This entry is part 2 of 2 in the series Understanding Costa Rica Real Estate

Early arrivers to Costa Rica buying land.In Part 1 we considered the early foreign investors in real estate here in Costa Rica’s southern Pacific zone.  The idea being that in so doing, we’ll have have a better understanding of the real estate market here. We continue now with Bob (early visionary investor) as he proceeds to segregate and sell his large parcel (finca).

Bob’s vision for what is to come is so clear (to him) that he recognizes that he essentially stole the gorgeous ocean view property that he now possesses. The plan is to sub-divide the large property (finca) into smaller parcels and sell them at a considerable profit.

He takes his 60 hectare (150 acre) finca and segregates off 5 hectares and puts this on the market at $60,000, the price that he paid originally for the entire finca, leaving 55 hectares as a pure profit proposal.

Now granted, I’m fabricating the name and the transaction. But this I do as a composite of various such transactions that I was aware of at that time. What I experienced when I got into the real estate business here in 2004 were the ripple effects of not just one deal like Bob’s, but the after-effects of many such deals.

There is some historical precedent to the investor phenomenon that transpired at that time. Well known examples are: the dissension regarding Alexander Graham Bell being the actual originator of the telephone. Elisha Gray applied for the patent on similar voice technology, essentially on the same day as Bell. Alfred Wallace and Charles Darwin both – independent from each other – came up with the theory of evolution at the same time. It was essentially the luck of the draw that Darwin is credited as the author. And to look at the advent of American Contemporary art in the New York art scene with Jasper Johns, Andy Warhol, Rauschenberg, Roy Lichtenstein and on, is to see one of the strangest examples of unrelated, converging visionaries.

I wonder at this “phenomenon”. It is recurring in human history. Unrelated individuals and groups, all at roughly the same time, turn their attention to something. It’s almost like some cosmic force directing select ones to go and do a thing. Ok, not to belabor this point, but I find it fascinating. I mean, I could understand one guy. And then maybe that guy talks to someone else about what he’s doing and they think it sounds good and so they do it also. But unrelated, concurrent action??  Por favor! 

Well, barring an un-quantifiable cosmic event from our understanding, I can only suggest that this is simply the way of the world. “Progress” of civilizations. The time had come for this gorgeous country to be discovered and exploited for what it had to offer – its riches. And, as it turns out, there were plenty of buyers.

There were several Bob-like visionary investors who converged at roughly the same time in the early days of real estate here in Costa Rica’s southern Pacific zone. These all went on to see enormous returns (turning $1.00 USD into $120.00+-) on their relatively paltry investments. A couple of the best known Dominical-centric examples of these investments are the areas of Lagunas and Escaleras and to a lesser degree, Hatillo. 

We are now getting to the time when I began work in Costa Rica real estate. These were the conditions of the market at that time. The majority of real estate sales at that time were of raw land, and this was despite the majority of buyer’s initial request was for an existing home. There simply weren’t many to pick from. The inventory was primarily raw land. After looking at the available options for existing houses they would go to the default position of buying land and either building, or holding the land for a future purpose. 

The houses at that time were difficult to sell, despite the common preference of the buyers to purchase a house. Those early arrivers to the area were somewhat unique. I like to say that we were all a bit “out of round”. We had decided to move from our homeland to an area of the earth that was certainly not the most accommodating of environs. What houses there were, were frequently expressions of that individuality that brought them here in the first place. These were not homes for the general market. Some were lovely in their uniqueness while other were, quite frankly, atrocious. 

What I came to call the “Costa Rica Formula” for buying land had a couple of iterations. The visionaries were the big winners of the formula, but those that bought from them were also beneficiaries of having been early arrivers on the scene. The formula was to buy one of the available segregations from a Visionary. Despite having been segregated from the mother farm, these properties were generally still quite large by today’s standards, commonly consisting of multiple hectares (1 ha = 2.48 acres). To then cut off a marketable piece of that parcel and sell it, effectively reducing or eliminating the initial investment principle. Buyers at that time could almost all count on this being an option.

In 2004, some of the Visionary’s pieces  were available, as well as the lots being made available from those that they had sold to.  And there was quite a lot of work being done to bring more to market. These were the days prior to the big crash of 2007/8. The reason for the crash fed the formula, and the market spiked. We were in a boom.  The sub-prime market made for an unreal and absolutely illogical availability of money to homeowners in the U.S. This was the market I started working in at that time.

My thought is that the spike in demand, and the subsequent prices, is one of the many ripple effects from the sub-prime lending mortgages thing that resulted in the demise of the global economy in 2007.  Not to belabor the point, but I think that it’s important to understand this as, here we are some 10 years later, and the effects of the “spike / crash” on the market are still very present. I’ll get to this more in a following article on present day conditions.


Seller Financing Opens Door for Home Buyers in Costa Rica 2

The Downturn… (cue ominous music)

It would be easy to label the decline of the Costa Rica real estate market (since the peak in 2007) in a negative light. In truth, there is no such thing as “negative light” only the opportunity for change, and if our market has seen anything over the past three years, it is change. The shift from bank loans to seller financing is one of the primary changes that has (pardon the pun) opened the door to prospective home buyers, as well as, land and commercial buyers.

Seller Financing Open The Door in Costa Rica

Before defining the effects, basic models, and legal structure of seller financing, let me back up just a bit to clarify why we now find it present in about half of the Costa Rica real estate deals we facilitate.  Like most lending institutions around the world, Costa Rican banks are better described as “institutional holders”.  Banks are not lending for a few reasons— falling real property values, the recession, and they are not lending to each other (e.g., no credit to leverage).  In Costa Rica, the debt-to-income ratio required to obtain a loan is as ridiculous as the double-digit interest rates being charged (often twice the rates in the United States).  The banks’ parsimonious response has opened the door to seller financing, and Costa Rican property owners have embraced the new paradigm.

Sellers Get Creative

“What do I need to do to sell my property?”  We received this common question too many times to count over the past few years.  Our answer typically included these answers—

  • list your property with an aggressive price
  • keep the property or house clean and presentable
  • offer seller financing

We have had a couple of recent sales with seller financing that fit the basic model—

  1. Price, parties agree to a sale price.
  2. Down Payment, buyer agrees to make initial payment, out of which, the seller pays commissions and closing costs.
  3. Financing Term, the number of years the mortgage or trust runs, with or without a pre-payment penalty, and with or without a ballon payment.
  4. Interest Rate, the % added to the balance due.

The main question sellers have is “What recourse do I have in the event of buyer default on payments or terms of the mortgage contract?”  The answer is… it depends on whether the financing is set up with a mortgage or a trust.

“To Mortgage or To Trust… THAT is the Question”

As Eduardo Abarca Vargas, a reputable lawyer here in Uvita, explains, “Once the terms of the financing are agreed, there are two ways to set up the legal documents… in the form of a trust or a mortgage.”

About a year ago, he helped us clarify the basic differences between trusts and mortgages—

  • Mortgage— The Borrower agrees to an encumbrance against a real property to the Lender, (e.g., first degree mortgage).  A mortgage is filed to the Registry by the Notary Public in Costa Rica.  Once it is processed by the Registry Officer, it is registered on the property and shown as a lien.  In the event that the Borrower defaults, the Lender is entitled to enforce foreclosure.  Then, the property goes to auction and the Lender is the first lien holder to be paid.  If no person bids for the property, it is then returned to the Lender.  This is the most popular financing tool used in Costa Rica. As Eduardo explains, “The most important reason to choose a mortgage as a guarantee is that, in November of 2007, the Costa Rican Congress approved a specific Law (Ley de Cobro Judicial # 8624) to enforce the mortgages before the Courts.  This brought many advantages that the former law did not offer.”
  • Trust— The secured Trust concept is as safe as a mortgage contract, but more complex in terms of documentation and set up.  It can be more versatile and more economical than setting up a mortgage and with a simpler enforcement.  The Trust Agreement identifies the parties and terms— schedule for payments, interests, penalties and a default provision— and issues an irrevocable stock power of attorney to the Trustee.  The enforcement procedure of an eventual default scenario implies the simple sale of the property to a third buyer and the distribution of the proceeds. As Eduardo points out, There is not an specific law to regulate the foreclosing process based on a Trust, therefore there is neither a Judge involved on the process nor any specific rules to foreclose.” This is the main reason most lenders are encouraged to set up mortgages instead of trusts.

Mortgages, a safe option in Costa Rica real estate.

Eduardo summarized the two options, “For the seller who wants the property to be returned to them in a timely manner, a mortgage serves the best purpose.  It usually takes more time to execute a mortgage, but once the foreclosing process is done the lender will have a complete judicial file to support the transfer of the property.”

As recently as 2007, the majority of land and house deals completed in the southern Pacific zone of Costa Rica were done with cash.  Since that time, we have seen a global recession.    Most investors are not as liquid as they once were, and most banks are still not lending.  The good news is… Costa Rica property values appear to be at the bottom, and seller financing has opened the door for home and land buyers.

To contact Eduardo Abarca Vargas– please call 2743-8345 or email him at

About Tigre

My first visit to Costa Rica was in 2002. I immediately fell in love with the warmth of the climate and people. After spending two weeks in San Jose, Puerto Viejo on the Caribbean side, and Tamarindo in Guanacaste, I knew there was a good chance I would return sooner than later. Sooner came just 6 months later when my uncle mentioned he was flying down to Costa Rica to close on a piece of property in the Southern Pacific Zone. On that trip I found my own piece of paradise above the small town of San Buenaventura, home to the San Buenas Golf Resort. Two years and 8 trips later, I decided to move to Costa Rica full time. Every day I am thankful for that decision.

2 thoughts on “Seller Financing Opens Door for Home Buyers in Costa Rica

  • CuriousGinCR

    So one might see it a little odd if the “Lender” used the same lawyer to file foreclose on the property as the “Borrower” is using to protect the property? I am currently witnessing this in the high court of Costa Rica right now. The person foreclosing on the property is using the same lawyer as the owner of the property who took the loan in the first place. Should be interesting to see how this unfolds in the court of law when the lawyer has to represent the person taking the property and the person who wants to keep the property. Welcome to Costa Rica where anything is possible. 😉