You can spend time and money on deals that don't go anywhere....that's part of the business...but you want to avoid spinning your wheels.If a seller sends you a tape and says something like..... 

For instance, with homes, we really didn't want to take back/evict, if we could avoid it.

@Jonathan Godes the advice you provided is incorrect, however no fault to you as the code surrounding a situation like this is extremely complex :)@Kurt Pourbaix To answer your question, if all you are doing is lending then this will be considered a passive activity for you so your profits will completely avoid the SE tax aspect.

Some buyer's agents also ask for a smaller fee from the buyer (depending on the deal), but this is negotiable and you should be able to avoid it. 

My question is what is the best way as far as avoiding paying the highest taxes for both parties to make this transaction?

I do write down the details of all my failure events, to build a system to avoid that same event.

Thus avoiding the issue entirely.

That will surely avoid some headaches down the road.

One thing to consider, there is a high possibility switching to a 30 year mortgage will only reduce costs enough to avoid a negative cash flow.  

Seller avoids the foreclosure so they can qualify to buy a home sooner.