The quest begins when you speak to Niah, who is at #28 on the Ondra's Gift map. She has trouble convincing construction workers to help her rebuild the nearby Lighthouse, and so would like you to investigate it. She gives you the Lighthouse Key to that end.
The Lighthouse itself will be at #29 on the Ondra's Gift map. Niah will move close to it after giving you the key.
The party will arrive at #1 of the first level of the Lighthouse Ruin. The stairs leading up to the next level are at #7, but you'll get attacked by several Shades and a couple of Spectres on the way.
You will have to fight several Shades and a few Spectres at #10 to reach the table though. The stairs provide an opportunity to set up a defensive wall position so that the enemies can't reach your spellcasters.
The stairs at #14 will lead up to the third level at #15.
At #16 on the third level map is where the party will encounter the Cean Gwla spirit named Lilith. If you can make a Perception check of 18, you'll pick up on the fact that she's scanning the horizon on the ocean constantly, and that her hands are stained with what looks like black ink. You can attack her straightaway, or otherwise provoke her into it by speaking to her too many times. Be warned that it can be a really tough fight. She'll summon a LOT of Shades and Spectres, and she herself is capable of petrifying multiple party members.
There's an easier way to complete the quest. The Logbook can be found on the nearby table at #17. That and the Evacuation Notice will indicate that the name "Red Dream" is of some significance.
If you avoided killing Lilith, and found the clues that may provide insight to what's keeping her in her undead state, then you can speak to Niah again about the "Red Dream". She will indicate that it is the name of a ship that still docks regularly in Defiance Bay, and that its Captain, an Elf named Maerwith, can be found in the Charred Barrel in the Brackenbury District.
You'll start off at #1 on the main floor of the Charred Barrel. The stairs to the upper floor are at #10.
You will then be at #15 of the upper floor. Maerwith can be found at #20. The way to get what you need is to begin by saying that someone at the lighthouse was keeping track of a ship, then making a reference to the Logbook, and then suggesting that Lilith stayed behind in spite of an Aedyran advance. Those three dialogue options will convince Maerwith to go see Lilith, and that will result in Lilith willingly leaving the Lighthouse Ruin. Not choosing the right options will convince Maerwith to either stop speaking to you, or even attack you, in which case killing Lilith will be the only way left to resolve the quest.
However you managed to get Lilith to leave, you must speak to Niah again to conclude the quest. You'll get an xp reward and 1,000cp. The first floor of the ruin becomes a tavern called The Wailing Banshee. It offers all of the usual services besides rooms to sleep in. A chest in the room will also have a book called Those Lost in the Flood.
If you had to kill Lilith, you will get a minor reputation boost with Defiance Bay.
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