The bank will not evict you prior to the foreclosure. Often the auction's winning bidder will offer 'cash for keys' to the property tenants. The amount they offer will depend on the property value, the property condition, and how much time the tenants need to move out (they are usually given a couple of choices such as one amount for a move out in two weeks and usually zeroing out for a longer periods of time. If the tenant doesn't leave the property free of debris, damages the property, or over stays the agreed time period the deal will be off and the new owners will evict. The tenants need to make sure that every thing is in writing.
Part of the reason your short sale was denied was that the banks want the transaction to be 'arms-length' meaning that there are no ties between you and the other parties to the transaction (which can allow for side deals that do not benefit the lien holder).
If you still have time before the foreclosure date, you may want to try for another short sale approval with a new buyer or even a mortgage modification.... more