Business woman Yasmin Milburn was in the middle of selling her £260,000, five-bedroomed home on Colonsay when it was destroyed in the early hours of yesterday.
Ms Milburn hit the headlines this summer after she stepped down as the island's only police officer just five weeks after taking up the job.
Ms Milburn, 52, and partner, Trevor Crowe, 59, owned Col na Sithe, a four star B&B with views over the sea. But the property has been reduced to a shell after the 4am blaze, which volunteer firefighters could not contain.
Two firefighters had to leave the building because of the damage to the structure. Moments later the roof collapsed, forcing them to tackle the blaze from outside.
School bus driver, Kevin Byrne, 66 said: "I understand the pair of them and their dogs are safe. The house has only one wall left.
"I saw the fire brigade move past around that time, but it was dark so I could not really see what was happening. It is a horrible sight, it is as bad as it can be - they have nothing left.
"The family is sheltering in a friend's house. They have lost everything. They will need accommodation, food and a means of communicating so they can get everything sorted. The community will help them with that."
Mr Byrne said the last property fire of any note on Colonsay was more than 40 years ago when a farm house was totally destroyed.
"A disaster of this nature is a shock to everyone, it's dreadful," he said.
A spokesman for Scottish Fire And Rescue said: "We received a 999 call from a member of the public shortly after 4am, reporting a fire at a house in Upper Kilchattan on the island of Colonsay.
"The island's volunteer unit was immediately mobilised and reached the scene around 4.30am.
"The incident commander sent two firefighters into the building wearing breathing apparatus and equipped with a high-pressure water jet.
"Due to the unstable nature of the structure the decision was made to withdraw this team and conduct firefighting operations from outside the building. The roof of the building has since collapsed and the crew are continuing to dampen down the structure."
A spokesman said the cause of the fire was unknown and there was nothing to suggest it was suspicious.
Ms Milburn, who runs the Hebridean Isles Trading Company, selling wool products, was appointed as the island's special constable on June 19, but stepped down on July 24.
Her first, and only investigation, followed a heated row at the island's pub involving Mr Crowe, after which the tyres on his £25,000 Land Rover were slashed.
Shortly after that Ms Milburn had a dispute with a neighbour after he used power tools one evening.
The neighbour alleged Ms Milburn had threatened to come back in uniform and arrest him.
She stepped down after Police Scotland bosses assured her the island was largely "self-policing".
Before the tyre-slashing incident the last recorded crime on the island was the theft of £60 from the home of an elderly resident in 2006.