Very good question, and of course the buyer will expect the seller to reduce price.
BUT
Buyer's agent should have cautioned the buyer against overpaying to get the house if the house wasn't going to appraise, and should have anticipated the possibility by researching the market carefully.
There should have been dialogue/interaction over what could happen and what the buyer would expect be done about it before submitting that offer.
Most likely, the only choice the buyer's going to have is whether to come in with additional money or cancel the transaction.
Hopefully there's an appraisal contingency in the contract.
Don't overshoot the target, triggerfingers!

Buyer made the offer, afterall. Either they want to buy the home at that price or not. Buyer should have been made aware of this possibility when bidding up the price of the house. 

When we go in high to win a bidding war, I always tell them about this very scenario to be certain that they are willing to make up the difference outside of the loan (in addition to their down payment) - before submitting the Offer.

I also mention to the listing agent that we may have trouble with the appriasal and ask if his/her sellers are aware. 

That said, it's the sellers' option but, a large majority of time, the buyers & the sellers meet in the middle.

 Challenge the appraisal. 

I would not "expect" the seller to accept a lower appraisal value. They could of course, if they were open to that. But the choices are: seller comes down in price, buyer kicks in the extra money, buyer and seller negotiate a split in difference, or the buyer walks.

In your example above, unless the buyer wants to kick in the extra money, they'll walk.

No, not always will sellers acept a lower appraised price. The buyer can always come forward with the cash to bring the purchase price up to the contract price, or everyone can call it off.

I've had it happen. Seller has lowered the selling price to meet the appraisal.

Seller has not met the appraisal and buyer walked.

Buyer and Seller worked things out via compromise or closing credit

They should have been told of this possibility up front and already been ready. The choices are dispute the appraisal with hard evidence, pay the difference or move on

I expect the sellers to come down something...and they always do.

Sure, go ahead and put it back on the market and wait for someone who needs closing costs too...and has less money than my client.  Or maybe seller should not negotiate and just wait for a LOWER offer.

A bird in the hand is always better than two in the bush.

Last month I put a deal together that was overpriced...I called the listing agent B4 making offer and asked her if she could justify the value, because the property was priced too high...she said "No, I can't.  It is overpriced. Yes, you are right...it will probably not appraise, but that is what the seller wants" . By some miracle it did appraise...barely...the appraiser stretched.

Whatever happened to full disclosure?  What is the listing agent going to say when the next buyer agent asks why the deal fell through?  Are they going to lie and say that the buyer was not qualified?

This is a problem: when supply is limited, listing agents will tell the seller everything they want to hear in order to get a listing...

Eve

Ps: and NO, it is not the buyer agents job to challange the appraisal...

If the seller was reasonable he would lower the purchase price. Probably will be an issue with every buyer. 

Oh the "joys" of multiple offers!!!    I second what Candice A. Donofrio  & Nina Hollander said.  

In Texas put more downpayment or walk away.

I've coached to be ready to come up with more money.  Even in a rapid market, appraisal values have difficulty keeping up.  One technique I've run into is with multiple offers.  If the offers are competitive, revealing the offers to the appraiser can show that the market wants this house for a bigger value.

I am going through this with a seller now.  Buyer jacked up their price to include their out of the norm cloisng cost and now buyer doesn't want to lower their closing assistance.  Seller will lower price IF buyer agrees to lower closing assistance.  

It's all up for renegotation when the appraisal comes in low.  If you truly want the house, find a way to stay in the deal.

Buyer has the option to proceed by making up the difference or to walk away. They should have been told this was a possibility and what the options might be.

Overpay or walk . Or grab the difference in personal property

No I don't. I feel it is my job to get the appraisal up to the purchase price. I often go get the appraisser & see where it all went wrong.

In your example, the buyer should go find another house.

In this example, seller is going to sit there waiting for another appraisal? If it's FHA it will hang around for 4 months.

Depends on the contract and whether the buyer will get a mortgage and the type of loan.i have heard of sellers who will wait another year rather than sell. I agree with candice

Hopefully you discussed this possibility with the buyers prior to making an offer that you felt may not appraise. If they have the money to do this and want to its their choice if they don't want to its their call again. I would probably point out to the listing agent letting them know that if the seller doesn't come down and these buyers walk the appraisal may not allow them to sell at this price to others either, unless they are willing to cover it out of pocket. Best of luck Praful Thakkar 

I like Candice A. Donofrio's answer...  

Walk away

If the appraisal comes in lower than the price and the seller refuses to lower the price,  the buyer has two options.

1.  The buyers can make up the difference in cash or the buyer can walk away from the deal. 

Depends on desire and finacial ability.

I'd ask them to walk, it's a bad idea to over pay in this changing market.

If I were a listing agent and people were overbidding, I'd be sure to advise my client to counter with either an appraisal contingency or an "if appraisal comes in at __________ or below, buyers will pick up the difference"

The buyer should be working with an agent that will prep them for that scenario, and explain why they may want to "overpay" or not depending on their situation.

If the appraisal has no errors as to square footage or room counts, it is likely the opinion of value is not going to change. How much off on value? One percent maybe fine - ten percent I would walk. Markets are showing signs of cough cough weakening

Whatever the buyers want to do and can afford to do.  In my market sellers rarely, if ever, reduce the price. Sellers expect the buyer to pay. If the buyer does not ...another buyer will. 

If I don't think it's going to appraise in multiples with offers getting nuts I advise my seller to counter they waive the appraisal contingency or not to accept that offer.  Stupid to take an offer for a contract that isn't going to close.

Depending on the type of loans, here in Texas there's an addendum for this so it depends on what both buyer and seller agreed upon in the addendum.  Without the addendum seller can select to lower the price, keep the price, or split the difference with the buyer.  I guess the question is how motivated the seller is in selling the home now vs putting it back on the market.  Whether buyer has a lease that is expiring in the next couple of weeks etc.  In a hot seller's market this is very common and many sellers used to ask buyers to write something in the contract that buyers will make the difference if the home doesn't appraise.

Praful,

Candice A. Donofrio said it perfectly!  

In this case, our buyers typically make up the difference with cash. Otherwise they don't get the home.

I would most have likely prepped my buyer that this might happen so the gameplan would have been in place.  It depends on how much lower it came in.  If it were a few thousand dollars that is one thing but twenty thousand wouldn't be doable.  We sold a home for $940,000 and the appraisal came in at $800,000.  The buyer came in with $140,000 in cash to make the deal work.

Buyers should poney up the extra cash, challenge the appraisal or get a new one done. 

Depends on the circumstances;  we have a pretty robust market and it's difficult sometimes to prevail in a multiple offer situation if you do not waive the appraisal contingency, so it's not a situation we face regularly. 

In our rapidly escalating market, Praful Thakkar, properties often do not appraise. In a multiple offer transaction, it is likely the buyer who is in contract or other’s who made offers will bridge the gap created by the short appraisal. Depends on how badly the buyer wants the property and their financial capability.

Did the agent educate the buyer about overbidding and what might occur with an low appraisal , or did they just Expect  the appraisal to protect them ?
Have come across a few offers recently where I had the conversation with the buyers agent, asking what happens if it doesnt appraise  and theyre response was , "well, we will cross that bridge when we come to it.. it shouldnt be a problem"  I also make sure to explain to seller what range I "think" the house will appraise, and what the options are IF it doesnt..

When faced with that scenario we include language in a counter offer that OBLIGATES the Buyer to pay the higher price or FORFEIT their earnest money...

It is up to the buyer. I had an appraisal come in low, after warning the buyer it would happen. The bank would not budge and the buyer paid cash! Go figure!

Most of the time the seller lowers the price or the buyer walks!

In CA CAR there is a box chk the sale is NOT subject to a loan meaning to get a house most sellers want you to check that box before offering to you. That is too bad you lost your EMD. Why are you such a wimp buyer?  

What should a buyer do?

How much does the buyer want the house?  Often the buyer has no choice and find themselves completely tapped out. 

If the listing agent allowed the seller to be harmed by the financial or lender selected by the buyer, then the outcome is a price beat-down.  The smart listing agent will have addressed the appraisal issue in the purchase offer AND kept buyer 2 and 3 ready to take action.

How much does the buyer want the house?

Your buyers will need to make the decision.

Agree with Nina & Candice!

It is the buyers' decision.

Hopefully there is a clause in there to cover the buyer to be able to back out if need be

Review the appraisal for mistakes. Update my own valuation to determine which is more in line with reality. Determine my clients commitment to the property, discuss the options and proceed as they choose.

I wouldn't expect seller's to drop price.  Multiple offer scenario to seller means that seller probably thinks that maybe one or more of the other buyers are willing to come up to the price point regardless of appraisal.  

The question is the buyers willing to come up to the offer price?  If the buyer's aren't willing then move on.  Rising market prices and multiple offer scenarios means that buyers should be prepared for appraisals to fall short, and be expected to pay the difference if they really want the home.  Once home is closed it will be the new comp for everyone else later on. 

If the buyer has the means and wants the house, pay the difference and move on. I am hearing more and more sellers refusing to lower to appraised values.

It was a bidding war. In this event I would asked the listing agent prior to all the hype if the appraisal came in low who would be expected to make up the difference.

Have seller and buyer split the difference

Follow the terms of the contract.

I don't " expect" seller to lower price. Depends on how low, how much cash on hand buyer has on hand, and how much do they want the house? Seller has other buyers that might be willing to pay the difference. Buyer can keep looking if they can't find evidence to convince appraiser to raise value.

it depends on how far off the price is.... a couple of thousand, they can split the bill!!!! that's the easiest way for all...

It all depends on the home, the market in that specific neighborhood, the loan (amount of cash the buyer has and is willing to bring in) and many other factors.  Sometimes the buyer will bid up to get into escrow and know this might happen.  Sellers need to look at the big picture and listing agent should prepare for this as should the buyer agent.  

Sometimes this price war to get a home into escrow is not the best scenario...sometimes it is. 

If they want the home, they will honor the price they offered or lose the house.

Decide if they want the house.

What is the financing method?  Check with the lender to see if there are any options here.  

depends on how bad they want the house, if they have the means to make up the difference and the accuracy and quality of the appraisal.

I would tell my buyers to walk, 

Buyer should do all they can if they want the house. The fact that cannot be disputed by seller is every buyer to be will face this scenario. "deal" with it