Answer: There are a couple of ways to renovate your lawn. You can rototill it up and start all over, or you can rent a core aerator and aerate your lawn, then spread some sand or compost over the area and reseed.
A core aerator will remove one inch by three inch plugs from the lawn. Leave the plugs on the lawn and they will dissolve in rain or water from the sprinklers. After aerating spread a thin layer of sand or compost over the area and water it in well. The sand or compost plus the soil from the plugs will work their way down into the holes left by the plugs loosening the soil and helping it absorbe and hold moisture. You can then overseed your entire lawn. Good luck with your project!
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