Honestly, its not that crazy.
Some times houses can be so run down that the renovation cost can be just short of what it would take to rip down and rebuild. Plus with older houses you never know what might be lurking in the walls that could add up huge additional costs like Asbestos or knob and tube wiring. If you also don't like the layout/style of the house, then you can add that to the benefit of doing this.
The actual house likely will cost about 2 million or so in terms of materials and labour give or take, so it's not like she threw out 12 million. The land itself is worth a boatload as well.
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