Remodeling School

It took a year, but Erika and Greg Tansey got the house they wanted, doubled its value and gained some hard-won insight into the rules of renovation along the way

Sarah Max

(MONEY Magazine) -- AN OUTDATED, DILAPIDATED 1941 CAPE COD wasn't exactly the home that Erika and Greg Tansey dreamed of when they moved to the well-to-do Portland, Ore. suburb of Lake Oswego last year. But they were unable to afford the kind of house they really wanted on their $600,000 budget, so they opted for Plan B: a fixer-upper. And this $446,000 house sure fit the bill. "Greg called the backyard the 'heart of darkness' because it was totally overgrown and infested with hornets," says Erika. "The bathroom was so small that your knees hit the tub when you used the toilet. The hallways were narrow and dark. And the garage was basically falling over."

What the house lacked in charm, space and amenities, it made up for in location--within walking distance of shops and restaurants and in a terrific school district. Besides, it had great bones. It just needed a little work. "Originally, we didn't think it'd be that big a project," says Erika, before delivering the kicker. "We ended up gutting the entire house."

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A remodel is an ambitious undertaking no matter what the circumstances. "It's expensive, it's intrusive, it's disruptive, and if you haven't planned very well, you end up having to make snap decisions that send your anxiety levels through the roof," says Alan Heavens, author of What No One Ever Tells You About Renovating Your Home. Still, millions of people take on renovation projects each year. Some, in this weak selling market, do it as a way to stay in homes they've outgrown; others, like the Tanseys, do it as a way to afford a house in the first place.

Erika and Greg started demolition on their place in September 2005, with more significant plans than they'd first imagined. Among their goals: to raise the roof, put in an addition, double the square footage and reconfigure the layout. Aiming to do much of the work themselves, Erika, 34, a freelance marketing consultant, and Greg, 35, a venture capitalist, budgeted their extreme home makeover at $200,000 tops.

Well, renovating ain't called the money pit for nothing: The project took six months longer than expected, cost $80,000 more than their worst-case scenario and finished just as the bubble began deflating. By the time they moved into their (almost) completed house in August, they were thoroughly exhausted--but very eager to share what they'd learned.

LESSON 1

The words "under" and "budget" do not coexist

For most homeowners taking on a major renovation, the first step is to hire a general contractor to manage the project. Among other things, the "G.C." creates a budget, shops for materials and hires subcontractors. If you're willing to take on the equivalent of a full-time job, you can act as your own G.C. and save as much as 20% of the total budget. The Tanseys, both of whom have M.B.A.s and project-management experience, dared to do this. By going it alone in this regard (with family friend and licensed G.C. Dave Fahlman on speed dial), the couple expected to save roughly $50,000, money that Greg hoped "we could put back into getting the house we wanted."

But they ended up spending all those savings--and then some. Despite generally on-target projections of expenses, the Tanseys made a few costly blunders. "Some of our estimates were way off," says Erika. Upgrades were the biggest culprit. Like the siding: They'd initially budgeted it at $7,000, which might have paid for the vinyl variety. Only later did the Tanseys realize that they preferred cedar shingles, which cost five times that amount. They ended up compromising on cedar siding, which still rang up at $21,000. Their budget came further undone with other late-in-the-game upgrades, such as mahogany decking.

Obviously, a budget is essential for any renovation. It's key too that the document be as detailed as possible. "There are thousands of items that go into a house," says Carl Heldmann, author of Be Your Own House Contractor. Pay $1 more for each and your expenditures quickly multiply. Ideally, you should know from the get-go exactly what you'll want--basics and upgrades. Even if you have a pro making the budget, you'll still have to choose materials, a decision that can significantly affect the bottom line. After all, you can spend $1,000 on a basic kitchen range or $10,000 on a Viking.

As Erika and Greg learned, it's also crucial to have room in the budget to account for errors and uncertainties. Even the most seasoned G.C. can't know exactly what's needed until the walls come down or predict how the next natural disaster will affect wood prices. To prepare yourself for unknowns, add 10% to your total budget, advises Heldmann. "I promise you'll spend every penny."

LESSON 2

You can get a better price

Though the Tanseys' initial budget wasn't as solid as they would have liked, their diligence in pricing out subcontractors and materials saved them thousands over the course of the project. After she was quoted $8,000 to cut down a tree, Erika called seven more services before getting a $4,000 bid. When it was time to paint the interior trim, she got estimates from $5,000 to $15,000. One landscaper said the job would take $35,000; she found someone to do it for $11,000.

As Erika's experiences prove, it's worth the time to get at least three bids on major aspects of the project. The quotes can range wildly, in part because contractors are loath to give solid estimates to people who aren't serious about hiring them, says Heavens. They tend to be more realistic if you call because of a word-of-mouth recommendation, however. So ask friends, family, even the local paint or lumber supply store for names. "They'll know who pays their bills on time, what their reputation is," says Jim Lapides of the National Association of Home Builders Remodelors Council. All that said, don't make money the sole basis of your decision. You want to be confident--via references and track record--that the person will get the job done right in a reasonable amount of time.

LESSON 3

Don't count on hosting New Year's Eve dinner

When the Tanseys' new windows didn't make it onto the back of a delivery truck, that set off a chain reaction. Without windows, the siding couldn't be put on. Without siding, there could be no insulation, which meant no drywall and therefore no trim, light fixtures or flooring. One snag resulted in a three-week delay.

It was one of many holdups: Torrential rain flooded the basement. The framer came down with a bad case of pneumonia and couldn't work. The flooring guy shot a pipe with his nail gun, triggering a leak.

The Tanseys didn't have much control over these setbacks. But they did have control over their reaction to them. Because they weren't married to deadlines, they found it easier to cope with changes in plan. They'd hoped to be in the house by April (ha!), but they'd also been skeptical enough to sign a month-to-month lease on the no-frills apartment they were renting. It was a smart backup plan, since their move-in estimate turned out to be off by four months. Bottom line: There will be delays, some of them completely out of your control. And if you're trying to have the house finished before the birth of your triplets, you're setting yourself up for a bad case of acid reflux.

LESSON 4

Even Bob Vila has his limits

While Erika dealt with subcontractors, kept track of materials and cared for their then infant daughter Claire, Greg spent weeknights and weekends at the house. "Sometimes I feel like a single mom," Erika said mid-construction. "But it's not like Greg's living it up. The poor guy works all day, then goes to work again."

Assuming you do the job right, you can save a lot of money rolling up your sleeves and doing it yourself. But, as Erika and Greg learned, this isn't free money. "The three key elements of a remodel are cost, quality and time--and they all conflict," says Fahlman. "You are constantly having to pick which is more important." Initially, the couple opted to save money at the expense of their time together. After doing nearly all of the demolition work, Greg helped with framing and then, with a how-to book in hand, took on the electrical work. He'd planned to tackle the tiling too, but after months of 16-hour days, he thought better of it. As those in the midst of a renovation should regularly do, he and his wife reassessed what they were willing to sacrifice. This time, money won out. "We had three tile guys here for six weeks," says Erika. "It was the best $12,000 I've ever spent."

That unbudgeted cost, plus landscaping, brought the Tanseys' total remodeling bill to $280,000, for a final tally of $726,000 including the house itself. Happily, their efforts and expense paid off. "On the one hand, we had a crazy year," says Erika. "But we love our house." And they've made money on it, at least on paper: Based on comparable sales, local real estate agent Trista Nelson values it at $980,000. "We wouldn't have been able to afford nearly as nice a house if we hadn't remodeled," says Greg. Proud of their accomplishments, he and his wife are eager to start planning their next project: a relaxing family vacation.

start

JULY 30, 2005

Erika and Greg Tansey buy a tiny Cape Cod in Lake Oswego, Ore. and set a remodeling budget of $200,000.

AUGUST 2005

An architect draws plans; permits cost $8,000, quadruple what the Tanseys had budgeted for them.

SEPTEMBER 2005

The roof comes off and Greg starts demo work. The couple donates old windows and doors to a nonprofit, saving money on disposal and getting a tax write-off to boot.

OCTOBER 2005

It rains for nearly a month straight. The plywood on the roof is no match for the water, which soaks the hardwood floors and floods the basement.

NOVEMBER 2005

The foundation for the new family room and master suite is done. But the framer gets pneumonia and is out sick for a month.

DECEMBER 2005

The framer is healthy again, work resumes, and the roof goes on. The Tanseys hope to be in the house by early April.

JANUARY 2006

The windows are three weeks late, and hopes for April are dashed.

FEBRUARY 2006

Siding rings in at $21,000, three times what they projected.

MARCH 2006

The good news: The windows and doors are in, the siding is on, the plumbing is done, the wiring is almost complete. Bad news: They're $50,000 over their initial budget.

MAY 2006

To save money, Greg considers doing floor tiling himself. Erika persuades him to hire pros. It takes three of them six weeks to do the job, at a cost of $12,000.

JUNE 2006

Hardwood floors go in with one snafu: A nail gun punctures a pipe that leaks onto the first floor.

JULY 2006

The rooms are painted, the finish carpentry is done and the end is in sight--but not without one last leak, this time in the upstairs bathtub.

AUGUST 29, 2006

Voilą! Move-in day! Total spent: $280,000

finish

Sweat Equity in a Soft Market

Making money on real estate isn't the no-brainer it was during the housing heyday. So how do you figure out if you'll get a return on your remodeling investment? By asking the following questions.

IS THIS A DESIRABLE LOCATION?

The best scenario for building value: remodeling a bad house in a great neighborhood, says David Hohman, an appraiser in Winter Haven, Fla. You'll likely find such gems in older parts of town where schools are good and new houses are in short supply.

WHAT IMPROVEMENTS WILL I MAKE?

Think about what upgrades you'd like to see and whether they're appropriate for your neighborhood. Owning the largest, most expensive house on the block might be good for your ego, but it's not good for your investment. You will want to stay compatible with the houses around you in terms of proportion and style, especially as buyers become less forgiving.

WHAT'S THIS GOING TO COST ME?

You could price out every single element needed to complete your project, but there is an easier way: Pay a general contractor a consulting fee to give you a ballpark figure. (Most are unwilling to give free estimates to people who aren't serious about giving them the job.)

WHAT'S THE BOTTOM LINE?

After you have come up with a clear idea of what you want and what that will cost, hire an appraiser to give you an assessment of what the house will be worth when it's complete. If it will be worth less than its current value plus what you'll have put into it, "go back to the drawing board," says Carl Heldmann, author of Be Your Own House Contractor. Or at least make sure that the changes pay off for you in terms of quality of life.

Financing That Fixer-Upper

Cash is the best bet. But if you don't have stacks of dollars piled up in your (leaky) attic, your second-wisest option is to borrow against the equity in your home. Last? Loans designed specifically for remodeling.

If you have home equity

HOME-EQUITY LINE OF CREDIT

This is often the easiest way to borrow for a remodel, says LendingTree.com's chief economist, Jim Svinth. You can get up to 100% of your home equity--though beware of taking the full amount in this soft market--and write checks as needed. You pay interest on only the money you draw down. HELOC rates have gone up lately, but borrowers with good credit can qualify at the prime rate, recently 8.25%.

CASH-OUT REFINANCE

Given that the average 30-year fixed-rate mortgage is now at 6.4%, you may pay less in interest by refinancing your existing mortgage for a bigger one and investing the surplus in your project. If you have a $200,000 mortgage on a house worth $400,000, you could refinance with a $320,000 loan. That'd give you $120,000 to remodel.

If you have no equity

CONSTRUCTION LOAN

Buying with plans to remodel? After scrutinizing your construction plans and estimating what the house will be worth when done, lenders will offer you a mortgage to cover the existing house and improvements. Such loans typically cost 0.5% more up front than traditional mortgages, says Steve Habetz of Threshold Mortgage. Most require you to hire a professional G.C.

CONSTRUCTION SECOND

Already have a home and now need a loan just for the remodel? This is like a construction loan, but only for renovation. Consider getting one if you've locked in a great rate on your first mortgage. But do the math first. Since interest on these can be 0.5 percentage points more than a home-equity line (about 9%), you may be better off refinancing into a construction loan, says Habetz.

home

Financing a renovation 67

Proof that it's possible to sell fast in a slow market 74

When to raid home equity by Gerri Willis 76 Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.