Water damaged exterior walls are quite common. The problem usually occurs when an exterior wall has been poorly constructed and weatherproofed. Poorly attached exterior siding or incorrect installation or failure to seal the wall behind exterior siding with house wrap or felt paper are causes directly related to water damaged exterior walls. Repairing them requires a moderate amount of effort, and at least one day, depending on the size of the project.
You will need a circular saw, sawhorses, a tape measure, chalk line, carpenter's square, hammer and a flat pry bar. The circular saw blade should be sharp. A dull blade will make rough cuts on the siding. Make sure that the sawhorses are strong enough to hold the material for the project. Also, you should wear eye protection and gloves.
Bracing the wall
Temporarily support the roof in the area that the exterior wall supports. Never attempt to remove an exterior wall without first supporting the roof. Install a temporary wall by placing a 5 by 10 cm (2 by 4 inch) board on the ceiling and floor and filling in between with vertical studs -- 40 cm (16 inch) centres. Make sure that the wall is plumb and straight -- a leaning support wall will not provide the necessary support.
Removing the damage
Remove the siding of the exterior wall. Use the flat bar to pry away the exterior siding. Find a stopping place for the siding about four feet to the left and right of the damaged section. You will need to remove any damaged plywood or OSB (oriented strand board) by prying it loose with the flat bar. Remove any damaged insulation from the wall and, using your hammer, pound any damaged framing loose and remove. Be careful not to damage any interior wall material such as plasterboard or panelling.
Replace the framing by cutting the framing materials to length and tapping them into place. You will need to attach the framing by toe-nailing into the sides of the wood. You may use either nails or 7.5 cm (3 inch) wood screws. Insert the new insulation into the wall with the paper facing the interior of the wall. Replace the exterior sheathing, plywood or OSB, and attach with nails. Cover the new area with felt paper or house wrap, and replace the exterior siding. Make sure that the new siding matches the old. Prime, caulk, and repaint the new siding if necessary.