BaTi₀.₉₅Fe₀.₀₅O₃-δ has been suggested to be an intrinsic dilute magnetic oxide with a clear dependence of magnetism on oxygen vacancy concentration. However, it has also been shown that the dopant Fe ions distribute themselves rather inhomogeneously within the lattice, though without disrupting the crystal phase of the parent BaTiO₃. With the help of x-ray absorption spectroscopy (XAS), here we find that the incorporation of a larger amount of anion vacancy pushes this inhomogeneity to the extreme, leading to the precipitation of Fe metal clusters. It is also observed that the residual solid, without the Fe-metal cluster, undergoes massive structural and compositional reorganization.