GALVESTON — Chris and Melanie Peele looked at buying beach-front property as an investment.

Yes, they knew it was a risk, Melanie Peele told the city council Thursday. But the couple had always dreamed of buying a house in Galveston, she said.

After saving for 10 years, they bought their dream house in February. Hurricane Ike took it away in September.

Now, the Peeles are among dozens of West End property owners counting on a federal buyout program to purchase their storm-damaged house and help them recover some of their investment.

Without the buyout, they have no more money, Peele said, barely audible through her tears.

Starting today, the city is making a list of property owners interested in a buyout, but city officials fear many houses might not qualify for the program because they’re not damaged enough.

The Hazard Mitigation Grant Program is funded by the Federal Emergency Management Agency, but administered by the state’s division of emergency management.

Although federal regulations allow the money to be spent to buy, move or elevate houses, the state’s priority is on purchasing property, said Brandon Wade, assistant city manager.

But in considering which projects to fund, state officials must still play by federal rules.

Houses that are owner-occupied, less than 40 years old and have substantial damage, which would cost more than 50 percent of the structure’s value to repair, automatically qualify for the program, Wade said.

Houses that don’t meet those qualifications must go through a cost-benefit analysis to make sure the money spent to buy them is equal to the amount of money the government might have to spend in the future to repair flood damage, he said.

All property in the city qualifies for the grant program.

But West End property owners like the Peeles, whose houses ended up on the public beach after the storm, are counting on the grant to get them out of being stuck with property that now belongs to the state of Texas.

When the storm came ashore on Sept. 13, flooding 75 percent of island houses and leaving a trail of destruction along much of the upper Texas coast, it chewed away the island’s beaches.

Many houses that were once beach-front property are now gone. Houses on the second row of neighborhoods south of FM 3005 are now on the beach, which is public property under state law.

In about 10 months, the Texas General Land Office will make its final decision about which houses are on public property. Those that are must be demolished at the owner’s expense. Property owners would then be left with a mortgage on property they no longer own.

State officials have told West End property owners the program will save them, but those promises might be oversold, Wade said.

Many West End properties still standing did not sustain much storm damage, thanks to modern construction techniques, Wade said.

And because they already are raised above the base flood elevation, they didn’t flood, he said.

Proving it is worth spending federal money to keep them from flooding again, when they didn’t flood this time, could be hard, he said.

To make the cost-benefit analysis formula look more favorable, the city plans to group severely damaged properties with undamaged properties.

Participation in the program is voluntary, but a property owner who pulls out at the last minute could upset the cost-benefit ratio making everyone ineligible, Wade said.

Grant applications are not due until mid-March, but state officials are interested in awarding the grants as quickly as possible, Wade said.

The total program funding is based on how much money the federal government spends in Texas on Ike recovery efforts, but city officials do not yet know how much will be ultimately available.

The city and participating property owners must come up with 25 percent of the project’s costs.

But the General Land Office has hinted that it might provide some match funding for West End buyouts, Wade said.

By mid-December, Wade said he hoped to be able to hire a consultant to help guide the city through the grant application process.

At least nine Pirates’ Beach property owners have added their name to a buyout request list.

Even though he’s worried that some property owners might be disappointed at the end of the process, the city needs to apply to buy as many houses as possible, Wade said.

“To not apply is to guarantee we get no money,” he said.