Appraisal significantly lower

[Vlad S.]

I am getting ready to put an offer in a “hot” / sellers market (NJ). I intend to finance the purchase with a conventional 30y 20% down loan. I am worried that after the offer gets accepted, the appraisal value might come in significantly lower than the contract price.

I understand that discrepancies happen, and I’m not concerned about a small gap (10-20k), however, if the appraised value would come in significantly lower (50-100k, or more), then I would simply not be able to afford this property (given my then lower down payment, and worse mortgage interest rates).

I am wondering if anyone has any experience with what happens in such cases? I understand the conventional ways of dealing with it: “get seller to lower the price”, “come up with the discrepancy”, “appeal the appraisal/get reappraised”, or even the less conventional “arrange for a secondary loan”. However, would I be able to back out of the contract should that happen? I asked my RE agent, and they didn’t give me a very clear answer. When I suggested adding something specific in the offer that says “buyer can back out if appraised value is less than X”, they suggested to deal with this after the offer stage and at attorneys review, and use the brokerage’s standard/unmodified contract until we agree on the price.

Am I overthinking this? The offer does have a financing clause, but I’m not clear if it would be in play here. I’m less concerned about losing out on the house, and more concerned about getting into issues with the seller where we agree on the price, but I won’t be able to get a standard 30y 20% down loan due to appraisal value coming in significantly low (again, not talking about 10-20k difference here). Has anyone encountered a situation like this before, and what ended up happening?

Thank you for any input.