You can issue a legal notice to both the Sri Ram Finance and the seller demanding the return of the amount you have made towards payment to first party at the behest of the second party on an oral agreement for sale of property. 

You may state that since the second party is not capable of executing sale deed in your favor due to his personal liabilities with the builder,  you are canceling the agreement with the seller hence the finance company to return your money and it is at its liberty to take action for recovery of home loan from the seller/borrower directly 

If the demand is not complied with then you can approach court for recovery of your advance amount from the finance company and you can implead the seller and necessary party to the suit. 

First send a Legal Notice to whom you paid the amount i.e. your neighbour, asking for the money. If he doesn't comply then file a suit U/o XXXVII of Civil Procedure Code for the MONEY RECOVERY.

Serve a copy of the suit along with the Legal Notice to the Shriram Housing Finance Limited to inform them that you have taken an action to recover your money.

You made a big mistake by transferring the money before the Registration in the form of RGTS. RGTS is generally recoverable. The only way is by filing a MONEY RECOVERY SUIT  U/o XXXVII of CPC.

As per as the Auction is concern I will suggest you not to participate in the bidding. If Shriram Housing Finance Limited still requests you to participate send them a Formal Notice stating them that unless & until you are getting your money back you will not participate in the Auction.

If you win the bid you cannot deduct initial amount paid and pay balance amount 

you would not get refund of initial amount 

you have to sue the owner to recover your money 

You can proceed against the borrower independently.  Obtain a stay for this auction till your dues are cleared.

G.Rajaganapathy 

High Court of Madras

The whole deal was fraught with defects.  This is not how auction sale is conducted. 

After perusal of the agreement with the finance company further advice can be given. 

Dear sir,

The first step would be to issue a legal notice to both the parties. This non-payment is a breach of oral contract that you had. You shall clearly lay down you reasons for not carrying forward the transaction and validate the same with the help of reasonable cause wherein you can say that owing to the problems between builder and seller, you wish to withdraw from the transaction.

However, if your notice does not receive any response, then you shall institute suit proceedings against them for recovery of your money. Thank you.

- Since, you have paid the initial amount after entering an agreement with the seller , then the seller is only under obligation to refund your amount , if the finance company refused to adjust the said amount . 

- You should issue a legal notice to the said seller for getting refund of the amount. 

- Further, if the said finance company has also issued you any approval , then only you can take legal action against the company. 

- Even , if you will participate the auction and got bid , then also bank will not adjust the said amount given to the seller , as bank can adjust the paid amount only. 

- Further , you have one time settlement letter , and paid the same , then you can get an stay order on the auction proceeding , after filing a suit before the court.