangement.

In a nutshell, under-contract is when the seller accepts your offer but that there are contingencies that need to be addressed.

The difference is that with pending is that the parties have addressed all the contingencies and are ready to close.

The contract in its stage of the binding agreement effectively removes the apartment off the market so that the seller won’t agree to another contract for the same apartment.

It also requires the buyer to pay for the property.

The reason why the state of “under contract” is precarious is that the buyer is allowed to walk away if any of the contingencies have not been met.

The entire transaction will only lead to “closed” when the contingencies, as instigated in the contract, i.e. the purchase agreement, have been successfully made or fulfilled.

Under Contract and Pending may be used interchangeably

Contingent contracts are not uncommon and once the agreement is signed and executed, it may not be differentiated from pending in some circumstances.

If you think about, a contingent contract or being under contract can be interpreted as a pending sale.

In either of these cases, however, they can be varying degrees of how the seller is operating.

Whether a sale is contingent, under contract, or pending, some sellers may still allow their brokers to conduct showings and open houses, or entertaining alternate offers until the close of the sale.

Especially, if there is a precarious contingency, a seller may be interested in back-up offers just in case the deal falls through.

In some contingency deals, the buyer may place a contingency that the seller take the listing off the market entirely.

Contingencies that can make or break your deal under contract

There are many reasons why a deal falls through. These contingencies are as follows:

The title search

A title search examines public records to confirm a home’s legal ownership. It reveals who has owned the home before you and who currently owns it.

In this stage, the title company will also investigate the title to ensure that there are no liens, disputes, or other issues. If the home turns out to have a lien on it, the deal may go sour.

The appraisal

If it comes to the fact that the home is actually worth less than the loan amount the mortgage lender and bank will most likely step away from the transaction.

But at this point, you still have the chance to renegotiate the purchase price so that it reflects the appraisal.

The buyer can do two things at this point, pay for the difference in cash if negotiations fall apart or simply walk away.

The inspection

It’s the buyer’s right to have the home inspected to determine the quality of the home.

The inspection enables you to get a full view of the condition of the apartment you want to buy.

The contingency is in full effect once the inspection has been done.

You’ll receive reports about the house as well as recommendations on how to deal with any defects found there.

Negotiations

The buyer and seller try to work out a solution if the inspection reveals things about the apartment that had not been disclosed prior to the agreement.

Most include repairs and this step is where you can negotiate with the seller on the defects found during the inspection.

You can ask the seller to reduce the price of the home to cover the costs of any repairs.

Or, you can just ask the seller to repair both cosmetic and significant damages.

If the seller refuses to lower the cost of the home or has balked at making repairs, then the buyer can walk away from the deal.

Additionally, when neither side can’t agree to such conditions, then the property goes back on the market.

To “walk away” is when you’ve canceled the deal as per your purchase agreement and you can even get your earnest money back.

“Earnest money,” means that payment is put into a trust or escrow account that’s held by the brokerage firm until closing, whereby the funds then get applied toward the buyer’s down payment and closing costs.

This is why there’s a contingency.

And it’s aptly named. A contingency, according to its definition, is a detailed contract that attempts to provide for all possible contingencies.

Securing financing

This is the stage where the buyer needs to acquire adequate funding, which is the most important contingency.

In real estate terms, this is the “financing contingency” state whereby the contingency allows you time to find a loan in order to buy the property.

This stage is when the appraisal has been completed, and the lender’s underwriter evaluates with scrutiny your income, your credit card debt, and your credit score, among others.

If the underwriter finds that all your financials are up to date and have been verified by the paperwork you sent to the underwriter, at this point the lender will make a decision on approving your loan.

So if you start the process of buying a home and get pre-approved for a loan, don’t make the mistake that the amount of financing will remain the same throughout the entire home transaction.

This step is just the start of the process to get you closer to the closing.

After the lender has finished processing your loan and has accepted it, the buyer will receive the loan commitment letter.

This means that the buyer’s loan has been approved. Hooray! You’re so close! But first, the following things must happen for a smooth closing.

Read on: How to Choose a Mortgage Lender in New York: Ultimate Guide

What Happens After Contingencies are Met?

Setting a closing date

After the loan approval, a real estate attorney will be set to conduct the closing.

Here the attorney will doublecheck the property’s title, and draft up the necessary paperwork, among others.

The escrow or title agent will send you the formal notice of the actual closing date and time.

The title agent will also tell you what to bring to the closing.

You should also be receiving a document outlining your mortgage loan obligations and closing costs, to name a few.

Proof of homeowners insurance

At this stage, you have to search for a home insurance policy for your home.

Don’t be fooled that, because in other cities homeowner’s insurance is not required by law, you can forego it.

In New York City, the lender will require you to get homeowners' insurance to protect both the interior of the apartment and the exterior of the property, such as things you share with neighbors like the elevators.

Your lender is on your side when you adequately buy a policy.

The lender is looking out for you, and your home, and it’s in their best interest that your property is protected.

In fact, if you’re buying a condo or co-op in the city, your lender will require proof of insurance before they award you the loan.

So you’ve heard that New Yorkers need two separate insurance policies. Is this true?

According to the Insurance Information Institute, it is, whether that’s a condo or a co-op.

Home Insurance Property

The homeowners' insurance or insurance policy is the first policy required.

If there’s burglary or theft, your personal possessions will be covered.

Moreover, any expenses, including living expenses and costly items like jewelry, will be covered if a fire occurs in your apartment or any other disasters that are addressed in your policy.

Lawsuit Protection: Personal Liability

If you have a visitor at your apartment and you just mopped your floor, the visitor may slip on the wet floor and incur bodily damages.

In this scenario, you would have to pay for medical fees and may even be sued for damages if you don’t have insurance.

Or, if you draw a bath and leave the room for a moment and the water overflows and leaks into the apartment below you, the personal liability or insurance policy offers you the assurance that you won’t have to pay for any damages out-of-pocket.

You should always remember that, since you live in an apartment building, you are living among others in very close proximity. Many things where you are at fault can happen.

The Master Policy

The second policy you need is the “master policy,” which is provided by the condo or co-op board.

You will be charged a fee, which is taken care of by your maintenance fee or association dues.

This policy covers all the areas you share with others in your complex, such as the elevators, the roof, the basement, the boiler, and any walkways for both liability and physical damages.

To reiterate, the homeowners' insurance must be acquired prior to closing and the policy’s documents must be present at the closing.

The final walk-through

Sure, the property has been inspected. And, as we noted, the inspection may find things in the property that could be potentially dangerous to you.

If the seller has agreed to make any repairs, they must find a trusting, licensed repairman so that the home is adequately up to date.

The final-walkthrough, while not required, is highly recommended.

You should also look for things or items that have been removed but that were stipulated to be included in the purchase agreement.

The final walk-through typically happens a few days before closing in New York City but can happen a week or more before.

Most buyers' agents like to put the walk-through as close to closing as possible.

Depending on what you find during the final walk-through, repair requests can be made or negotiated between both attorneys.

Sometimes, that means the seller has to put some money into escrow for payment of not fulfilling the work agreed upon.

A deadline can be set at the closing table as to when the work should be completed.

Like home insurance, the re-inspection must happen before the closing.

Transfer of utilities

Just prior to closing, you and the seller should have the utilities transferred from one to the other.

You should call your utility company to remove your name off the accounts as of the closing date.

Also, have your mail forwarded and schedule movers.

Closing day

At a determined place, you will be expected to sign all papers, including the over 100-page agreement.

Be sure that your interest rate is correct and that there aren’t any penalties for prepayment.

Your attorney should be present, at your side, but if the attorney can’t make it, be prepared and ask your real estate agent to join you.

The real estate agent will know just as much as the real estate attorney.

So you’re finally done. The keys to your new home will be given to you, and you are now the owner of your dream house!