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Mahy died in 2012 and had lived in the three-bedroom house in Governors Bay on Banks Peninsula since 1968, where she raised her two daughters.
The cottage has a rating valuation of $640,000 and is on the market with a deadline sale of June 11.
Her daughter, Penny Mahy, told The New Zealand Herald the house is owned by her younger sister Bridget and after nine years, she has made the difficult decision to sell.
When asked what she thought of the proposal to turn it into a community facility and writers retreat, Penny Mahy said they absolutely love the idea.
"I know since the house has gone on the market a lot of locals are banding together and hoping to save it and preserve it, which would be lovely."
"It's probably a little bit excessive for most families these days but when we grew up in the house basically every wall was covered in books."
Margaret Mahy owned hundreds of books that were stacked along 170 lineal metres of book-shelving, she said, most of which now belong to Penny and Bridget.
"She had an amazing collection. She brought everything she could find by other New Zealand authors as well.
"It's probably a fabulous flat catalogue of first editions of pretty much everything written for children or young adults in New Zealand."
If the house is purchased by the community, Penny Mahy said they would be '"certainly" consider donating the books.
"At the moment, they're in storage in cardboard boxes. So much of Margaret's personal identity was her library.
"It would be lovely to see that collection saved and be available as a resource going forward."
Margaret Mahy wrote more than 160 picture books, novels and collections of short stories before her death.
Governors Bay resident and founder and director of Christchurch's Hagley Writers' Institute, Morrin Rout, said a group of locals would like to purchase the house and make it available for schools and general public as well as establish a writer in residence programme.
"It would be a huge shame if we were to lose this opportunity to own it and we are working as quickly as we can to find support and advice on how we can retain this taonga and have a permanent and very personal place to remember and celebrate this remarkable and greatly loved writer."