Remodeling School

(MONEY Magazine) -- An outdated, dilapidated 1941 Cape Cod wasn't exactly the home that Erika and Greg Tansey dreamed of when they moved to the well-to-do Portland, Ore.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.

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."

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.

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.

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.