If this home is for his principal residence, unfortunately, there isn't a loss he can take for "loss on a principal residence."
HOWEVER, if this property was intended to be an investment, then he does have a investment loss. He's going to have some limitations, most likely, on how much he can deduct per year. But, something is better than nothing.
Best way to prove this is to show that he is an investor by showing other investments.
I didn't do any research, so this is off the cuff, and please take it as such - the point I'm grappling with is whether this would qualify as an investment loss (and thus subject to offset of investment income) or a real estate loss (and thus subject to the $25K loss if adjusted gross income is $100K or less). Safest bet is the investment loss route - if he doesn't have investment income (interest, dividends, short-term capital gains), the loss just rolls forward to future years. And he's got some great incentive to go create some investment income! It'll be tax free for awhile to come.
Andviv, what city was this in? I'm just curious. My husband and I had a similar type deal on a couple of spec houses in a new development in S Phoenix area. We only had $15K down on each and were going to close anyway - figuring the market would come up eventually and we didn't want to lose the $30K. We're about to sign and the builder called the title company and delayed the closing. They ended up dropping the price to lower than appraisal without us asking them to. (Boy, lesson learned there - always ask)
The biggest cost, unfortunately, might be to your friend's confidence. That's what I'm worried about. I've seen people lose relatively small amounts of money and then vow to never invest again...and the cost is much, much greater.