SALEM — The first sign of trouble came in December at a lottery to select the owners of some of the new Palmer Cove Condominiums.

There were 15 condos for sale, with three-bedrooms going for what appeared a bargain — $189,900. When this project was conceived, an overflow crowd of applicants was expected.

Instead, there was just one.

"We knew it was a challenging market, but we didn't think the market would be that weak," said Michael Whelan, executive director of the Salem Harbor Community Development Corp., which had undertaken the affordable housing venture at 50 Palmer St. "One application was a shocker."

Seven months later, a home-ownership project that held out so much hope for the city's low-income Point neighborhood, where more than 80 percent of residents are renters, teeters on the edge of foreclosure.

A $2.2 million construction loan was due in June, and the Salem Harbor CDC, a nonprofit agency, has asked the city for permission to abandon the condo project and switch to rentals. That's the only way out of this financial mess, according to Whelan.

"The real estate market has collapsed out from under us," Bill Quinn, the agency's attorney, told the city's zoning board in June.

The failure of this condo project has been a great disappointment to the CDC and may be more of a loss to its lone applicant.

"It's heartbreaking for me," said Lucy Corchado, the former city councilor and lifetime Point resident who planned to move there with her three sons. "Quite frankly, this was probably the only opportunity I had — at least for now."

At a Board of Appeal meeting a few weeks ago, the CDC was met with long faces and hard questions.

"I'm really surprised that none of the (CDC's current tenants) or the neighbors expressed an interest in buying," said board member Annie Harris.

"So were we," Whelan said.

Whelan and his staff were criticized for not doing a better job of selling the condos, which were advertised for as little as $142,500.

"I think that you missed the boat by not hiring someone to market the property," said ZBA member Bonnie Belair.

The board declined to take action that night and continued the hearing until Aug. 27 to give the agency more time to explore options.

There are none, Whelan said.

The only way out, he said, is to rent Palmer Cove as affordable housing and to do it through low-income tax credits, which will allow the agency to repay the construction loan.

This condo project, he said, fell victim to the real estate bust, the credit crunch and tumbling condo prices across the city, which made this good deal less attractive.

Without a big economic incentive, this was a tough location to sell, he said.

"We've learned a lot about public perception," he said.

Whelan said it would be disingenuous to keep marketing this as condos and only misleading to the few buyers they might attract.

"I think we'd be acting in bad faith ..." he said. "We have a condo project we know will not succeed."

Corchado bristles when she hears that response.

"I think it's (bad faith) to expect people to support this and go back on the promise of the CDC to make this a home-ownership opportunity," she said.

Even if this winds up as a rental property, it is still a good project that will revitalize a corner of The Point, Whelan said. It would be much worse, he said, if it was sold by the bank and a new owner came in with no ties to the city.

"We either get the approval at the ZBA meeting or it's a disaster — it's a foreclosure," he said.