1. If you have appraisal contingency, you should use it to cancel the contract and get the deposit back.
2. Then, submit a fresh offer to reflect a price close to the apprased value.
3. It is silly to pay 11% higher; you will "lose" that 11% equity the instant you close escrow. You would have paid $210K for a property that is worth $185K. ("keep the change" is okay for coffee..)
Appraisal came in at $185K b/c of comps. What next? As a buyer (we made an offer) your agent should be using the appraisal to further decrease the price of the home. You do have a Buyer's Agent, right?
What recourse do we have now that the appraisal has come in lower?? Your offer should spell out your choices. Some home buyers decide this is the home for them and purchase even though the home is worth less from the start. Those buyers will have to bring additional funds to the closing because the lender will not.
I suggest speaking with your agent and lender to clarify your choices.