This is in Mesa, a 'burb of Phoenix. We really liked MLS No. 4486765, which is a short sale, and put in a full price cash offer, and didn't ask for any closing costs or a home warranty as is customarily done in Phoenix. The seller's agent replied that we had to agree to a $500 nonrefundable clause and is going to run some sort of auction deal. Basically, everyone has to submit their best offer by 5 pm on July 5 and he will reply to offers on July 7. I thought he was trying to screw us and withdrew our offer.

What's the best way to handle this situation in the future? We want to buy, but don't want to be involved in an auction.

Some properties just require an auction, remember you want the lowest price but they want the highest. Just place your best offer and hope for the best.

I would hope that the non-refundable aspect only applies "IF" you happen to be lucky enough to be the winning bidder; not a Fee for simply allowing you to submit a bid.

That is correct. The nonrefundable provision only applies if my offer is accepted, whereupon the nonrefundable amount is immediately deposited into escrow.

To be fair though, I think the seller should be required to deposit an equal amount and be forced to pay me if it takes longer than 60 days to get approval from the seller's lender. That house has been listed for sale for more than 300 days and the previous buyer walked.

Hi Chaikster, this highest and best is a very common situation in our market now. Like Alabama said, just put down your best offer and hope it's best. It's next to impossible to lose that $500. Your agent would have to be a major bonehead to lose it. It's just there to make the seller feel comfortable.
At my last mastermind with other top short sale agents, we all agreed that $500 is a dumb idea and ends up wasting the seller's time because buyer just waits 60 days to cancel instead of when they would normally want to cancel.
Best of luck!