An appraisal is a process in which the value of a home is established. If you find a house you want to buy, make an offer, and it is accepted, then you have what is called a ratified contract. A ratified contract means that you and the seller have agreed on a sales price, on a settlement date, and other conditions. Next, the REALTOR® will get a copy of that signed contract to your lender, who will order the appraisal. The lender wants to make sure that the house on which they are lending money is worth the purchase price.

In normal real estate markets, determining the home’s value is a pretty straightforward process: the appraiser looks at the home you want to buy, and compares it to other sales of similar homes in the neighborhood. They would consider what has sold, for how much it has sold, and also what is on the market, but has failed to sell. Typically, the appraiser would visit the house and take a tour. They would carefully examine the house in terms of size, and condition, and upgrades. Based on all those factors, the appraiser will determine the home’s value, and report back to the lender, telling them whether the house is worth the selling price, or not.

That is, this is how appraisals are handled in a normal market.

But as we all know, today’s market is anything but normal. For many months now, home prices in many parts of the country have been falling. And some lenders want to know not only what the house is worth, they sometimes want to know what it is going to be worth, in six months or a year’s time. And if an appraiser tries to determine property value into the future, sometimes the value projected will kill the deal because the appraisal comes in much lower than the sales price.

If you are buying, you want to get the place for the best price possible. If the appraisal comes in too low, you will not get the mortgage, and perhaps not get the property at all. Here is what to expect: if the appraised price comes in lower than the sales price, the first step belongs to the seller. They might be asked to lower the sales price, to match the appraisal. If they do it, you might just get the house for less money. If they do not lower the price, then you might be asked to come up with the difference. If you have a lot of cash, and you are willing, that is your decision. This is a good time to consult with a REALTOR®, to get their advice.

What can you do if your appraisal comes in low and you want to walk away? In many cases, an appraisal clause in the contract, or your financing clause, might give you the right to cancel the contract. Again…talk to a REALTOR® before placing a contract on a house you want to purchase.

You never want to pay too much for a property and the appraisal can help protect you from being overcharged at the settlement table. But if you truly believe the appraisal is wrong, then talk to your lender. Tell them your concerns. They might be willing to do a second appraisal and keep the deal on track.