This Remodeled House

A few years ago Jody and Don Costello dreamed about putting an addition on their San Diego home to create a new master bedroom. But the dream turned into a nightmare. The roof leaked, damaging carpets and walls. That led to mold problems throughout the house. The slipshod work, done by unqualified workers, had to be torn down and rebuilt because it violated local building codes, the Costellos claim. The contractor walked out. The Costellos say they spent $94,000 on the addition--they'll have to fork over $115,000 more to repair all the damage--and the house is still torn up. They're suing their contractor, who's disputing their claims but concedes that he walked away from the job when it turned sour. "We have a big investment in this house,'' says Jody. "And now it's not sellable. We're stuck with it.''

The Costellos' tale is just one of many from the dark side of the current housing boom. Sure, homeowners can crow about the rapid rise in property values, which makes renovation seem like such a smart investment. And they can cheer low interest rates and free-flowing home-equity loans. But the sound you're most likely to hear from people looking to expand or upgrade their homes these days--a $106 billion-a-year business--is a scream that would make Edvard Munch proud. Now that your neighbors are add-ing on family rooms and installing soaking tubs, finding a contractor who can squeeze in your job is tough. Finding a good, reliable contractor is even tougher, which makes it all the more important to do your home-work first (especially since, as the accompanying graphic shows, the percentage of your investment you'll earn back has slipped as the cost of the work has risen).

Homeowners who are willing to wait for their dream kitchens and master suites can protect themselves by doing some thorough research before the contractor shows up. Here's how to avoid getting nailed:

Check credentials. The friend of a friend who's good with a hammer may well be a good carpenter, but any major project demands a licensed contractor with a permanent place of business, a real phone number and a line of credit with local suppliers. An unlicensed home-improvement contractor is more likely to disappear into the night and turn up later with a new company name than any other kind of consumer business, according to the National Association of Consumer Agency Administrators. To properly vet a home-improvement contractor, ask to see his license and make sure it's been issued to the same company you're contracting with; ask to see copies of his insurance policies and verify that he is carrying worker-compensation insurance, as well as general-liability insurance. Visit clients for whom he's done similar work. Call his subcontractors to make sure they get paid on time. Ask his suppliers if he pays those bills on time. This may sound like a ridiculous amount of work for someone who just wants a cool granite countertop or one of those neat steam showers, but it's necessary. "Reputable remodelers understand that's all part of the business," says William Owens, a Powell, Ohio, remodeler and chairman of the National Association of Home Builders Remodelers Council. He tells homeowners to look for contractors who have been certified by the NAHB or the National Association of the Remodeling Industry or the National Kitchen and Bath Association. Their certification at least suggests that the contractors are willing to put some time into their industries, says Owens.

Keep the cash. "You lose your leverage as soon as you pay," notes Courtney Yelle, director of consumer protection for Bucks County, Pa., who says homeowners who put more than 30 percent down before work has started are asking for trouble. Put as little down as possible; no more than 25 percent to 30 percent for material-heavy jobs (like kitchens, where the cabinets need to be ordered), and less than that for jobs like roofs that are mostly labor. He tells consumers to pay with a credit card; that gives them a second avenue of dispute resolution and weeds out those contractors who are so marginal they can't afford to take plastic. The contract should allow for periodic payments as the job is completed. Don't make the final payment until the job is done and the contractor has signed a letter stating that he, and his subcontractors, have been paid.

Plan carefully and follow the plan. It pays to hire an architect to design any project that will change the outside of the house or significantly reorder the inside. Use the architect's plans to get bids from at least three contractors, and don't hire the contractor whose bid is much cheaper than the others. And expect cost overruns, schedule slips and stress despite those best-laid plans. Even good projects are hell to live through, especially when dust fills the house, the refrigerator is in the living room and the contractor is starting to sound bored. That's when you have to pay even more attention to all the details.