What do you do when the appraisal on the dream home you want to buy comes in below the price in the offer the buyer has accepted… even as much as 10 to 20 percent below?

Chances are that raising the cash for your down payment and closing cost has tapped you out.  Finding thousands more to make up the difference between  the appraised value and the contracted amount is out of the question.

You’re not the only buyer who has hit the low appraisal snag.  This past June and July, 16 percent of real estate pros reported a cancelation in a sale, mostly due to a large number of low appraisals.

However, you don’t have to walk away.  In fact, some real estate professionals and economists say that low-ball appraisals are pushing values down home values and undermining the housing recovery.

You can fight back.  You have options and chances are you can find a way to make the deal work without increasing your down payment.

Appraisals are largely based on prices recently paid for comparable local properties.  Over the past decade, finding “comps” that accurately reflect values has been a challenge as values rose quickly during the boom and fell just as fast during the bust  Discounts paid for foreclosures and short sales have created a dual price structure between “normal” and distress sales.  .

Finally, when pricing offers today many buyers rely popular online valuation tools, called AVMs or automated valuation models, instead of a comparable market analysis from a real estate professional.  AVMs give fast property value estimates but they often differ greatly from appraised values because they are determined by algorithms using available local price data, not actual inspections of the property.  During this time of record low home values, it’s no wonder that more and more appraisals are coming in below prices that buyers and sellers have agreed on.

It may seem ironic that buyers would want the homes they want to buy to appraise for as much or more than they are willing to pay.  Remember, the purpose of the appraisal is not to help you get a better price, but to protect your lender should, heaven forbid, you default.  The lender wants assurance that your home will be worth enough to recoup their investment.

Even if you have a great job, sterling credit, an adequate down payment and money in the bank, you lender will still want a conservative appraisal.  In light of losses they have taken on the millions of foreclosures in recent years and the tough times many banks have had on Wall Street, lenders are taking no chances these days.  They are more interested in protecting themselves from a loss than they are in making you a loan.

Here are five steps you can take to save your dream home.

1.    Get the seller to lower the price.  By far, this is the easiest solution, especially if your appraisal comes in less than 10 percent of the contract price.  Obviously, a lower price is a great idea for the buyer, but why would a seller go along?  In July, 2011 the average home in America took about 88 days to sell.  Demand is soft and time is money.  Your seller, particularly if they are selling to buy another home, could be in a real bind if you are forced to back out and they have to put the house on the market again.  After all, there is no guarantee that if you walk away, the seller won’t receive a low or even lower appraisal from the next buyer’s lender. Today, many buyers are offering incentives to sellers, such as payment of some or all closing costs.  Lowering the price might be a cheaper option for the seller in order to get the deal done on time. Sometimes a bird in the hand is best.

2.    Ask the seller to offer to carry a second mortgage for the difference.  This solution doesn’t cost the seller anything but the buyer incurs greater debt. If the buyer really wants the home but cannot come up with the difference in cash, making payments or a lump sum payment at a later date to the seller is an option.  After the escrow closes, sellers often retain the right to discount the second mortgage, sell it for less than face value to an investor.

3.    Do your research and dispute the appraisal.  Is the contract sales price a fair assessment of the property value based on a well-prepared comparable market analysis (CMA) from your real estate agent as opposed to an online AVM? Was the appraisal done by an appraisal management company that may have used a less than expert or out-of-town appraiser?

Disputing the appraisal may sound a little aggressive but you might be the victim of a poorly prepared appraisal.   Do some research first and go to war if you have the ammunition.

You have the right to get a copy of the appraisal from your lender and to find out who did it.  What is the appraiser’s reputation?  Have any complaints been filed with your state appraisal licensing agency?  Where is the appraiser based? Did they perform an appraisal in a housing market that they may not know well? Did the appraiser have adequate information about the subject property.  If your appraisal was conducted by an out-of-town appraiser unfamiliar with your market, you have every right to demand an new appraisal.

What comparables did they use?  Ask your agent and the seller’s agent to put together a list of recent comparable sales that justify the agreed-to sales price. Submit that list to the underwriter and ask for a review of the appraisal. Also, ask the agents to call the listing agents of pending sales to try to find out the actual sales price of those properties. Listing agents do not have to disclose the sales price, but many are happy to help out because they could find themselves in the same situation.  Pending sales are more current and are not closed, so the original appraiser would not have access to them.

The key to a successful dispute is data. You will need as much data you can get to back up your dispute.

4.    Ask the lender for a new appraisal.  Should you find that you have a good case that the appraisal wasn’t fair or accurate, ask your lender for a new appraisal, which you may be charged for.

Another strategy is to get two additional, unbiased appraisals and use the average of all three to arrive at a fair price. This is a risky strategy, in light of the fact that another appraisal might not come in higher than your first; it might even be lower if values have fallen.

Depending on how convincing your argument is, your lender has the ability to override the appraisal estimate, which is unlikely, or to order a new appraisal, which is more likely. If a new appraisal is ordered, talk with your agent about somehow splitting the cost with the seller. Perhaps the listing agent and selling agent will split the fee so the buyer does not have to incur additional costs associated with the transaction.  Appraisals cost around $400 or so.

5.    Get your own, independent appraisal.  If you order your own appraisal and your loan is an FHA loan, ask the lender for a list of approved appraisers. Usually the bank will review your appraisal and ask the previous appraiser if they agree or disagree with the newly submitted one.

If the first appraiser disputes your appraisal, the bank may request a third appraisal done by another appraiser, or they may just reject your appraisal.

However, if the first appraiser agrees with the disputes you present, they may adjust their original appraisal and you may get a better price.

If these tactics fail and you cannot make up the shortfall in the appraised value, you may find yourself moving on.  If so, be sure that you were protected by a contingency clause in the sales contract, stating that the transaction can be terminated if the home doesn’t appraise at, or above, the sales price.