Also the OP can swallow the pill without chocking (metaphor)!

So in the OP scenario, the buyer at the auction will inherit a 1st mtg of $100k or so, so if you're willing to pay $400k for the property "all in", then you'd bid up to about $300k. 

According to the OP, the tenant has turned three of the bedrooms into grow rooms, cut holes in an exterior wall to install ventilation.  

The OP did mention this is a SFR, so no other units, which obviously makes this consideration more important.All that said, viewing this as a cost you should or shouldn't undertake due to how many months it takes to recoup is, IMHO, the wrong way to view this.

To the OP, your number one and two can be yes, it depends on how your structure your deals, you don't have to use your money.As to consideration, in RE contracts the good faith evidence and the value is reflected in the earnest money deposit more so than other types of contracts dealing in smaller values with personal property.

Bill,I don't see anyplace in the OP with the term "SS" or "short sale" ...

If indeed the OPs offer will get the deal closed and everyone paid, it's possible the seller and listing agent miscalculated the need for a short sale.

It would be great to hear back from the OP on this.

OP, can you at least get the guy's name and city?

To the OP, @Ryan Bolt, consider using private lenders to fund your rentals and then refinance the cash back out using the delayed financing exemption.