At this point I would be happy if the owner agreed to split the difference and come down to halfway between the contracted price and the appraisal value. I'd hate not being able to do the 20% downpayment I planned, it would suck not getting the lower interest rate, but the monthly payment wouldn't be that much more even with the required mortgage insurance figured into it. That seems like the most equitable solution unless the owner is just dead set on not budging at all.
But we'll wait to see what the other side decides to do, if they give up on the appraisal issue and propose another amount themselves. Sure I'd love to get the best deal possible for myself but I'd hate to have it happen when it means someone in a difficult situation gets screwed over so bad. At $65k she'd be taking a HUGE loss on what she paid for the place, almost 50% if memory serves. And it's not like she's selling because she took out a mortgage she couldn't afford, or something else of an irresponsible nature. She had to move to take care of an elderly parent, and needs to sell, and here's someone who really wants to buy and the stoopid bank is ruining it for everybody.
I know they have to protect their interests as well, after all they'd be ponying up the bulk of the money - but COME ON. That appraisal is not right, if that's the industry standard then the standard is crap.