The way house 2 was auctioned is certainly not unusual, and it was not the result of 'two auctions'.
When I bought my house at auction, I was the highest bidder but it did not reach the reserve. The auction was paused and I was pulled into a back room and advised that I needed to increase my bid to the reserve price to have any chance of owning the property. I was then told what that magic figure was, and I agreed to increase my bid to that level.
At that point, I initially thought I had just bought the property, however when we returned to the auction room, my higher bid was announced and the property was placed on the market, but anybody else in the room was free to make additional bids. As it turns out, there were no more bids and I won the auction at the reserve price, and the house was sold "under auction conditions" - ie an unconditional sale.
Had I not increased my bid to the reserve level, The auction may have resumed and then passed in for post auction negotiations with one or more parties. Any sale as a result of those negotiations is not necessarily "under auction conditions".
The real issue here is that the organisers of the Block auctions allowed another auction to proceed (Stace & Yanita's) while they boys' auction was effectively paused. The auctioneer did not make this clear at all, using the phrase "passed in" when in fact it was anything but.
Stace and Yanita were indeed ripped off, but not because the boys' house was auctioned twice. It wasn't, but the auctioneers should have delayed Stace and Yanita's auction until the boys house had either been sold or properly passed in as per the correct definition.
Whether the reserve on the boys' house was lowered during the negotiations phase I am not sure. I'd have to go back and review the footage. If it was lowered to meet the existing highest bid, then that's a shocker. Their auction should only have been allowed to resume if the highest bidder had upped their bid to meet the pre-ordained reserve. But this should have all been done and the deal concluded before Stace and Yanita's auction started.
I suspect the show producers are to blame for that - they can't have 20 minutes of dead air while negotiations are going on behind closed doors, so they clearly chose to proceed with the next auction, oblivious to how this could seriously alter the outcome.