What happens if the appraisal comes in low?

Good question. I had just that scenario happen to my buyers recently. It's the first time it ever happened to me.
The property in question happened to be in an older part of town, where homes are being bought, fixed up or rehabbed and lived in. There is still solid appreciation in this area and the last thing I was worried about on this particular transaction was the home not appraising for the purchase price listed in the contract. In fact, I told the buyers I thought they had an easy 10-15K in immediate equity.
The bank, however, felt differently.
More to the point, the appraiser hired by the bank felt differently and put a number on the property almost 8% less than the purchase price we had negotiated.
It wasn't a fly by night appraiser either. It was a company many banks use to do their appraisals for mortgages. I felt they didn't do the home justice for a couple different reasons:
1) The lender and appraiser, in my consideration, weren't very familiar with the area and the appraisal was ordered very late in the process, meaning it had to be done at the last minute and be done quickly.
2) As a result, I felt they didn't appreciate the neighborhood nuances of location and how much each degree of rehabilitation adds to the home. The comparable properties the appraiser used, while similar to the home in question, were way off in other ways.

Regardless of why it happened, my buyers were not able to purchase the home at the agreed upon price which they felt very comfortable with because the appraisal came in low. The seller was not willing to sell it for 8% less than the agreed on price. In the end, my buyers have had to go to another lender and so far, so good. This lender works in the area regularly and has been able to come up with what will probably turn out to be an even better financing package without any worries in regard to appraisal.
The original bank was just doing their job. They knew the couple purchasing the property, liked them and had them approved for an even bigger purchase should they chose to go that route. They can't lend on a home that doesn't appraise for the contractual purchase price because that property is what is securing the loan. If the home isn't worth the money they're lending for its purchase, even if they buyers are completely comfortable with the purchase price, they can't get their money back should the buyers default on the mortgage.
For most banks, it's that simple.
It's possible a mortgage broker familiar with the area could be more relaxed when it comes to an appraisal that's low or maybe they may have the ability to be more creative in the financing to secure their position.
It all goes to show that even if you and your Realtor have gone over the comps and feel good about your purchase price, love the home, and are happy about your terms, it could still not end up closing because of the appraisal.
Questions? Call or email me.