Avoiding home improvement disasters.

Alva and Greg Campbell had their first doubts about their contractor when they noticed that the flooring in the new downstairs hallway looked familiar. Upstairs, to their shock, they found a large hole in the center of the bedroom's original red-oak-and-mahogany parquet. Later, eight long months into a $100,000 contract to renovate their 70-year-old Dallas house, the contractor simply disappeared. When the Campbells found him six frantic weeks later, they agreed not to sue for breach of contract. But a year later, they ended up in court anyway, over that foundation's crumbling, incorrectly mixed concrete. Then they found out that the contra ctor wasn't insured.

A classic renovation horror story, complete with cost overruns, nonexistent schedules, shoddy work and mental anguish. In 1991, the Better Business Bureau heard more than 30,000 similar tales on repairs and renovations. How can you make sure that your home improvement epic ends more happily?

"Homeowners hire a contractor because building is not their field of expertise," points out David Creech, president of Creative Design Contractors Inc., in Charles County, Md. "And there are unscrupulous contractors who take advantage of people's ignorance. Unless homeowners take an active part in the project and research the contractor's ability and reputation, they leave themselves wide open to being ripped off."

Homeowners often fear sharp operators, but it can be just as risky to hook up with a poor business person. "A lot of folks don't realize what it takes to make money in this business," observes Ann Marie Moriarty, senior editor with the trade journal Remodeling. "Some [contractors] might be doing good work. But if their prices are too low, eventually they run out of money. It's always the last one or two clients who get burned."

During the 1980s, spending for remodeling products and services more than doubled, reaching $106 billion in 1990. Between 1990 and 1991, however, according to the Remodelors Council division of the National Association of Home Builders (NAHB), home improvement expenditures dipped 8%, largely because of a drop in high-ticket renovations and additions.

Has this created a buyer's market in home remodeling? Probably yes, if that buyer is careful. In slow markets, warns Moriarty, more contractors may underbid to keep afloat, and be forced to cut corners or walk away mid-project. "Bigger, better-run companies will probably cut their margins just a tad to be competitive," she continues. "Therefore you can probably afford a better-quality remodeler."

Laying The Groundwork

Despite its sour turn, the Campbells' project was carefully thought out. The contractor came highly recommended for his work on several of the historic neighborhood's old houses. "He's a wonderful craftsman," Alva concedes generously, "but he'd never overseen a massive overhaul like this. Managing the money and the people were just beyond him."

Greg and Alva spent the spring of 1988 walking through the house with various remodelors. "Our first concerns were very basic--foundations, plumbing, wiring," Alva says. "We'd say, 'Anything is possible for unlimited money, but can we do this for what we have to spend?'" As the budget took shape, the Campbells decided to hold off on landscaping and some decorative frills. And, because reworking existing space is usually cheaper than building on, they moved several walls to make the floor plan more usable.

"Most people just don't understand construction costs," says East Coast contractor Creech. In early planning sessions, he and his clients discuss choices for the visible components--windows, door trims, light fixtures and appliances. But equally important are the unseen framing, plumbing, wiring and insulation. "Homeowners tend to overspend on their initial wish lists," Creech says. "When the reality hits them, we have to start finding ways to cut back."

When costs are a concern, advises Remodeling's Moriarty, try to leave plumbing, heating or electrical systems in place if they're sound and up-to-date. "In appliances and cabinets," she continues, "you can usually get a good value with a better-quality brand at the bottom of their line." She also suggests tapping your contractor's experience in choosing products. A builder might know that those jazzy faucets you crave are impossible to repair. Bear in mind, however, that remodelors lean toward what's standard, tested and available. Don't be talked out of what you really want.

"One thing we discovered was that renovation is an art, not a science," Alva recalls. "If you go in expecting a single solution, you're fooling yourself. So you collect information, and finally you, the novice, has to make a judgment call." But, she jokes, "you learn a lot very fast. I was suddenly talking pier-and-beam foundations like an expert."

The Campbells learned too late that their contractor needed closer supervision. Regular business meetings and detailed progress reports might have kept problems from snowballing, Alva says. "The contract should spell out and budget for how work is managed day-today."

Mid-project changes derailed schedules and drove up the Campbells' costs. Unforeseen conditions forced several of these "change orders." The savvy homeowner will budget in an extra 10% or so for such surprises.

Change orders are usually written up, signed and paid for before they're done. Contractor Creech stresses that the change-order policy should be clarified upfront. "Haiti Nay through the project, the owner can suddenly decide that he or she wants lights installed here and here," he says. "Well, the electrician has already roughed in the wiring for the original positions, and someone has to pay to have him come back and redo it."

Another Home, Another Story

Even the right contractor can't always steer you clear of remodeling's pitfalls. Drs. Patrice and Herbert Nickens of Washington, D.C., praise the contractor who expanded their 1907 cinder-block and stucco home. "He was very conscientious and had some artistic sense," Herbert says. "He saw and headed off some problems we might not have anticipated." Their 2,200-square-foot addition extended the kitchen and added a family room, a master bedroom suite, a guest-bath entrance, atrium and attached garage. The contractor estimated three months' work; the Nickenses anticipated eight, but construction dragged on for 18. Because the contractor worked alone, calling in help when he needed it, things moved slowly.

Regarding the budget, Herbert laughs ruefully, "I don't think homeowners know what they'll end up paying--if they did, they'd probably never begin." Early on,the couple heard construction estimates between $75 and $120 per square foot. "We thought that was crazy," he recalls. "But we inched right up there."

"The first big decision on our renovation was whether we should do it at all," Herbert notes. They appreciated their house's charm, but they couldn't plunge into improvements without regard to market values. "Before taking on a project of this scope," Herbert says, "you have to be ready to do a fairly harsh analysis of the house and your location." The Nickenses looked at houses--old, new, badly or well-renovated--and eventually decided to stay where they were.

Like the Campbells, the Nickenses worked with an architect on detailed working drawings and specifications. "If you don't have a lot of details about exactly what you want, then you can't compare the prices you're quoted," Herbert says.

Most contractors also can provide designs, usually along fairly standardized lines. Some will fold the cost into the final bid, while "design build" firms will charge for a custom plan. "I don't think consumers should cringe at paying for a professional design," notes Remodeling editor Moriarty. "Too often what you get for nothing is worth just that."

The Nickenses asked three contractors to make bids. "Getting a low bid might not be the best choice," Herbert Nickens warns. "One builder might come in 20% below another by using very skimpy materials.'' Compare the proposals carefully; what isn't there might cost you later.

In 1991, NAHB pegged the average cost of a kitchen remodel at $17,592; a major bath renovation, $9,449; adding a bathroom, $11,592; adding a patio or deck, $4,437; and remodeling a family or living room, $19,902.

Yet such numbers mean little in pricing any particular project. "I couldn't believe all the decisions,'' recalls Alva Campbell. "One toilet costs $50, another one costs $500." With scores of such discretionary choices in a major project, the cost might easily double.

"We consciously chose some fairly expensive building materials," says Herbert Nickens. "We could have cut costs there, but we chose not to. We made each decision with our eyes open--wincing, perhaps, but they were open."

The couple also winced when unexpected complications forced some change orders. "You also find that existing problems of your house suddenly become very obvious," Herbert says. "You end up saying 'as long as we're at it, we may as well do that, too.' Which may be true, but your budget goes up."

Their contract specified a schedule of payments tied to completion points in the project. "Don't put too much cash down upfront," Herbert advises. "If your contractor disappears, you're never in good shape, but if he's got half the money, and he's only put up two sticks, you're in deep trouble." A series of smaller payouts, at least six, might be more agreeable to both parties.

Work should never begin without a highly detailed contract, that spells out every task and product, as well as any finishing work or materials the homeowner is supplying.

All contracts should be approved by a lawyer. A release-of-liens form signifies that all subcontractors have been paid. "If your contractor fails or is unscrupulous," warns Herbert, "the subcontractor could hold you liable for the payments. I've heard stories about people stuck with bills for thousands of dollars for electrical work or plumbing." Choosing Your Contractor . Perhaps the most critical decision in a remodeling project is the general contractor. How do you find a true professional?

* Get recommendations from friends, relatives and acquaintances. Then ask the contractor for a long list of former clients you can grill. * There's no guarantee, but membership in the National Association of the Remodeling Industry (NARI) and the NAHB Remodelors Council suggests an established business.

* Make sure the contractor is licensed and bonded if required by your state.

* Is he or she insured? Don't take anyone's word--contact the insurance company. Otherwise, you could be liable for whatever happens on your property.

* Check with the Better Business Bureau for any unresolved complaints against the firm.

* Is the firm solvent? Check with suppliers.

* Be even more careful in your selection if the work requires an open-ended "time and materials" or "cost-plus" estimate as opposed to a negotiated bid.

* Make sure the highly detailed contracts, workable change-order policies and a final release-of-liens are all standard.

* Last but not least, can you work with and trust this person? If you don't feel a rapport in the upbeat planning stage of the remodeling project, your partnership will surely turn rocky in tougher times.

Going It Alone

Some homeowners take on the daunting task of being their own general contractor--or find the role thrust upon them. Dolores Robinson hired a professional remodeler to help tackle "the ugliest house I'd ever seen," a shabby Mediterranean cottage saved only by its prime location (two blocks from Beverly Hills) and a fire-sale price of $370,000. "I had a very clear vision of where the house should go. But lwas always having a battle trying to get what l wanted." Two general contractors later, she took the helm herself.

According to NAHB, costs in an average remodeling break down as 35% materials, 36% labor and some 30% contractor's overhead and profit. In theory, if you're the general contractor, you save that final portion. But it's hard for a novice to make that logic work. Estimating costs is tricky, even for a pro, so your budget could run out long before the work does. Banks are reluctant to finance major work not overseen by a contractor. Also, pros can usually bargain better for labor and materials. "You're at the bottom of the subcontractor's list because you're a one-shot project," Moriarty warns.

One thing you'll probably need to do as the general contractor is buy insurance for the workers and the site. Few people have the time and patience needed to select and order materials, hire and supervise subcontractors, enforce quality, get permits and inspections and chase details.

"I can now see the value of a contractor in dealing with problem workers," Robinson says. She finally got tough with the subcontractors. "in the contract, we'd rite in the completion date," she explains, "and agree that, aftera 10-daygrace period,we'd start subtracting $100 for each day the job went over." Robinson's new interior and exterior walls, imported tile work throughout, a revamped kitchen and baths and extensive landscaping consumed more than $100,000. It was worth it; Robinson refused a $750,000 offer on the newly done house two years ago, and even in this cooler market she estimates it would fetch $650,000.

Other homeowners are even more hands-on. In a family neighborhood of Atlanta, Iona Warren, a real estate agent, saw potential in a run-down but sturdy traditional brick two-story priced at $69,500. She and her husband, Carlton, and their three children have already rebuilt the porch, wallpapered, repainted, ripped up carpeting and refinished floors. They subcontracted the heating and cooling systems and rough plumbing, but installed their own fixtures and wa boarded over the ductwork.

A potential do-it-yourselfer must steer clear of overconfidence, since amateurish improvement adds little value and might even detract from a house. But Iona and Carlton proceeded carefully. "You can really make the money stretch if you're willing to do some sweat work," Iona says. She estimates that materials and contracted work eventually will total between $15,000 and $18,000.

An off-the-cuff appraisal recently lagged the home's value at $100,000. "But I don't know if we'll ever sell," she says. "It's a beautiful house."

"And it has helped us pass on our values--I saw my parents do this kind of work, and now our kids have seen us."A similar blend of daily comfort and long-term reward of financial and emotional satisfaction is perhaps what homeowners seek for their remodeling dollar.

For brochures on selecting a contractor and referrals to local members, send a self-addressed stamped envelope to: National Association of Home Builders/Remodelors Council, 1201 15th St. NW, Washington, DC 20005, 800-368-5242; and National Association of the Remodeling Industry, 4301 N. Fairfax Drive, Suite 310, Arlington, VA 22209.

Manuals on estimating renovation costs are published by HomeTech Publications, 800-638-8292 and R.S. Means Co. 800-448-8182.

A contract form for remodeling is available for $5.95 from American Homeowners Foundation, 1724 S. Quincy St., Arlington, VA 22204.

Beginner's Guide to Architectural Services is $3 from the American Institute of Architects, 1735 New York Ave. NW, Washington, DC 20006.

For a catalog of brochures on building topics, write to Building Research Council, University of Illinois at Urbana-Champaign, 1 E. Saint Mary's Road, Champaign, IL 61820-6995.

Ask about free booklets on design ideas and directories of dealers and certified designers from National Kitchen & Bath Association, 687 Willow Brook St., Hackettstown, NJ 07840; 908-852-0033.

Sources of low-cost funding, not necessarily need based, are described in Consumers Guide to Home Repair Grants and Subsidized Loans, $10.95 ($3 shipping) from CERC Grants, 350 Scotland Road, Orange, N J; 800-872-0121; in N.J. 291-676-6663.

Hiring Contractors Without Going Through Hell by Ellis Levinson discusses the management of home repair specialists (Walter and Co., New York, $23.95).

SHOPPING FOR MONEY

In a recent survey of how homeowners paid for their home improvements, NAHB's Remodelors Council found that 52% drew on savings, 27% initiated equity loans, 18% used other loans and 5% depended on liquidation of assets or proceeds from the sale of a previous home. ff you need financing for ambitious undertakings, your options include:

* Home equity loan: Using your home as collateral, you can borrow up to 80% of your home's appraised value. This is repaid at a fixed interest rate over five to 30 years.

* Home equity credit line: The loan becomes a line of credit you can tap. The adjustable interest rate, a percentage point or two over prime, is charged only on the amount withdrawn---a nice fit with remodeling's periodic, unpredictable cash needs. Be wary of low, short-lived "teaser" rates; if the prime shoots up, so do your payments.

Interest on financing secured by your home is still tax-deductible within certain limits; however, this is coming under fire. Always remember that equity loans still put your home at risk.

* Refinanced mortgager. If you take out a new, larger mortgage reflecting the house's current value, and pay off your old mortgage, the difference is available for home improvements. Most experts recommend refinancing only if you can snag a new interest rate at least two percentage points below your present one.

* Home improvement loan: if you haven't built up much equity, you might turn to these straightforward loans, which may be secured by the house. Regular monthly payments, at a fixed interest rate, chip away at the loan over its five- to seven-year term. The interest rate may be higher than equity-based financing, but upfront costs are minimal.

* Unsecured personal loan: If you lack equity or sufficient collateral, yet are creditworthy, you may still be able to obtain an unsecured personal loan. The interest rate will be high and the loan term short.

The Federal Housing Administration offers Title I loan insurance for secured home-improvement loans of up to $17,500. The insurance protects the lender against default, so a Title I loan may be easier to get and offer a lower interest rate. For participating lenders in your area, call 8Q0-733-HOME.

* Mutually Beneficial Family Loan: There is a way you can borrow money from family or friends and save face. Say you know someone who has substantial savings or an investment that is only earning 5% interest. Now the banks are offering home improvement loans at 10% interest. You can opt to get the loan from your relative at 8%. This way he or she earns 2% more on the money and you save 2% per year.

You'll find that interest rates and upfront fees vary widely even on the same type of loan. In general, on a long-term loan, hunt for the lowest rate possible, and on a shorter-term note, try to whittle down the initial costs.