Aug 302015
How seller financing works in Costa Rica.

Seller Financing is a great option for buying a property in Costa Rica.

It is a common question: “I’d like to buy a property in Costa Rica. What kind of financing is available?”

To be a foreigner in Costa Rica and look for a bank loan is like falling down the rabbit hole. The dizzying maze of requirements and documentation and “go visit that guy” and “you need to talk to the other department” and “you need these other documents” and so on, are stupefying. Possible yes, but not for the faint of heart. I’ve seen it done by foreigners, but only by seasoned veterans that have both lived here for some time, and also who have done considerable business here.

Enter Seller Financing. This is the best option and it is gaining ground amongst sellers here in the Costa Rica real estate market. Side note: there are some options available for financing that don’t look to lending institutions in Costa Rica. You can use the equity you have in your homeland to get financing from a lender in your homeland. If you are interested in this option, let me know. I’ve got a couple of connections that you can talk with. These will typically have higher interest rates than what you are accustomed to.

For those who are looking to buy a property in Costa Rica and would like it financed, let’s talk about the seller of the property carrying some amount of the purchase price with terms that work for both buyer  and seller.

Seller Financing is a creative process which ideally is guided by the needs of both sides of the deal – buyer and seller. So, to describe a “typical” seller financed deal is a bit of a stretch, but I’ll stick my neck out here and put terms that can be, remotely, sort of, kinda, “typical” of such a transaction.

  • First payment: 40% of purchase price
  • Interest on balance: 8% (negotiable: 6% – 10% bracket)
  • Term: 2 years (in practice, this one is all over the map)
  • Payments: Interest only payments every 6 months
  • Balloon payment and interest payment at 1 year. 2nd balloon payment of the balance and last interest payment at 24 months
  • Securing documentation: a Costa Rica mortgage (hipoteca – ‘ee-poe-TEC-ah’ in Spanish)
  • Securing property: the property being purchased

Since I am a fan of the seller financed arrangement, (I’ve seen and been involved in a number of these) I always talk with my sellers to see if they are interested. The above scenario is presented as a reference-guide but is only one of the many possible options.

Down Payment: The example states a 40% down payment. I’ve seen the 40% to 50% down payment work. With this range of initial investment, the buyer has enough in the game that they are very reluctant to let it go due to some adversity in their life situation.

The seller is inclined to agree to this amount due to the stability that it offers to the deal. Also, depending on the situation of the seller, it is enough that he/she won’t mind so much if the deal defaults and they simply have to sell the property again.

The buyer is helped by this amount for the obvious reason that it requires much less cash to secure the property they have found and have fallen in love with. Buyer’s circumstances can be that they have an investment that will mature and pay-out during the term and so all they have to do is manage the interest only payments in the interim.

The seller may need some fixed amount that bears no resemblance to any “conventional” loan construct. I’ve seen deals such as a $125,000 property where the seller needed $100,000 for some reason and was simply not able to negotiate to a lower amount down. But since this amount solves his situation, he is flexible on the terms for the balance of $25,000.

The Term can be negotiated to see if there is a fit that satisfies the needs of both sides. This can be as short as say, 6 months, or up to 5 years. I’ve not seen any seller financed deals run longer than 5 years, but that’s just my experience.

However, most sellers are looking for a shorter term than 5 years. A 1 year term stands a good chance of working for the seller. 2 years? Less but still do-able. 5 years is at the outside in seller-carry scenarios.

The point is: negotiate it. Have clearly in mind what you as a buyer need and what you have to offer. It might end up being a simple fit, or you might have to compromise some to make it work. But you want to know that the final agreement works for you and that you’ll be able to get a good nights sleep with the terms decided upon. If not, no deal. Keep looking.

I know, this is easier said than done when you find the property you want. But if an enamored “need” for a property causes an emotion based outcome where you compromised out to the limit of what you can do, you may have a couple years of discomfort that can completely erase whatever heart-felt love for the property you had initially. Now the property reminds you of the stress and sleepless nights instead of the safe-haven from life’s anxieties that the property once represented to you. 

Payments: In the example, interest only payments are used. These obviously don’t pay down the principal at all but serve to buy the buyer time to arrange their affairs for the upcoming balloon payment. These work nicely and are easy to calculate.

An amortized deal is where both interest and principal are paid with each payment. I’ve not seen many of this type, but by searching “amortization calculator” on the web, these also are easy to calculate.

Balloon Payment: These are fairly self-explanatory. A big chunk, or all, of the balance due is paid.

Securing Documentation: I have always used a Costa Rican mortgage. My attorney is a strong proponent of this option, so it is what I use (no, the lawyer does not make more with a mortgage than with say, a trust).

His reasons are that, in the event of a default, the courts are now involved. There is no basis for dispute. The terms of the mortgage were breached and it now enters into a legal process that ensures the outcome. A trust is another option that should be considered but the detailed comparison of these two options is beyond the scope of this article. So for the moment, let’s go with the mortgage option.

Securing Property: the property itself. You now have 40% – 50% invested in the property and the seller is in a non-risk situation of either receiving the balance per the terms outlined in the contract, or getting the property back to re-sell at the same or perhaps even a higher price.

The buyer benefits from not needing to provide some other asset as collateral. Simple, right?

Closing Comments: To request a property purchase with seller financing you are reducing the negotiability of the price. In some cases it is an “either, or” situation. If you have the cash available, you can simply negotiate a price. Typical discounts on properties here in Costa Rica are loosely around 10%. With a seller financed deal, you will either pay the asking price or nearly so. You give up some of your negotiating strength with seller financing.

So the seller financed deal will cost you in that you’ll likely pay a little more for the property, plus whatever you pay in interest.

The benefits are obvious: you are able to purchase the property that you want. The paperwork is simple. The attorney for the deal will draft up the Sales & Purchase Agreement (SPA) and also the mortgage. In a non-financed deal, the buyer’s attorney does the SPA. However, when there is a mortgage involved, the seller may require that his or her attorney be used and the buyer will have his attorney review and approve the documents. Buyer pays the cost of the mortgage, usually around $1,000.

This is a rich topic that has many permutations. But guided by a knowledgable real estate agent and a good attorney, seller financing can facilitate the purchase of your property here in Costa Rica.

Ben Vaughn is a long time expat, mid-50's single man, father of 3, grandfather of 4, living and working in Costa Rica's southern Pacific coastal zone. His blog is one of, if not "the" longest running real estate blog in Costa Rica. Yes, his blog is about real estate, but with a twist: what's it like to "be" here. Ben says that his numerous conversations with people looking for a property (since 2004) in Costa Rica's southern Pacific "Zone" have underscored the fact that real estate in Costa Rica is not just about selling a property and making a commission. The real estate guy is generally your first point-of-contact in Costa Rica for so many diverse topics: how to open a bank account, which lawyer to use, is it necessary to learn Spanish? which dentist to use, how to buy a car etc...
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