Now, more than ever, I see concern and disparity over a home's contract price and the appraisal. As of August 2013, this issue was important enough to make the pages of Florida Realtor magazine. In short, after buyer and seller (and their representation) have negotiated to a fair price it is relatively commonplace to have an appraisal come in too low, thus killing or significantly changing the deal.
There is no way to avoid this process, but there are ways to overcome it. It comes down to common sense and diligence. The professionals (Realtors®) you work with and the perspective you bring to the table are keys to successfully moving forward.
So why are appraisals a rising concern? The first thing to understand is that the rules have changed. Appraisers must evaluate properties in the context of market value as defined in the Federal Register, Volume 75, Number 237, Page 77472. In short, this means they must value the subject home to "the most probable price" instead of "the highest price".
One can easily see the conflict in that language. In today's competitive situation, most houses are being sold after multiple bidders and several counters, near the top of their range. An appraisal is defined to be at the center of a bell curve, not near the right side.
Therefore, an appraisal below a contract price does not mean the home isn't worth the appraised value. It means it is not worth it to the lender in the context of market value. Maybe a hard concept to grasp, but what this means is that the value is in the eye of the beholder, based on their criteria. Banks certainly have different criteria than the Buyer.
Just like the government's market value is about 40% below where most houses are being sold, appraisals are likely to continue to be slightly lower than contract prices for the foreseeable future.
What you need is to have intelligent Realtors® to assist in overcoming this disparity. Whether it be challenging the appraisal or creatively solving the difference, you can close on a house even with a low appraisal.