A New Kind of Seller Part I

The big question of the day seems to be, is Costa Rica real estate being affected by the topsy turvy current global economy? In a word: yes.

In a previous article dated December of 2007, (click here to read) I had simplified the possible affect of the economic downturn in the States. I wrote that the affect can be negative, neutral, or positive. My conclusion at that time was that the affect had been positive. I’m modifying (please note my choice of word there) my position now that we’ve been in “the change” for some time. Please note that I’m not changing from my position, but as you will see, I am detailing out the affect of the global changes. I am still of the mind that, overall, the change is in the “positive” column.

The Change: The economy was amazing for a long time in the States. There were some bad lending practices that came out of that economic climate that have resulted in some pretty devastating events there, not the least of which has been some huge, multi-billion dollar aid packages to salvage long standing, pillar financial institutions there. Money, once so readily available to all, is now hard to come by in the U.S.

The dollar is weak. All one of us Gringos has to do is travel to Europe to really grasp the impact of this. Conversely, the Euro, Sterling, and the Canadian dollar are strong. Oddly enough, even the Costa Rican colon is gaining ground against the dollar.

Our real estate market here in Costa Rica’s southern zone has been, for the most part, cash on the barrel head. Our single family lot buyers over the last years have been made up of buyers that have the money on hand that they need to acquire their land. Oftentimes this money came to them by way of an equity line. The equity buyers are pretty much gone. So, there is a negative affect in that we have lost what was once a rather large stream of ready buyers.

The compensation of this change, effectively offsetting the negative affect of the absent equity buyer is: more Canadians, Europeans, and yes, even Costa Rican’s inquiring into available land here in the zone. We are busy here, but things have definitely changed, and there are opportunities to be had, and this is largely due to a new kind of seller.

I get asked if prices in Costa Rica are coming down. The short answer is no. The long answer is this article.

The changes that we are talking about here are resulting in some of these properties coming available. So one of the changes that we are feeling here in real estate is that the quality of our inventory is improving. I can’t say yet that prices are any lower than where they have been in recent history, but the selection is the best I’ve seen since the land-grab of 2004 and 2005. The reason is that distressed sellers are selling what they have here in Costa Rica, to preserve what they have in the States. These are sellers that never intended to sell their property, or they wanted to wait until the felt the prices had topped out, but now are willing to do so to keep what they have up in the States, and to hopefully be able to ride out the storm there.

There is a glut of lots in Costa Rica’s southern zone. Not so much in the Dominical to Uvita zone. This is where the mountains come down to the sea, and the ocean views are spectacular. We have some lots in this zone that feature views that touch the soul. These are available for a price, and I don’t think that we’ll be seeing those prices coming down any time soon. They are rare and desirable.

In my office in Uvita, we are approached on a daily basis by people that want to list their property for sale with us. Due to the lack of an MLS here, this can be a formidable task for these sellers. (Click here for an article on how to sell a property in Costa Rica) . We are getting a lot more “selective” in taking these listings on.

Over the last 5 years, there has been some pretty amazing price increases on land here. Realistically we can talk about 20-30% annual increases. Many of the sellers have this in mind when they decide to sell. I think that we are early enough in this new phase of the cycle that we are still seeing sellers that project what their property may be worth in a year, and ask that for it so as to optimize their take on the sale. So we aren’t seeing that many “deals”. But I think that understanding the market and what's going on can yield some decent results now.

We are now able to work more with our sellers in establishing a realistic price so that the property will sell, and the sellers are listening.

Click here for Part II

A New Kind of Seller Part II

Evaluating a property here in Costa Rica is a dicey prospect, and “comps” as often as not, are based on what someone else is “asking” for their property, and not so much in what something comparable has actually sold for. The problem is, there may have been a gap of time since a nearby property has sold, and what the seller calculates his property to be worth now. This is based on the word-on-the-street about land value appreciation here. Or there may be an anomalous sale somewhere in the zone that can be referred to. So there is often a huge disparity between what the last nearby property sold for, and what the seller thinks his property is worth.

To sell a piece of property here, a seller needs to appeal to the needs of the real estate agent. Those of us who have offices are busily working our leads, and updating our websites (hopefully) and meeting with clients that have questions about how to build and so on. We spend a lot of our time, perhaps the lion’s share of it, working with listings. When we have a ready-to-buy client, and hopefully have his/her best interest in mind, we have a number of properties that come to mind in response to what they tell us they are looking for. We are in this business to make money, plain and simple. So we want to show the prospect something that fits what they are looking for, as well as is a good value.

The Type of Sellers We are Seeing:

Developers that got into the game here, just a little bit late. The accounts of big money being made on buying up a large tract of land and subdividing it to make enormous returns percolated out into the global community of developers.

The value of the large parcels was going up at a higher rate than the value of the individual lots, so that the margin for profit was shrinking for these developers. There was still enough in it for it to be irresistibly alluring so the big tracts kept selling. This is not to say that the single family lot prices weren’t going up, they were, but just not as fast, proportionately, as the large parcels. By the time these late developers got their single family lots to market, the big land grab slowed down some due to higher prices.

The most common request I used to get for land was for an ocean view lot for under $100k, and we had them. I remember tracking the number of such lots and watching them dwindle down to nothing. Almost to the day the sale of the last under $100k ocean view lot can be established. Sure, there are a couple out there still, but they likely have a price mitigating feature of some kind. I’m here referring to general market, ready to build, ocean view lots.

Our bread basket moved into the Ocean View Lots for $125k, then up to $150k and so on to where we are now. I don’t think that you can start looking for a decent ocean view lot in Uvita for under $200k now (although, I do know of one :o)

So the easy sale moved into normal-type real estate business. Obviously the higher prices knocked a good sector of our buyers out, or moved them into the still a great value category of non-ocean view lots.

The result of this has been a number of developers who have had to wait too long to recoup their initial capital, and many of them have investor groups back home that are waiting for the big returns that the front runner had talked about with them 2 and 3 years ago.

These developers are ready to deal. Have cash in hand and you can negotiate a pretty attractive price on an ocean view property. Package a couple of their lots together and you can further enhance the potential for getting a deal. Of course, you need to know that the “asking” price was fair to begin with. This is a function of your real estate agent to help you to know.

I know about such scenarios right now in specific properties in Hatillo, Lagunas, none in Escaleras at present, Uvita, and several in the Ojochal and south zone.

The area south of Ojochal is being impacted right now by the construction of a golf course. (I am personally involved in this.) The affect on land desirability there is being affected and there is a quite a bit of speculation going on around this project. The project itself is offering some pretty low buy in prices right now since it is in a pre-development phase. I think that we’ll see this area do some macro-cosmic growth in the coming years.

There are still a lot of buyers around. We have lost a big chunk of our equity buyers. They have been replaced by Europeans, Canadians, and Ticos (Costa Ricans). Selection is good, and there are deals to be had.

So things are good in our little neck of the Costa Rica real estate marketplace. I am building a list of buyers that would like to be notified of the “Good Deals”. I’m calling this list “VIP Deal Seekers”. The requirements to be on the list are that you have ready cash available, and can arrange your affairs to make a quick decision. This usually involves a trip to Costa Rica to view the property. A distressed seller will accept below market offers for the promise of a quick closing. If you would like to be on this list, please let me know. I’ve structured my contact page to accommodate the request.

Sales Process Overview Part I

Down and Dirty:

• Pick your real estate agency


• Pick and Consult with your agent


• View properties


• Make an offer either in writing or verbally through your agent to the seller


• Negotiate the price and terms


• Get signed Offer To Purchase document to lawyer that outlines the details of the deal so that he/she can draft the Purchase and Sale agreement


• Deposit 10% with the accepted offer. The deposit is “non-refundable” with the exceptions of the contingencies mentioned in the offer. The deposit is held in escrow until closing.


• Due Diligence period


• Close

If you want to know specifically about any of the above details without reading through this entire 3 part article, please click on the bulleted point above to go directly to that information.

Pick your real estate agency

I’m not really sure how this happens. Some may pick an agency that they are familiar with already. This may be a large known name brand real estate agency such as ReMax, or Century 21 or some such thing. I benefit from having this blog and receive a good number of clients to my non-brand name agency by those that have read information here. Sometimes it’s a matter of walking by and spontaneously stopping in.

The usual guidelines apply in Costa Rica that apply anywhere as regards “good business”. You want an agency that has a good reputation, has been around for awhile, and that you feel treats you right. Going with a known brand-name is no different in Costa Rica than going with any other agency. There is no licensing of real estate agents in Costa Rica, and all agencies should be concerned about their reputation. Getting a referral from someone that has had a good experience in real estate here would be a help.

Pick your agent

Within the agency that you choose there will likely be several agents. It’s a little tough at this point to have had a discussion with one agent, realize that there is no chemistry, and ask to talk to another one, but I don’t think that it is prudent to proceed with an individual that you don’t feel comfortable with, or that you feel doesn’t have your best interest at heart. Some simply decide to move on to the next agency and try there.

Consult

When you have your agent, there needs to be some talk talk. He/she will need to understand the purpose for the purchase and your budget.

Generally, we will start with a consultation that involves sitting in our office in Uvita, but it can be over a cup of coffee in a soda, and discussing the objective of the client. Why are they here in Costa Rica looking to buy a property? Most investors in Costa Rica real estate fall into one of about 4 different categories:

1. Re-locators


2. Land-bank investors


3. Income generating investors


4. Migrators


5. End of the world escapists (Ok, so there’s 5)

Relocators:

These are those who are looking to live in Costa Rica. It may be immediate, or at some point in the future. Most of my relocation clients are looking to move down in the future. They may be about to retire in a few years and want to secure their property now, while prices are still affordable. Or they may be a couple that simply want the Costa Rican lifestyle and perhaps are financially independent, or are able to work on the Internet, or tele-commute in some fashion. This may or may not involve children. Relocators may be part of a larger group of friends and/or family that want to put together a compound and live a simpler life. Then there are the escapists that are looking to secure a remote part of Planet Earth for what they feel is the coming fall of society.

Migrators:

These are the retired and/or independently wealthy, or the tele-commuters that will spend their homeland winter months here in Costa Rica, and the other 6 months back in their homeland. (I know that the term “homeland” has taken on a negative connotation in recent years in the States, but for the purpose of this document it is used to identify the client’s land of origin.) The migrators may or may not want to rent out their property while they are not in Costa Rica.

Land Bank Investors:

“To purchase land for the express and sole purpose of storing money until such time as it may be sold for a decent rate of appreciation.”

The above definition, as eloquent and literally astute as it sounds, is not copied from some academic reference. I made it up. This is the easiest way to be involved in Costa Rica real estate. All it involves is making an informed decision, buying the property, and waiting. This has made up a large part of our business in the southern zone of Costa Rica. It is now starting to change more with the number of migratory types and re-locators coming in which is resulting in a huge wave of construction.

Income Generating Investors:

Purchase a piece of land that will generate income on a regular basis. Purchasing an ocean view lot and building a nice home on it of, say, 2,400 square feet, and furnishing it nicely, can generate some pretty decent vacation rental income. In the Dominical, Uvita and Ojochal area, the vacation rental prices range from $1,200 - $7,000 a week. I’d say that $2,500 per week is common. You can see what these look like by visiting the Dominical.biz Vacation Rental page. This is a popular purchase purpose since the investment can return a cash on cash of 8 – 12% while the asset appreciation is running somewhere around 20% annually, AND that’s not all. Here is the Ginsu knives add-on that can come with an income generating real estate investment in Costa Rica: you own a beautiful vacation spot for yourself, friends and family.

End of the World Escapists

These are kinda rare, but they do happen, and they do seem to look towards Costa Rica with regularity. These usually want a large piece of land with water on it. They aren’t that concerned with investment potential.

Sales Process Overview, Part II:

Go and View Properties:

Once we have identified the purpose that the person(s) have in looking to buy land in Costa Rica, the agent will consider this as he directs them to the available properties that suit their interest.

I have always found it interesting to watch the process of land selection. I think that we all come down to Costa Rica with some pre-conceived notions of what we want, and for most of us, these change after we’ve stood on a few properties. Our marketplace is, for the most part, coastal mountain terrain. It’s hard to arrive here knowing what these properties are like; they are quite unique, even on a global scale.

Throughout the consultation and property viewing, the buyer is asking questions, getting informed, and making decisions. They are considering the various value affecting features of the property such as: the view, the access, proximity to neighbors, proximity to the beach, golf course, waterfall, how much breeze there is, the jungle, and so on.

Most buyers of land in Costa Rica are not all that familiar with the peculiarities of the land. However, most have had experience in land transactions somewhere, and that familiarity of basic good business is helpful. Basic good business practices are the same everywhere. The broker should be an open book with respect to the properties, “full disclosure” being the key words here. You should get the sense that your broker wants you to know everything that he knows about the property, good, bad, and indifferent. If you don’t get that sense from your broker, get rid of him/her and find another one.

When their property is found, it is time to move on to –

Making an offer:

When I recognize the moment that my client has “found” their property, I view it as imperative to get the property off of the market as quickly as possible. There is some cosmic mechanism in place that alerts all prospective buyers about that particular piece once one of my clients decides they want it. It has happened more than once that the day that I submit an offer on a piece of land, the seller receives another one within hours. Or an offer comes in just before I can get my client’s offer in. And this can happen on a piece that has been on the market for over a year!

Costa Rica real estate agents don’t “represent” buyer, nor seller as they do in the States. But as for services rendered, I think that our representation leans more towards the buyer. The seller holds the title to that property and so is pretty safe and doesn’t need as much care as the buyer. The buyer needs good guidance through the process, needs to know what to look for.

Having said that, “the offer” is the point where our representation of the seller kicks in. We can’t ask a seller to take a property off of the market, without it being a PDSD (Pretty Darn Sure Deal). The moment that they take the property off of the market by means of a signed OTP (Offer To Purchase), they will say “no” to any further offers, even if they are higher priced or have more favorable terms for the seller. So the real estate agent needs to make this clear to the buyer.

As for price negotiations, all things are negotiable. In the majority of the deals that I have brokered here in Costa Rica, the selling price has been at, or close to, the asking price. There have been some exceptions where the seller is particularly motivated and the buyer comes to understand this by the process of negotiations. When asked if the seller will listen to offers, I generally respond using the line that I learned from my real estate peers in the States: "I'll present any offer you wish to make".

There are basically two categories of concerns to a buyer that must be satisfied: subjective, and non-subjective.

• The subjective concerns are: Do I like the property? Is it in my budget? Is it where I want to own property, etc…


• The non-subjective concerns are: Is the land buy-able? Is it free and clear? Does the seller have the right to sell it? Are there any potential pitfalls to the title on this property being transferred to me? Can I build what I want on this property?

When we submit an OTP, all subjective concerns have been addressed. The buyer knows that they want to property and have the necessary funds to buy it. The offer cannot allow for subjective concerns since we are going to legally restrict the seller from being able to accept another offer on the property.

The non-subjective concerns:

The big 3 considerations in the non-subjective category are: Road, Water, and Electric. A typical land transaction in Costa Rica has the water and electric run to the property, and a community arrangement for road care.

The topic of soil stability is one that raises a lot of questions. As a real estate agent here in Costa Rica, I am way out of my comfort zone speaking to this topic at all. I’m certainly not qualified to be able to look at a property and recommend, or not, a soil analysis. A test of three perforations in our zone costs around $1,200 and falls to the buyer to pay for. Some developers have mentioned that they’d like to go ahead and have this done prior to listing the property for sale, but as of yet I’ve not ever handled a property with an existing soil analysis. This topic is extensive enough that I’ll likely make it the basis for a future article. So, for the purpose of this article, let’s just throw it in the mix of things to have in mind in the non-subjective concern category.

Frequently the “make an offer” stage happens verbally between the real estate agent and the buyer, the net result being that the terms of the deal, the price, the deposit, and the term of due diligence leading up to the close, are established.

The deposit is normally 10% of the purchase price. The property is not taken off of the market by the seller until hard money (non-refundable) is deposited. Keep in mind though that “non-refundable” refers to the subjective concerns. The non-subjective concerns can be put in as line item contingencies, and if these contingencies are not satisfied prior to the end of due diligence, the buyer can get their deposit back.

“Buyer will have the property re-surveyed and accept the new survey if it is within 3% of the original survey”, would be a non-subjective contingency. This particular contingency would be done at buyer’s expense and would be arranged by the agent. It would have to take place before the end of due diligence.

Getting the deposit into the lawyer’s escrow account is frequently one of the most challenging steps of the transaction. If you are buying a $200,000 piece of land, you need to come up with $20,000, obviously. This isn’t always so easy to do if it is a weekend, or even if its not. Generally you can get a $5,000 cash advance on each credit card by going into a bank. Frequently a call to the issuing bank is necessary. But it’s all do-able and I’ve seen it work many times. Even if the buyer is unable to come up with the full deposit while still in Costa Rica, they can always come up with enough to convince the seller that they aren’t going anywhere and that this deal is solid. The amount needs to be enough to assure the seller that he has a deal. How much this is varies, but it would be the rare buyer that would put $10,000 into a deal and then not see it through. This amount, or some other, will buy the buyer time to get back home and wire the balance of the deposit into the lawyer’s escrow account.

Sales Process Overview, Part III:

Due Diligence

The term for due diligence is normally 3 weeks, and closing is usually in 4. Due diligence starts when the deposit is made, and the written offer has been signed by buyer and seller. This document will have the contingency points detailed out. Some properties have no contingency points, some have several, it depends on the property. This is one of the more important areas where you, the buyer, has to rely on the expertise of your broker.

Your broker may have an intimate understanding of the property. He/she may not due to the amount of inventory available in the area.It just isn’t possible to know each property that well. I have some properties that I know extremely well, perhaps having sold a number of lots in the development already, and so I can authoritatively speak to the specific contingencies that should be itemized on the Offer To Purchase (OTP) form. When I don’t have this familiarity with the property, it still works out since I know what the basic concerns are. Road, water, electric, soil stability, and knowing for sure that the buyer will be able to use the property as they wish.

There are boiler-plate concerns that the lawyer will study on every deal, and these don’t need to be itemized. The most basic is, can the seller sell the property? Does he/she own it free and clear?Are there any encumbrances? The lawyer will make a study of the National Registry (www.registronacional.go.cr) for most of this information. What, if any, easements are there on the property?If the property is part of a development, are there any Codes, Covenants & Restrictions (CC & Rs)? Buyer will know what monthly and annual fees are required in ownership of the property.Annual taxes are ¼ of 1% of declared purchase price. Click here to read an article on how to declare the value of your land purchase in Costa Rica.

All of the above considerations will be dealt with on the OTP. Full disclosure of all things pertinent to the property are the breath and spirit of good real estate brokering in Costa Rica. If you, the buyer, get the sense that you are not getting the whole story, and that maybe your broker is not offering all that there is with respect to a property, you might want to look for another broker. You don’t want to feel that you are having to ask all the right questions, but instead that your broker is offering all that he knows about the property.

The term of due diligence and closing can vary from one property to another, but the periods mentioned above are the customary. As mentioned in Part II of this series, there are no “subjective” concerns. The only thing that can derail the deal are the contingency line items, and these line items must be satisfied during due diligence.

If there is a legitimate reason for extending either the due diligence period, or the closing, you should express the concern to your broker.Your broker will have the needs of both parties in mind and so will be able to facilitate the best scenario for both parties.The seller wants to sell and the buyer wants to buy, so all things are negotiable and do-able.

It may be that you aren’t sure if you can get the new survey done in time to meet the obligation of the due diligence period, or you may not be sure that you can get all of your funding for the deal by closing. In such situations, your broker can discuss the concerns with the seller and come to an equitable arrangement. I like the use of “option to extend” clauses, when necessary. I have had cases where we were unsure that we could get a property re-surveyed by the end of due diligence.In such case, we simply mention in the OTP that every effort to get it done by the term of due diligence will be made, but may ask for a 2 week extension, or some such arrangement, leaving it less binding. The seller may reject or accept, it depends on the seller. I have seen cases where the seller will reject such a clause, but then assist in getting the item satisfied, perhaps using his influence with the topographer to guarantee that the new survey is done by term. I have also seen situations where we get to term, without such an extension clause, and an extension has been granted when we provided the explanation of what all had transpired. By the way, I’m not emphasizing the re-surveying of land as a contingency. This is done with some regularity but isn’t always necessary.

After the deposit is made, if the buyer changes his mind for some non-mentioned cause, and decides to not purchase the property, he/she will lose their deposit. However, if something is uncovered during due diligence that fails to satisfy one of the contingencies, the buyer will have the option of having the deposit returned to them.

The Closing

Almost all land transactions in Costa Rica are done using a corporation. It is likely that you will purchase a “shelf” corporation from the same attorney that is doing the deal. The attorney likely has any number of such corporations available in his/her office for just this purpose.

A word about corporations in Costa Rica.

Buying an existing corporation in Costa Rica is generally not advisable.Using this “shelf” arrangement is common and safe. But, if the seller of a property is suggesting that you purchase his corporation that owns the property, thereby avoiding the transfer of title fees, which can add up to thousands of dollars, you are taking a risk. There is no way to thoroughly study the history of an existing corporation. Agreements can be made in the name of a corporation, binding the owner of that corporation to the obligation. When the corporation is sold, that obligation goes along with the corporation and you find out down the road that you’ve got to pay for the previous corporation owner’s obligation. Besides the “shelf” arrangement, there is one other that works well also. A developer of multiple lots may go ahead and put each lot in the name of a separate corporation, thus making the sale of the property both less expensive and easier for the buyer, the broker can vouch for the integrity of the developer. This can be a very clean way to do a deal as well.

You don’t have to be present for the closing. You can allow your lawyer power of attorney in the corporation that is buying the property. This power is very specific and allows him/her to buy one time in the name of the corporation. Most shelf corporations have this provision built in. On your next visit to Costa Rica after closing, you can remove this power, or the original power statement can state that it (the power) dies after being used one time. If you think about it, it would be very difficult to harm a corporation by “buying” in the name of the corporation. It would be the power to “sell” in the name of the corporation where some damage could be done.

So with this power to buy one time, the closing can happen with, or without the buyer needing to be present. This is immensely helpful in Costa Rica since the buyers have gone home 4 weeks prior to closing and are likely not in the position to get back down for closing.

The buyer should transfer funds into the lawyer’s escrow account several days before closing, to be sure that the international transfer gets there in time. Usually a wire transfer initiated in the morning in the States will arrive to Costa Rica in the afternoon, but I have seen these take up to five days to arrive.

So closing takes place, funds are disbursed, and there is a celebration on the part of all involved.

Should Full Value Be Declared on a Costa Rica Property?

In the process of buying a piece of land in Costa Rica, we get to a point where the client has to make a rather strange decision. Should they declare the full value of the property on the Purchase and Sale agreement? Or should they under declare so that they can avoid paying taxes on the full amount? This may sound like a “shady” decision. One would think it to be illegal to not declare the actual amount paid for the property on their contract. It’s not. In fact, the common practice here for years has been to declare a lesser value and the practice has been embraced by virtually everybody in the country. So, the consideration of “how much to declare” is a feature in nearly all land transactions in Costa Rica.

It is normal to purchase a piece of land using a Costa Rican corporation. In Costa Rica, these are called “Sociedad Anónima” or “Anonymous Society”, or “S. A.” for short. The options for getting one of these is to simply purchase a pre-existing S. A., or corporation, from the attorney who is handling the deal, or to go ahead and have one formed when you first start the process of looking for a property. These take about 3 weeks to form.

Most of the professional law firms in Costa Rica will have a number of “shelf corporations” ready for purchase by a land buyer. What this term means is that the corporation was formed and paid for by the law firm and they have it there for this purpose, ready to be used by such a client.

The concern when purchasing an existing corporation is its history. It is impossible to determine what, if any, obligations may have been made in the name of a corporation. If a buyer were to purchase a corporation from a land owner, they could conceivably have someone show up on their doorstep a few days, months, or years later with a contract signed by the previous “president” of the corporation, in the name of that corporation (now yours), and guess what? If you don’t pay the obligation, this fellow can go after your land, which your corporation owns. This concern is essentially nil when buying a shelf corporation from a reputable law firm.

On the other side of the coin, there are some compelling reasons to purchase the corporation that owns the property. This reduces the closing costs since the sale of a corporation does not involve any transfer of title. The title is owned by the corporation, and continues on as such after the sale. The sale is merely the sale of a corporation with its assets, whatever they may be. The property remains in the possession of the corporation, and the national registry remains unchanged. This is a simple and inexpensive transaction, not unlike buying a pair of shoes, well not quite, but you get the idea. There is, of course, still due diligence required with respect to the basics of a land transaction. A title study, the survey checked for accuracy, disclosure regarding road care, water system, and electrical service, but again, there is no transfer of title.

So it’s good to be informed. I would consider doing such a transaction with a developer that has a number of lots, and he/she has put each of the lots in its own corporation for the purpose of making the purchase of those lots easier and cheaper for the buyer. But in the case of finding a stand alone property where the current owner offers to sell their corporation, I would likely advise against it. The Purchase and Sale contract should include a declaration on the part of the seller that he hereby does swear on all that is good and holy that there is no history to this corporation, and that if there turns out to be… well I think you get the general idea.

In Costa Rica right now, a shelf corporation will run you between $500 and $700 US. This is the most common scenario in my real estate business. I have a long standing relationship with Randall Sanchez in San Isidro de Perez Zeledon. His firm is called “Bufete Sanchez” and I’m not sure why. I keep meaning to ask him why law firms in Costa Rica call themselves “bufetes” (boo-feh-teh) and perhaps one of these days I’ll remember to ask him. Anyway, at any given time Mr. Sanchez has 40 or so shelf corporations ready to go. These corporations are sitting there with no history and ready to use.

So “additional expense” number one of two is the corporation for somewhere between $400 and $600.

The second “additional expense” is that the roughly 4% of sale’s price transaction fee that is normally split 50/50 between buyer and seller. So the buyer would pay a 2%-ish closing fee. This figure includes the transfer of title fee, and various taxes and so on that add up to the 4% amount.

Obviously, if it is legal, and common to under declare the value of a land deal, both the buyer and the seller of a piece of land will benefit from a lower closing cost amount. The vast majority of the sales that I have brokered have been for full amount. But what I gather from the “street” is that a normal "declared value" on a land transaction is $20,000. Compare 4% of that figure to 4% of $250,000 and you’ll see why some sellers of land, who customarily pay ½ of the closing fees, will push a buyer to under declare.

Here is the crux of the biscuit.

There is no capital gains tax in Costa Rica. There should be. There is no logical reason why not. As I have mentioned in a previous “tax” related article, there are a lot of subsistence, coffee, and various crop type farmers in Costa Rica. Farmers own a lot of land. This land is zoned “agrícola” or agricultural, which also happens to be the zoning on nearly all of our single family lots and large parcels. I can’t imagine that the Costa Rican government will ever touch the existing arrangement with regards to such land since it has worked well for years and the declared value on a gazillion farms all over Costa Rica is probably somewhere around $5.00 US (just guessing), making the annual tax bill affordable for such farmers. If this were to change, it could have a seriously negative affect on many hard working farmer families and subsequently on the Costa Rican economy. However, there is no reason for there not to be a capital gains tax. If one of these subsistence farmers were to sell a property at today’s prices, he/she would have the funds from that sale with which to pay the capital gains tax.

Capital gains tax is coming, we just don’t know when. The government body that will likely enact such a tax is a little distracted at the moment with CAFTA (Central America Free Trade Agreement) which is an extremely thorny endeavor considering that the electric, phone, and Telecommunications of Costa Rica is handled by government controlled monopolies which have to change per the terms of CAFTA.

I’m sorry that we’re running a bit long with this one, but in order to tie all this together there remains just a bit more, and this part is key.

The question that a land owner now has is, “why can’t I just under declare on my purchase value, and then re-assess the property when I get close to selling that property?”

The declared purchase price is registered in the National Registry (www.registronacional.go.cr). This doesn’t change when there is a reassessment of the property value. The only thing that changes with the new assessment is the amount of tax that the land owner pays annually. When that property seller goes to sell, his capital gain will be calculated, not on the amount of the new "tax" assessment, but on the price that he/she is registered as having paid for the land.

So, the decision is yours/ours. To under declare or not. My thought is that the best financial decision is to declare full value and thus pay less capital gains tax when there is one in Costa Rica.

Costa Rica Land Tax Change?

I received a question in the forum at Dominical.biz by a gentleman who wondered if he should continue in his endeavor to retire to Costa Rica. His concern was based on a recent article on the front page of the Tico Times that described some rather frightening tax scenarios for owners of Maritime Zone properties up north in the Guanacaste Province. There was the example of a couple whose beachside property’s taxes were increased from $70 annually to $15,000.

I have had a number of clients wonder if maybe the days of Costa Rica being a good investment, and a place to retire are over. It would seem from the various questions that I get that the article gives the idea that there is a new tax law in Costa Rica. So, being the ever vigilant real estate agent that I am, I called my lawyer to ask about the “new tax laws”. The answer surprised me. “Don Benjamin, there is no new tax law”, nor was the existing tax law changed. What the Costa Rican government is doing is re-assessing properties, primarily in the Maritime Zone. The extreme increase in taxes resulted from two likely causes.

1. Enormous appreciation of the property since it was last assessed
2. Likely the "declared value" of the property when it was bought by the current owners was considerably less than what they actually paid for it. This is a common practice here in Costa Rica.

To understand the amount of appreciation that has occurred here in Costa Rica over the last 15 years, we have to understand some about the culture. Land was essentially “value-less”, it didn’t really factor into a family’s budget concerns, not that they really had any budget concerns. The point being, land was a given. Someone in the family had a property large enough, usually much larger than necessary, to house everyone in the family, and their friends too. Well that may be a bit of an exaggeration, but you get the point. The Tico (Costa Rican) culture was, and still is to a lesser degree now, mulit-generational. To this day, a number of my friends in San Isidro de Perez Zeledon, live on a now smaller piece of land with a cluster of Tico style houses where you will find grandparents and great grandparents, as well as adult sisters and brothers with their families living. Family compounds are what I guess we’d call them in our culture.

So up until our start date of say, 1993 for understanding the valuating of Costa Rica land, many Tico families lived on property that was multi manzanas in size. (A manzana, as you may know means “apple” in Spanish. However, in Costa Rica it also means a piece of land that measures 1.7 acres. “Manzana” is not unique to Costa Rica, but it is one of very few countries that uses that measurement.) It seems that a 60 manzana parcel was a common size for a homestead stake. Land was so value-less at that time that the government was looking for men that would simply take responsibility for a particular piece of land, so they granted them ownership rights to the land simply by the Tico land owner being willing to own the property. From that point on, anyone in the family, due to the cultural structure, could live on that piece with their extended family in close proximity.

Then came the foreigners. Upon discovering the beautiful beaches of Costa Rica, as well as its expansive valley and mountain views, and postcard overlooks of quilted patchwork coffee fields, adventurous foreigners would approach one of these land owners about purchasing their property. Money, to the Tico at that time, was hard to come by. When I arrived in Costa Rica in 1999, the going wage for most labor services was around .80 - $1.00 per hour. The Tico didn’t have a mortgage nor rent in mind for what he needed to earn. Housing was essentially free. They would get the wood they needed to build their house from the trees that were in abundance on the family farm. Family and friends would help with the construction. Houses were not built in a permanent way and they would need to rebuild the house after some years. The exceptions to this were when there were certain types of woods available that essentially have the same durability as cement. Manú is one and there is another called Ajo, or “garlic wood”. Houses built with these woods are still around. These little Tico houses that endure to the present have the most beautiful wooden floors in them, burnished by years of foot traffic and daily sweepings and waxings.

The concept of say, $10,000, was nearly inconceivable to the people that lived at that time in that cultural structure. This really wasn’t that long ago. Comparative values in the States and Europe made the land here seem free. Twenty acres of ocean view property for $10,000? Imagine! Add to this the custom of under-declaring the value of the transaction so that the title transfer taxes would be almost nil all add up to the situation that we have now with this re-assessment situation. The properties of Costa Rica are registered as having a value of $3,000 lets say. In more recent times the figure of $20,000 is a common declared value. By the way, this practice of under-declaring is not illegal and is universal in its practice.

There is currently no capital gains tax in Costa Rica. There is no reason for there not to be, so we are expecting a capital gains tax at some point. When this happens, there will no doubt be a period of time during which land owners will be able to reassess their properties. For those that don't reassess, there will be some huge hits, such as those cited in the Tico Times article, to those who are sitting on a property with a declared value of $3,000 and the property then sells for $500,000.

The properties discussed in the Tico Times articles were all in the Maritime Zone (Google: “Maritime Zone” or “Zona Maritima”, “plan regulador”). Most of our land deals here in the Dominical, Uvita, Ojochal area are on land that is titled and is classified “Agrícola” or agricultural. Agricultural zoning serves the needs of single family lots just fine. You can build on 15% of the land size, and the minimum lot size is generally 5,000 square meters (1.25 acres). I can’t imagine that the tax laws for these types of properties will be changing any time soon. Nor do I see a push to re-assess such properties in the foreseeable future. Costa Rica is still made up of the farming, family compound-like life style. To enact such a change in law, or require that the Tico farmer pay annual taxes on the modern value given to his land, would severely hurt a large percentage of Costa Rica’s people. Conversely it makes sense to focus such taxation concerns on the zones where large hotels and lucrative tourism enterprises reside.

Please keep in mind that this viewpoint is derived from my personal observations of this land and the time that I have of living here and being fascinated by the new and different culture among which I live. In other words, I reserve the right to be wrong and to have the Costa Rican government surprise me. But I suspect that you can understand the logic.

If you are looking to invest in Costa Rica real estate, you must learn all you can and develop your own crystal ball. What do you think is going to happen? As a land owner and real estate broker here, I feel sufficiently secure and optimistic about what is going on with regards to ownership rights and taxation to continue building and working my portfolio of properties, and helping others to do the same.