Buying a FSBY when the appraisal comes back low

[S A]

An acquaintance of a friend was preparing to sell their house and let us look at it before they put it on the market. They said a realtor wanted to list it at $800K, but they gave us a price of $750K, because there wouldn't be any realtor fees. We liked the house, but had no idea what it was worth, so they let us have it appraised. The appraisal came in at $650K. We won't be able to get a loan for more than the appraised value (although the bank will have their own appraisal). My husband and I are both okay with paying $650K, but how do we approach this with the sellers? I think we have a good relationship with them and they are honest people. I want to offer $650K and be honest about this being our very best offer, because of the appraisal and financing. My husband feels like no one ever takes the first offer and if we don't give them room to negotiate, they'll just walk away because they'll feel like they "lost" if they take the first price offered. He wants to come in at $600K and negotiate to $650K. I think they'll still feel like they've "lost" because we can't even meet them in the middle and they still have to come down $100K. I'd rather they see we're not trying to screw them, so we don't risk them walking away because they are offended. They know about the appraisal and will undoubtedly ask what the result was. Any advice on which way to do things here?