Can a Seller Accept Another Offer While Under Contract?

You have made your proposal. The seller accepted. Contracts were made- and you read that the seller was offered a higher price. Now you’re wondering: can they legally accept it?

It’s one of the most nerve-wracking questions in real estate. The answer to this is in most cases: no. The rules can change fast, however, real estate contracts are constructed on the condition and as soon as those conditions are broken, the rules will change.

This guide contains precisely what sellers may and may not do after they are under contract, what protection the buyers enjoy, and what state-specific regulations may alter the scene.

What “Under Contract” Actually Means

Once an offer has been accepted by a seller, the buyer and seller both sign a purchase agreement, a legally binding document that prevents the buyer and seller from backing out of the deal at an agreed price, closing schedule, and all the stipulated conditions.

When this happens, the house is said to be under contract. The buyer starts to do their due diligence and the seller undertakes to work towards closing.

Under contract does not however mean the deal is closed. A majority of real estate contracts contain contingencies – conditions inherent in the contract that need to be fulfilled before the sale can be closed. Provided that these conditions are not met, the contract may be dissolved and the seller may even switch to a new offer.

The Legal Reality: Sellers Are Generally Locked In

After signing purchase agreement by both parties, the seller is bound by the agreement. Leaving without a reason or to pursue a superior offer, may subject a seller to severe legal and financial implications.

That said, there are three scenarios where a seller may legitimately entertain or accept a new offer:

• A contingency in the original contract fails
• The contract includes a kick-out clause
• State-specific laws create a legal window to cancel

When Contingencies Create an Opening for Sellers

The most typical cause of contract unraveling is contingency and the most typical manner in which sellers end up bound by a new offer (and are in a position to accept such an offer) is by contract. Here are the significant ones:

1. Home Inspection Contingency

The majority of purchasers put an inspection contingent that allows them 7 to 10 days to assess the physical status of the property. Should an expert inspector find significant issues, such as damage to the foundations, roofing, mould or defective electrical installations, the purchaser can:

• Request that the seller make repairs before closing
• Ask for a financial credit to offset repair costs
• Cancel the contract and walk away with their earnest money

In case the seller is not willing to negotiate, then the buyer can withdraw. The house is put back on the market and the seller is able to take new offers..

2. Financing (Mortgage) Contingency

A letter of pre-approval is not a loan. In the process of formal underwriting (usually 21 to 30 days) the lender gives the buyer a critical examination of his finances.

The loan may be rejected in case the buyer loses his job, takes on new debt or the lender increases its guidelines. The buyer then quits the contract and the seller is at liberty to seek out.

3. Appraisal Contingency

The lenders will insist that a licensed appraiser verifies that the value of the home is justifying the loan amount. When the appraisal is lower than the purchase price that was contracted the buyer can make up the difference in cash, request seller to lower the price or simply abandon the deal.

Sellers that are not ready to compromise when there is a shortfall in the appraisal are likely to have to relist and attract new bids.

4. Home Sale Contingency

The purchase made by some buyers will be subject to the first sale of the existing home. This puts the seller at a great deal of timing risk – which is precisely why we have kick-out clauses.

The Kick-Out Clause: A Seller’s Built-In Safety Net

A kick-out clause (also known as a 72-hour clause or a continued marketing clause) is a provision in which a seller continues to market their home, despite it being accepted subject to a condition to sell the home.

This is how it works in practice: An offer is made to the seller which is non-contingent and stronger than the previous contract, but the seller still has the first contract in place; the seller then formally notifies the first buyer. The buyer now has a deadline of not more than 24-72 hours to either waive their contingency and buy, or stand aside to allow the seller to conduct business with the new buyer.

It is absolutely legal and commonplace. Sellers should however be cautious: when the initial buyer decides to waive the contingency but he has not even sold his or her home it can be seen that he or she might not be able to get financing. All waivers should be accompanied by updated proof of funds or a new pre-approval request by the sellers.

Understanding MLS Listing Statuses

Not all “under contract” homes are equal. An MLS status can be used to know precisely where a deal is at – and how much room there is to allow a backup offer to be successful.

In terms of a backup offer, you have the highest chances on homes that are under contract as Active Under Contract or Contingent -Continue to Show. Homes that have the label of pending have been cleared of contingencies and there are backup offers in long shots.

What Happens If a Seller Breaks the Contract?

In other cases, being remorseful that a superior offer has been received, sellers just choose to walk out of their signed contract. It is called seller remorse– and to do it is costly.

Specific Performance Lawsuits

Because no two pieces of real estate are exactly alike, courts recognize that money alone may not be enough to compensate a wronged buyer. That’s why a buyer can file a lawsuit for specific performance — asking a judge to literally compel the seller to complete the sale at the originally agreed price.

If the court sides with the buyer, the seller is legally required to show up at closing, sign the deed, and transfer the property — regardless of any better deal they think they found..

The Lis Pendens: A Seller’s Worst Nightmare

Upon commencing a particular performance suit, a buyer is also capable of registering a notice of lis pendens – a formal notice in the county’s public land records to the effect that the property is ownership litigation.

This title is at once clouded by this notice. Title companies will not provide a clean policy on a contested property, and that is to say that the seller will not be able to close the deal with the new buyer, and the new buyer will not be able to obtain a mortgage. In the meantime the property is in effect frozen until the lawsuit is resolved.

Financial Damages

In case the title has been already transferred illegally by the seller or the buyer would rather receive monetary compensation rather than a forced sale, the buyer may then seek monetary damages instead. This may encompass contract price versus the actual market value of the home, as well as, the amounts of money wasted in the form of inspection fees, appraisal fees and temporary housing.

State-Specific Rules That Change Everything

Real estate is regulated on the state level, and the regulations are quite different. An article such as blanket statements that sellers are never allowed to accept a second offer under contract, is actually incorrect in the law of various states.

Texas: The Option Period

In Texas, the buyers buy an period of negotiable days called as an Option Period in which they can cancel any reason at the cost of non refundable option fee. The seller has no option but to abide by the contract in this window, and no longer have the option of accepting an alternative offer, despite the buyer being free to back out anytime.

California: Active Contingency Removal

California contracts do not have an automatic expiry of contingency. In case a buyer fails to meet a deadline, the seller has to send a formal Notice to Perform, and only after this, a waiting period after which the buyer may cancel. The sellers that neglect this step risk being subjected to claims of wrongful cancellation.

New Jersey and New York: Attorney Review Period

In these states a new contract under signature is placed into a 3 business days attorney examination period. The attorney of either party is free to cancel the contract with no penalties at all during this period. Technically therefore, a seller in New Jersey or New York can cancel and take a better offer legally as long as he or she does so within that review period.

There is no decision that you should make without consulting a local real estate attorney who can help you understand the laws of the state with regard to contracts.

Smart Strategies for Buyers When a Home Is Already Under Contract

The fact that a home is on contract does not mean that you have lost your chance altogether. The following is what you can do:

Submit a Backup Offer

A backup offer is an executed, fully binding purchase agreement that is in second place. Should the main agreement fail, your offer automatically goes into effect- no relisting, no bidding war.

One important point: be sure your backup offer has a unilateral withdrawal clause that allows you to withdraw without penalty prior to the seller promoting your offer to primary position. In the absence of this cover, then you might be legally liable to have two homes at the same time..

Stay Informed on the Deal’s Progress

Request your real estate agent to keep a watch on the listing. When the status is reset to “Contingent” once again, to the status of Active, then the main deal has probably fallen through the floor — and you should be prepared to act swiftly.

Frequently Asked Questions