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TORONTO (Reuters) - To exit through the back door of Toronto's "smallest house," first fold the Murphy bed back into the wall; it takes up the entire seven-foot width of the bedroom.

Built in 1912, the pint-size "Little House" features one bedroom, a kitchen with folding table and chairs, a living room and a full, if narrow, bathroom. With a living area of just 300 square feet, it was bought and renovated this year, and is back on the market for C$173,000 ($172,000).

"Holy cow, that is the smallest house," said cab driver Kamran Ghuman, after pulling up outside 128 Day Avenue in Toronto's west end. "It looks like it used to be a garage and then they made a house out of it."

Dwarfed between two larger homes, the detached bungalow was bought last spring for C$139,000 and redone inside and out, including a new decorative window for its gabled roof, hardwood floors, new cabinetry, appliances, a stone walkway and gardens.

"It reminds people of a small cottage or what they may have seen in a storybook," said owner David Blois, a property manager who took on the "flip" project.

Many neighbors agree.

"Look how cute it is. It looks like a little chapel," said Marika Wheeler, who has lived down the street for over 30 years and has seen the house change owners several times.

Blois says the house was built by a contractor on a strip of land where the city forgot to cut the curb for a laneway. He lived there for 20 years.

Since then, it has been home to several families, including immigrants from Hungary, Italy and Brazil.

Blois said one man who walked by the house during the renovations said he had lived there with his wife and three children.

Real estate agent Cristina Lopes said the property was a steal compared with bachelor or one-bedroom condominiums in Toronto, typically priced at over C$200,000 on property Web site mls.ca.

"Even though this is only 300 square feet, it looks more spacious than a condo that's 700 or 800 square feet," Lopes said. "It all depends on the layout and the layout of this home was really nicely done."

The house, on a street of two- and three-bedroom homes, also boasts a patio and parking for two cars, as well as a storage basement, accessible through a trapdoor in the floor.

Lopes said the owner has received a few offers since the house went on the market in the fall, but they fell through.

($1=$1.005 Canadian)