Education Minister Chris Hipkins subsequently labelled the deal "very disappointing", while staff and students called it a "slap in the face".
However, the cash-strapped university now said it was selling the mansion to help offset the "significant" financial hit wrought by the Covid-19 pandemic.
"The property is on the market now, and advertising will start next week," a spokesman said.
The home's purchase - exclusively revealed by the Herald in January last year - immediately led rankled staff and students to voice their disapproval over its bad look.
The university paid $5.06m for the property - or $1.5m above its council valuation - boasting manicured gardens, 338sq m of floor space across three storeys and a spa and lap pool.
It then spent a further $160,000-$170,000 repairing the roof and swimming pool.
NZ Union of Students' Associations president Isabella Lenihan-Ikin asked why the highly-paid Freshwater was given an exclusive deal-sweetener at a time when staff and students feared jobs cuts and reduced teaching services.
The deal also caught Auditor-General Ryan's eye, who said it involved "sensitive expenditure".
That meant the partly taxpayer-funded organisation ran the risk of being seen to give "disproportionate" benefit to Freshwater above the university's own business needs, he said.
Hipkins subsequently said that universities taking taxpayer dollars needed to spend their cash "wisely".
Universities collectively earn 42 per cent of their income from government through "tuition grants" and other funding, according to lobby group Universities NZ.
The University of Auckland earlier said the home was intended as a rental for Freshwater and venue to host university-related events.
Due to restrictions brought about by Covid-19, however none of those events took place.
"It is hard to accept that purchasing a house to provide accommodation for the incoming vice-chancellor, and to host an anticipated 14 events in two years, justifies the $5 million expenditure," Ryan said
"Nor does that level of hosting, in my view, justify an almost 50 per cent reduction in the property's rent."
Freshwater told staff in a group email last October - after the university had been contacted by Auditor-General investigators - that she had recommended the house be sold to help pay down debt.
A university spokeswoman denied Freshwater's decision was linked to the Auditor-General's review.
"It is the right thing to do, not something the university has to do," she said at the time.
The university's council of directors then gave the greenlight to Freshwater's recommendation on November 30.
The home would now be advertised for sale next week because "February is an appropriate time to market the property", a university spokesman said.
He said Freshwater moved out of the home in mid-December and would not move into another university-owned home or receive a future allowance to rent a private property.
The university also moved Freshwater's "personal effects to a nearby location" but did not provide her with a "financial allowance to support this move", the spokesman said.
Ryan in his December report also called on the university to consider whether Freshwater's rental deal should be treated as taxable income under the Income Tax Act.
The university said it didn't comment on individual staff member's "remuneration" due to privacy issues.
"However, we are continuing to work through the issues highlighted in the Auditor-General's report and have sought advice where appropriate, including from the IRD, both before the Auditor-General's report was published and since," it said.
