Active Under Contract: What Does it Mean in Real Estate?

Key Takeaways

• What active under contract means is that while the buyer and seller have entered into an agreement, there remains a few details that must be worked out before the sale is final.

• The chief difference between active under contract and “pending” is that the former means some contingencies must be settled before a sale can be made, while “pending” indicates that sale closure is imminent.

• Those interested in a property that is active under contract can make a “backup offer,” which puts them in line for consideration if the deal with the buyer falls through.

At some point, real estate investors will ultimately be looking to close on a deal. That’s where the term “active under contract” can come into play. But what happens when a property is listed as such, and what does the investor then do? Here is active under contract: What does it mean in real estate?

What is Active Under Contract?

Beyond the familiar “for sale” and “sold” signs one sees when searching for a house, there are other indications of a property’s market status that are less familiar. One status is called “active under contract.”

Such statuses aim to apprise potential buyers of where the property stands. They also tell them whether there is time to submit an offer.

What active under contract means is that while the buyer and seller have entered into an agreement, there remains some details – contingencies — that must be worked out before the sale is final.

What the offer here does is remove the property from the market and impede the seller from signing on with another buyer as the current buyer wends their way through the nascent stages of the closing process.

However, there is always a chance that remaining contingencies are not met, and the deal will collapse, opening the door for other potential buyers. Such contingencies can concern home appraisals, inspections, the ability to sell their current home, the wherewithal to purchase the property, and more. Satisfying such contingencies can make the closing process more protracted.

Those interested in a property that is active under contract may feel free to make a “backup offer.” While sellers may not enter into another agreement with a different buyer during the contingency period, even for more money, sellers are allowed to accept backup offers – just in case. After all, there is never a guarantee the contingencies will be met.

Active Under Contract vs Pending Listings

In addition to “active under contract,” there is another status that may be seen on a banner: “pending.” The two terms are similar in that both signal the seller has accepted a buyer’s offer. They also indicate that the seller and buyer are contractually yoked.

The chief difference is that “active under control” means some contingencies must be settled before a sale can be made, while “pending” indicates that sale closure is imminent.

Note that, in real estate listings, “active under contract” is the same as “contingent,” in that both terms mean steps must be taken before the sale closes. The terms are often used interchangeably.

How is the Contract Formed?

An active under contract listing comes about when the buyer and seller reach an agreement on the home’s purchase. However, in these early phases, there are still outstanding requirements that must be satisfied before progression to closure.

The agreement between the buyer and seller calls for the broker or real estate agent to produce a property description and post it to an area multiple listing service. Such descriptions generally account for about one-third of a property listing, along with photos and property info such as the number of bedrooms and bathrooms.

What Does the Contract Include?

Active under contract agreements list the outstanding contingencies as well as financing terms of the property in question. Once the contingencies have been met, the sale can proceed to closing.

What Does the Timeline Look Like for Active Under Contract?

Once a written offer is made via a residential purchase agreement (RPA) and accepted, the listing status switches from “for sale” to active under contract. The buyer and seller must then enter into negotiations, noting any conditions that must be satisfied before the deal is done.

Normally, the length of the contingency period can range from a few days to several weeks, approximately 30 days on average when market conditions are normal, and sometimes up to 60 days.

Closing on a Property: Being Active Under Contract

As an alternative asset, real estate remains a popular investment. After all, the investment can be leveraged, provide tax benefits, offer regular cash flow, be passed on to heirs, and provide a hedge against inflation.

For example, the alternative investment platform Yieldstreet, which continues to expand its offerings, has multiple ways to break into real estate that were previously reserved for institutional investors. Yieldstreet has vetted, curated opportunities in private and commercial real estate, as well as a Growth & Income Real Estate Investment Trust (REIT). “Active under contract” is a term an investor may see in some of these offerings as well.  

Another benefit of real estate, or any other alternative to stocks and bonds, for that matter, is that it reduces portfolio volatility through diversification, which is a critical element of successful investing, particularly over the long term. Owning various types of assets that perform differently generally mitigates the overall risk of investment holdings.

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

Desiring a property that is active under contract can be frustrating since another buyer already has it under contract. Having said that, it is not unheard of for such properties, for whatever reasons, to go back on the market. So, submitting a backup offer just in case can be a smart move.