Got $1 million to buy a house? If you're looking to spend it in a hot neighbourhood in Toronto or Vancouver, brace yourself. You might end up with a dilapidated home in desperate need of major repairs, or even a tear-down.

A Toronto house in the coveted Beaches area went on the market last week with a hole in the roof, peeling paint, and musty plywood flooring throughout. It had no running water because no one has been living there for years.

It was advertised as "in extremely poor condition" and "currently not livable."

Real estate agents bringing clients for a look were advised to pack a flashlight and "go at your own risk."

No matter. The decrepit three-bedroom detached house garnered multiple offers and sold in three days for $1.05 million, more than $150,000 over asking.

'It's scary looking'

"It's scary looking," comments Kate MacDougall, who lives across the street from the million-dollar mess. She says during her two years in the neighbourhood, "We've seen people come and like look in the windows, police and stuff, wondering what's going on."

Nonetheless, she's not startled by the selling price. "Obviously the properties here, people just want them. The beach is right there, it's a beautiful place."

"It's not a big surprise to us," chimes in selling agent Lindsay Wright. "It's the new normal for south of Queen [Street East]," she says, referring to the house's desirable neighbourhood.

It also appears to be the new normal in other sought-after locations where prices are soaring.

In August, the benchmark or typical price for a detached property in Metro Vancouver jumped 17.5 per cent from the year before, to nearly $1.16 million. In Toronto, the typical price for a detached home climbed 12.9 per cent to just over a million dollars.

Million-dollar Vancouver wreck This six-bedroom Vancouver home "fully in need of a complete restoration" just sold for $1.1 million. (CBC)

Two weeks ago, Vancouver real estate agent Shaun Gregory sold a 110-year-old detached house that is "fully in need of a complete restoration. There's no kitchen, it's been vacant for the last 10 years," he explains about the six-bedroom home that borders the city's Downtown Eastside, known for its high rates of drug use, crime, and prostitution.

The selling price: $1.1 million.

Gregory says the new owner plans to restore the home, and he finds nothing astounding about the sale. "It's a great emerging area of Vancouver, a lot of development happening around, so I'm not really that surprised."

The agent with Stonehouse Team Real Estate explains that the lure of cheap mortgages and a lack of supply are driving up prices, even for houses in disrepair. An interior shot of the Vancouver house which hasn't been lived in for 10 years and has no kitchen. (CBC)

"What we've got going on in Vancouver is historically low interest rates and a real lack of inventory, especially in the detached housing market," he says.

While prices are skyrocketing in strong markets, supply is shrinking. In Vancouver in August, the total number of listed homes declined by a jarring 26.2 per cent compared to the previous year. In Toronto, active listings declined by 10.5 per cent.

The high price of limited land

Ian Lee, a Carleton University business professor, explains that in lower demand regions like rural areas, "the value of the residential property is principally in the value of the house, as land is relatively less expensive."

But, he says, the opposite is true in urban centres where demand is soaring and there's a shortage of ready land to build more homes.

The consequence: "The lot is typically much more valuable than the building sitting on the lot," he says. "This results in a perfectly logical situation where a dump of a home can be worth a large amount."

Lee says, for example, in Ottawa's desirable Glebe neighbourhood, a lot is worth on average well over $500,000 while an older, non-renovated house on that land may be worth just $100,000.

'Perfectly rational'

The business expert concludes that for a developer to pay big bucks for a crappy house on pricey land and then demolish it is "perfectly rational."

Toronto agent Wright explains that the uninhabitable home she sold sits on a quality lot with a private driveway and a backyard that backs onto a park — all assets that helped command a good price. She won't reveal the buyer's plans.

MacDougall believes she has a good idea what will unfold: "I think they'll just tear it down and build something new."

Tear-down homes selling for more than $1 million may not be encouraging news for buyers still trying to get into the market. But, for MacDougall, it's something to look forward to.

Referring to the dismal looking, neglected house, she comments, "Nobody wants to live across from that."