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Kaitangata Volunteer Fire Brigade Deputy Chief Fire Officer Dwayne Thompson said they were called to the Start St property shortly after 10am.
The small three-bedroom house was unoccupied.
About 12 volunteer firefighters from Kaitangata and Balclutha fought the blaze for two hours. A small crew was left on site to aid the investigation and to keep an eye on the charred home.
Queenstown-based fire investigator Stuart Ide examined the property yesterday afternoon.
He said the fire appeared to have started in the rear bedroom, but the exact cause was not known.
Mr Ide said it had been a big fire, and the building was left unstable.
The fire was considered suspicious and was being investigated by police and the Fire Service, he said.
Detective Constable Robin Hutton, of Balclutha, said it was the second suspicious fire on the property.
The Fire Service was called there on June 13, after the shed caught alight.
Det Const Hutton said although the house was unoccupied, a former tenant had several personal items stored there and had intended to remove them yesterday, before the fire broke out.
Police were keeping an open mind, and all lines of inquiry were open, he said.
Police were seeking sightings of vehicles or people acting suspiciously between 8am and 10am in the Start St, Salcombe St, and Eddystone St areas.
''Please, anyone with any information at all, contact the police.''
Those with information should call Balclutha police on (03) 418-0203 or anonymously through Crimestoppers 0800 555-111.
Det Const Hutton said he did not believe the fires were linked to a spate of fires in the South Otago town in 2010.