First off you need to create a new neighbourhood and use Bluewater.
Once you're new neighbourhood is set up place a 3x3 lot in the exact place as shown in the pic below so that the lot is sloping downwards.
Enter the lot once it is placed. You'll notice it has quite a steep slope.
We need to make the slope "deeper" so that it cuts into the neighbourhood terrain and forces the lot to flood.
Take the large lower terrain tool and lower the terrain in your lot, it doesn;t have to be neat.
And even lower until it looks summat like this
Now SAVE the lot and EXIT back to the neighbourhood....you'll see the lot looks dicoloured...
Now use the Move Lot tool (the hand with the criss cross) and place your lot along the waters edge as shown
Once placed the lot should flood as long as you have it near to the edge of the water.
Enter the flooded lot
And choose the large raise terrain tool
Begin raising up the parts of the terrain where you want the land to be
Then use your level terrain tool to level it
You can then drag your level terrain tool to make the island the shape you want it. Of course no one wants a square island, we want a natural shoreline, so use your small lower terrain tool around the edges, play with the elevation until you get the look you want
And when you've gone all the way around....it's done, you can now build your house :o)