You and your partners have had your eye on a particular neighborhood for several weeks now. You’ve already made your first real estate investment there and your agent apprised you of a potential pocket listing hitting the market. The property is negotiating valuenot yet ready for the listing but you want to be able to make an offer before it officially hits the MLS.

Sure enough your agent calls you and says for the right price, you can make an offer on the home you want. So you do. Your offer is higher than you’d like to pay but you don’t want to risk losing the deal altogether. Your offer is accepted, the contract signed and the bank proceeds with your application and orders the property appraisal.

After a few days, the appraisal is completed but the value says only $190,000, not $200,000. What happens when an appraisal is below the sales price? The first thing that will happen is the listing agent will contact the appraiser to make sure there were no other sales that were missed that could support the value. If that fails, there are three basic choices: walk away, renegotiate the price or come in with the additional $10,000.

Lenders establish a loan basis on the lower of the appraised value or sales price. If the bank will issue a mortgage at 80 percent of the value of the home, in this example if the appraisal and sales price were both $200,000 the bank would require $40,000 as a down payment. Yet if the value is in fact $190,000 you would need to bring in $40,000 + $10,000 (difference) = $50,000. Is that what you really want to do?

Probably not but you’ll need to do the math first. If similar properties in the area indicate a $190,000 value and is supported by solid comparable sales, it’s likely you’re overpaying for the property. You can ask the seller to reduce the price by $10,000 but if that doesn’t happen then your only choice is to walk away and find the next deal.