Since all we can do here is speculate, that's exactly why I think the home inspection was requested. Home inspections have become de rigueur in real estate deals over the years. Lately, though, with the housing market crunch some buyers are waiving inspections just to have their offer considered. So the onus is on the seller to provide one.
I believe, if the Shermans were still alive they would have sold their property with the realization that who ever bought it was going to demolish it and build another home. It happens with such regularity in Toronto, especially in these upper income neighbourhoods.
When I used to drive to work downtown I'd use Avenue Rd. Sometimes I'd take side streets to avoid traffic. There'd be lots of sleeping policemen to slow down the drivers but it was evident driving down streets off Oriole Pkwy and Avenue Rd that many homes built in the 1930s, and they weren't small, had been torn down to build huge homes right to the lot perimeter.
For the Sherman home to withstand the wrecking ball, at 12000 square feet it needed a buyer who liked the quirks. Not too many buyers willing to plonk down $7 mil, imo.