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Short of a killer-force hurricane blowing your house away, it's hard to imagine a worse experience as a homeowner than tackling a big remodeling project. So why do we do it? You could credit all that home equity sloshing around, which qualifies us for cheap construction loans. Or the joy we get in investing in a fast-appreciating asset. You need to recognize at the outset that few projects pay for themselves when it comes time to sell. The average payback, reports Remodeling magazine, has ranged between 79% and 86% in recent years. The best returns come from redone bathrooms and kitchens, which recover 90% to 93% of costs. A couple of exceptions apply. When home prices rise rapidly, well-done projects often pay for themselves immediately.

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plus: What it takes to get done on time and ON BUDGET on page(s) 67

by PAT MERTZ ESSWEIN

plus: FINANCING a remodel on page(s) 69

YOUR HOME | The price of materials is rising, so pick your project carefully. By Elizabeth Razzi

PHOTOGRAPHS BY AMANDA FRIEDMAN

Short of a killer-force hurricane blowing your house away, it's hard to imagine a worse experience as a homeowner than tackling a big remodeling project. So why do we do it? You could credit all that home equity sloshing around, which qualifies us for cheap construction loans. Or the joy we get in investing in a fast-appreciating asset. Or maybe it's because of Ty Pennington, the genial host of Extreme Makeover: Home Edition, who seduces us into believing it will be easy. It's not easy. And both the hurricane fallout and a possible slowdown in home-price appreciation make it even more important that your remodeling project be the right one--that is, if one of your goals is to increase your home's value.

Storm damage is adding to the already strong demand for construction labor and supplies. Michael Carliner, an economist with the National Association of Home Builders, says that plywood, asphalt roofing shingles and possibly lumber will climb in price. "This is probably not the easiest or least-expensive time to get remodeling done," he warns. And if home-price appreciation slows, as many forecasters expect, you won't be able to count on a buyer down the road to pay the bill for a misguided project.

PAYBACK TIME

You need to recognize at the outset that few projects pay for themselves when it comes time to sell. The average payback, reports Remodeling magazine, has ranged between 79% and 86% in recent years. The best returns come from redone bathrooms and kitchens, which recover 90% to 93% of costs. A couple of exceptions apply. When home prices rise rapidly, well-done projects often pay for themselves immediately, says Sal Alfano, editorial director of Remodeling. A project might also return more than 100% if it involves bringing a house up to the standards of the neighborhood, he says.

Big paybacks come from remedying deficiencies that will cause many buyers to skip your house. As examples, Alfano cites adding a deck to a home in a neighborhood where decks are common, and building a second full bathroom.

One of the best ways to spend your remodeling dollars is to rehab your old home into your dream house. You'll avoid paying what may be an inflated price for a new home, and you won't have to give up your old neighborhood--the friends, the schools and the great commute. It was the inflated Southern California housing market that drove Ali and Mack Schreiber into a whole-house makeover. Their Fallbrook, Cal., home, built in 1977, was too small for a family with a 4-year-old and a 2-year-old--not to mention two dogs. Before selling, they would have had to redo the worn-out kitchen.

Ali, 40, says they actually made an offer on another home with a bigger lot. "But it needed the exact same things as our house. So we thought, Why don't we just stay here and make it what we want?" When the sellers turned down their offer, the Schreibers were relieved. "Why spend $500,000 on a house that you have to upgrade?" Ali asks. Instead, last May they hired Robert Edgecomb, owner of a DreamMaker Bath & Kitchen franchise, to do a $300,000 overhaul of their home. At the time, the house was appraised for about $500,000--more than three times the price they had paid for the place back in 1997, giving them plenty of equity to borrow against.

The house is getting a complete makeover. The outside will have a dramatic face-lift, with stucco replacing deteriorated wood siding. A new driveway will lead to a relocated garage. Interior upgrades will include a new kitchen and master bedroom, and a bathroom with what Ali calls "the biggest, baddest jet tub on the market." When the dust clears, the Schreibers think their home's value will be in line with new, $800,000 homes for sale in the area. Edgecomb says that whole-house remodels make up a big part of his business. "People say that they can't find what they want at a price they can afford," he explains. "They come to us pretty frustrated." His best tip: When changing the exterior, change the entire exterior to make it uniform. That's more likely to give the house a custom-home look. Some improvements will be important to you but may have little resale value. That big, bad jet tub, for example, may not reap much, if any, return on the resale market, real estate brokers say.

If your community is still a sellers' market, you may be able to unload a home with deficiencies, such as an outdated kitchen or too few bathrooms. But once a market turns to favor buyers, those homes will languish unsold. Susan Anderson, branch manager of the Coldwell Banker Residential Brokerage near the Schreibers' house, says home prices in Fallbrook have leveled off recently. But she says homes that are priced in line with the market and in good condition are still selling quickly. "People look at kitchens and bathrooms, and if they are done well, you can get your money out of that." Here's what the experts say buyers prize most:

Kitchens. Anderson--and all the brokers interviewed--consistently mentioned one popular item: kitchen countertops made of granite or a quartz-based synthetic, such as Silestone or Zodiaq. At about $50 to $80 per square foot, the quartz-based surfaces are similar in price (and sometimes in appearance) to granite. Both are far more popular with home buyers than laminates, such as Formica, which are still acceptable in entry-level homes.

Stainless-steel appliances appeal to many buyers. But relatively few in Anderson's market are willing to pay extra for top-of-the-line professional appliances, such as a Viking range, which can cost $10,000. For that to pay off, says Anderson, "you've got to find a gourmet." Jack Cotton, a manager for Sotheby's International Realty on Cape Cod, in Massachusetts, recommends some good old-fashioned Yankee thrift when it comes to updating kitchens. "Some of the older houses actually have nice wood cabinets," Cotton says. You can rejuvenate a kitchen simply by sprucing up vintage cabinets with new hardware and a coat of clear varnish, and replacing the existing countertops with granite. You'll save big because wooden kitchen cabinets are expensive to replace.

Bathrooms. The old-cabinet, new-countertop trick works with bathrooms, too, says Cotton. "It revitalizes your whole bathroom instantly."

Even if you prefer to take showers, make sure there's at least one bathtub in the house. "There needs to be a place where small children can be bathed," says Anderson. Large walk-in shower stalls in the master bathroom are especially attractive to mature home buyers. You need to know your market, however. In the Minneapolis-St. Paul area, for example, move-up buyers want both a luxurious tub and a separate shower, according to Scott Carlston, a local Re/Max agent. Perhaps they need to shake off the cold of Minnesota winters.

Floors. Updated flooring, all things being equal, increases a home's value by 5% to 11%, according to a study by G. Stacy Sirmans, a professor of real estate at Florida State University. In her Southern California market, Anderson says buyers want to see some type of stone--usually travertine (a variety of marble) or limestone. Those materials cost about $3 to $11 per square foot, uninstalled. Wood floors also register with buyers, she says. "Not fake wood floors but real wood floors." Laminate floors, such as Pergo, sound hollow underfoot and turn off many buyers. Real wood costs about $6 to $10 per square foot, uninstalled; Pergo costs less than $4 per square foot and is easy to install. Don't even think about vinyl. "Vinyl floors are a turn-off, even in the lower price ranges," says Greta McKenna, a Re/Max agent in Flossmoor, Ill.

Mud rooms. The humble mud room, once a way station between the outdoors and the kitchen, has become a hot item for remodelers and buyers in many parts of the U.S. These utility areas have grown into tony rooms with built-in wooden cabinets (which everyone calls lockers) for stowing items for each family member, whether a briefcase, backpack or diaper bag. There should be shelves or tables near outlets where digital cameras, iPods and Game Boys can be charged. Some even have dog showers (often just a drain pan on the floor with a hand-held shower head). Costs for a well-equipped mud room can be minimal if you outfit an existing space with new cabinets and countertops from a discount store, such as Ikea. Or a mud room can be as elaborate and expensive as a smaller version of your kitchen. The increase in home value, however, may be slight--perhaps only 1%, according to Sirmans's study. But Sirmans's research may not reflect the recent trend toward the mud room as a family command center.

Patio. Cotton, the broker on Cape Cod, is also a home-restoration enthusiast. He claims the remodeling job that yields the biggest boost in value with the smallest investment is adding a deck or patio to an older home. (Expect an 87% return on investment, according to Remodeling magazine.) If you can turn an existing window into a French door that opens onto a deck or patio, you get a two-fer: You'll not only create access to a new, outdoor living space, but you'll also allow more light into the room. "You make the room feel bigger," Cotton says. And although the investment is greater, he believes the space grows even more valuable if you turn a patio into a sunroom with glass and screens on three sides.

Cotton also likes to focus on the view from the street, where many would-be buyers make their first, brutal assessment of a home. In particular, a new front door with raised panels and slim windows along the sides "really makes the front of your house pop," he says. (Figure about $1,000, plus installation.) Improvements to the landscaping and front walkway could add more value than their relatively modest cost--if the rest of the house is in decent shape. The overall lesson for homeowners: To get the most resale bang for your remodeling buck, chat with some real estate agents to see what's currently in favor with buyers. Be skeptical, though, about the opinions of designers and decorators, whose cutting-edge ideas may not appeal to the broadest range of buyers.

MANAGING REMODELING CHAOS

When your home is turned into a construction site--with dust, noise and a Porta Potti parked in your driveway--every extra day feels like an eternity. These strategies will help manage the chaos.

Get your act together. The better handle you have on your wish list, your budget and the timing of your project, the smoother things will go once the project begins. You'll also help prospective contractors make more realistic estimates of their costs and time. To jump-start your thinking before meeting with an architect, design-builder, or kitchen or bath designer, try filling out the client questionnaire posted at http://academics.triton.edu/faculty/fheitzman/ha.html or the shorter questionnaire at www.markcanadaarchitects.com/custom.htm.

Pick a partner, not the lowest bidder. The traditional method is to solicit three bids from contractors and to go with the lowest one. However, money isn't everything. Peter Bourget, a design-builder in Atlanta, suggests that you first find several contractors who offer prices in a range that you're comfortable with. Then interview them and pick the one who best understands what you want and with whom you communicate well. If a contractor has had a good working relationship with your architect on past projects, that's another recommendation in his favor.

Expect the unexpected. Surprises are inevitable, and remodelers find most when they first tear into walls and floors. Bourget calls this phase "the period of discovery," when problems such as termite damage and poor woodwork are uncovered. That's why he tells clients to expect an extra week of work for every month that's originally scheduled.

Make timely selections. That's builder-speak for picking components, such as windows, fixtures and appliances, well in advance of construction. The idea is to get products on site before the scheduled subcontractors arrive to install them. Kitchen cabinetry typically has the longest lead time--six to eight weeks. Dillydally and the whole project can take longer. The selection process is harder than you might expect. In years past, you'd look at ten different doorknobs; now you may choose from among a thousand. How to sort it all out? Visit Web sites, such as www.faucetdirect.com, to survey the field without spending time and gas trekking all over town.

Don't pile on. Builders agree that the most expensive and time-consuming words in remodeling are "While you're here, would you . . . ?" Bourget says that his clients typically run 10% to 20% over budget because they add items from a longstanding "honey-do" list.

Hold out. Your contract should provide for a final payment, after all the major phases have been completed and paid for. That way, you'll have leverage to ensure completion of the project to your satisfaction. --PAT MERTZ ESSWEIN

FOUR WAYS TO PAY

Deploying your home equity wisely is the key to financing a remodeling project. Interest on up to $1.1 million in debt used to rehab or purchase a house is tax-deductible.

Home-equity loan. Because you receive the loan proceeds in a lump sum and pay interest on the entire amount right from closing, these loans are best suited to one-shot projects. Typically, you can borrow up to 90% of your equity for a term of ten to 15 years. Interest rates are usually fixed and run higher than rates for a first mortgage. Recently, loans to purchase a house were running about 6%, and home-equity loans averaged between 7.1% and 7.5%.

Home-equity line of credit. A line of credit is perhaps the easiest, cheapest way to borrow. The interest rate is variable and typically tied to the prime rate. If your credit rating is good, you'll pay the prime rate, currently 6.75%.

Although you can get a large line of credit, you tap the funds only as needed and pay interest only on the amount outstanding. That makes this type of financing a good choice if you plan to remodel over time.

Remodeling loan. If you don't have enough equity for a home-equity loan or line of credit, you may qualify for a specialized remodeling loan. A remodeling loan is also helpful for a project that will cost $50,000 or more because the bank adds a layer of fiscal responsibility to help you manage the loan. Banks will approve these loans on the expected value of the home after improvements. To make sure the home actually attains that expected value, the lender will require that the builder submit a breakdown of expenses. When the work reaches certain benchmarks, such as completion of framing, the bank will approve a "draw request" allowing payment to the builder. Before releasing payment, the bank sends an inspector to confirm that the work has been done.

IndyMac Bank (www.indymac.com), which makes these loans nationwide, charges a $900 fee. Its loans recently carried interest rates between 7% and 7.25%.

FHA Title I loan. If you have little or no equity and your remodeling job is relatively small, your best choice may be a Federal Housing Administration-insured loan. FHA allows loans of up to $25,000 for the basic rehab of a single-family home. For information, see www.hud.gov/improvements.