But I'm nervous about losing this place if a better offer sneaks in.

People are losing properties today, yesterday, and tomorrow.

I recommend setting up keyword alerts for each area as they are discussed in the forums daily with advertisements posted in the BiggerPockets marketplace hourly.One thing to note when looking at the individual markets, you can make or lose money in any market.

So if he fails to sell it he gets nothing and loses whatever earnest money he gave the Seller. 

If you don't have any money and you can't get a bank to finance you, then it is a really bad idea to go into debt on an investment that could lose money. 

Some reasons a local municipality may not want this is if the majority of the neighborhood is zoned duplex or multifamily and also they will lose some tax income from losing one unit among other reasons.

I have a clause for liquidated damages ($50 each day delay goes out of his pay), but this is still causing me to lose time. 

You would likely lose in court. 

In other words, yes it is possible for purchaser via auction and lose money if you paid fees/premiums that cannot be passed onto the owner redeeming.  

@Arshad Khan Don’t Pat all cash unless you want to lose money and get a lower return.