This entry is part 1 of 1 in the series Understanding Costa Rica Real Estate

Costa Rica History in knife metaphorI’d say that about 1/10th of my time spent with people looking to buy property in Costa Rica’s Southern Pacific zone is spent in the actual buying/selling of property. The other 9/10ths is a mix of conversations regarding what’s involved with living here, as well as discussing the business of real estate in Costa Rica.

At its core, the lack of an actual MLS (Multiple Listing Service) colors all aspects of the business here, and I’ll go into that later on in this series. To really understand the business of real estate here, I have found it helpful to go back in time and see the progression of events up to the present. This helps to not only understand the current market but also, to project what is to come.

Early days:
I got into real estate in Dominical in 2004. It felt like the day I got into real estate was the day that someone threw the on-off switch on the market. Since then I’ve heard some tales indicating that the market was already simmering and poised to boil.

I made a sale on my first day in the business. A $60,000 gorgeous ocean view property sized at around 2 acres.  The property featured Uvita’s Whales Tail front and center. That property has gone on to have a lovely home, guest house and pool built on it. It has been re-sold and enjoys a stellar vacation rental history (link to rental page on HomeAway)

Quick overview of The Zone:
The Zone is made up of a string of 3 towns with Dominical at its northern end. The northern boundary is not a hard line but is decidedly fuzzy, easily extending up to Hatillo and at times, up to Portalon. (link to Hills of Portalon Development).

From Dominical heading south on the coastal highway you get to Uvita and then further south, to Ojochal. The area between Dominical and Uvita has a nicely laid out mountain range that runs very parallel to the ocean. Hence the handle “coastal mountain range” This means that you can travel inland from the beach just a short way and get to elevation where it is breezy and cool and offers expansive views of the ocean and coastline, attributes which make this area extremely desirable to investors, relocators and migrators (part-of-the-year residents).

More History:
Before the incoming press of foreign interest in The Zone, the Ticos (Costa Ricans) owned all the land, and their land holdings were always in the multi-hectares (1 hectare = 2.48 acres. Think 2.5 to make it easy).

There was a time in the not too distant past when land in Costa Rica was nearly value-less. There were land-grant programs whereby a man simply had to be willing to take responsibility for a property and the government would “grant” him the land, with conditions.

At that time it was not known that “nature” had a lucrative aspect to it. Instead nature was largely viewed as “in the way” and needed to be tamed, subdued or eliminated. So, one of the conditions to receiving a land grant was to cut the trees down and raise cattle.

I suspect that this era may have coincided with the “McDonalds” explosion. This is an arguable point, so let’s just say it coincided with an extreme demand in the U. S. (and world) for beef.

After some time of cutting down enormous canopy trees and attempting to raise cattle in former rain-forest environs, there was a shift in our world’s appetites; nature became an important commodity. Granted, beef has continued to be an active commodity, but it was also learned that former rain forest land doesn’t necessarily make for the best pasture land.

Raising cattle in Costa Rica was a daunting struggle. The farmers found themselves up against nature. Having to maintain former rain forest jungle land in “pasture” condition presented its trials, as well as the fact that the beef business (exporting meat, bureaucratic inefficiencies, and 3rd world infrastructure or lack thereof) made a guy scratch his head and wonder if having all this land was such a good idea.

The Tico culture was/is multi-generational. These large, granted tracts of land, would end up being populated by the man who acquired the land, his now grown sons & daughters and their families, and the grand kids (soon to also have families.)

So despite having lots of land, a condition that in first-world countries equates to being wealthy, these farmers were subsistence. They lived off of what their land produced. As a child would grow to adulthood, Abuelo (abuelo = grandfather) would simply build them a house and apportion off some land (or not) and they would continue on contributing to the sustenance of the family. The land itself was not thought of in lucrative terms.

Abuelo just happened to acquire a land grant on, let’s say, 60 hectares of land that reaches from the inland side of the maritime zone on the coast up to the highest point of the coastal mountain ridge. He’s not thinking “oh boy! I’ve got some ocean view land here.” No, he’s thinking: “man I hope this land is fertile.”

Enter foreigner:
One day Bob, a tourist, is exploring the area and decides that he’d like to buy Abuelo’s property. Bob offers Abuelo $60,000 for the land. Abuelo has never even considered the remote possibility of maybe someday having such a sum. In fact, he’s never even seen that much money. He talks it over with his family and they (very understandably) feel that this would be a wonderful thing for them to do. So, they sell their land.

Bos is a visionary. He sees what is likely coming and so he stakes his early claim. Now, keep in mind that there is no electricity to this property, the access is horseback and the water is from a nearby spring that is bubbling out of the ground. Abuelo has run a pipe from the spring to an elevated storage tank near the family homes. Bob’s a visionary in that – what foreigner in their right mind would possibly want such a remote and forbidding piece of land?

To understand this is to understand the element that is credited with making the world go round. We all have different likes and dislikes. I wonder at the likes of Steve Jobs, Bill Gates and Paul Allen’s level of focus on the personal home computing idea at the time that they had that focus. I’m not of this ilk and so my hat is off to such ones. I view the early investors here in The Zone as being made of the same stuff.

In looking back over the history of the first wave of investors here, I marvel at their foresight. My then wife and I looked at some Whales Tail view property in Uvita around 2002 and, despite its being gorgeous and nicely priced, I felt that it was simply too remote. This was in the same area where 2 years later I sold my first property.

Ok, so I said that to understand the real estate market here in Costa Rica, it helps one to know a bit of the history. Granted, we’ve gone back to what I appropriately call the first-wave of intrepid and visionary investors – The Visionaries. We’ll continue on in the next article with Bob’s next steps and incredible gains on his visionary act.

Escrow in Costa Rica Real Estate

About a year ago, my business partner Ben, with his unique perspective on Costa Rica real estate, wrote about the changes with “escrow accounts” in his blog article- Wire Transfers, Escrow & An Investment Idea. He explained,

For years we have used a rather casual system here in Costa Rica by which lots of land was bought & sold. Buyers generally put 10% of the purchase price of a piece of property into escrow while we real estate guys and the lawyers went about being duly diligent making sure that the property was what it claimed to be. That money was put into what we called an “escrow” account.

signing costa rica-real estate contract

Escrow makes closing easier.

Well, as it turns out, those escrow accounts were anything but actual escrow accounts.  They were simply the attorney’s business bank account and he held the money pending the closing when he would then disburse the funds.

The process of buying a house or land in Costa Rica did include fewer steps, although I’m not sure it was necessarily a clearer or safer process for buyers and sellers.  Although we haven’t experienced any issue in our office, we have heard a few stories of deposits not being returned due to defects in the title or terms of the Purchase and Sale Agreement.  That is not the case now, as everything is clearly explained in the legal documents for a deal.

Escrow Companies In The Zone

Last week, we was visited by two lovely ladies from Stewart Title Company.  Even though our companies haven’t worked together (yet), they wanted to drop off their business card and a one sheet on “How To Open An Escrow Account”.  They went through it line by line and the words “Blog article!  Blog article!” kept echoing in my head.  It’s the life of a writer who also happens to be a Costa Rica real estate professional.

Ok, so you find your dream property in Costa Rica and negotiate a good price.  Your lawyer drafts up a Purchase and Sale Agreement, and all of the terms (including the escrow information) are contained therein.  Usually, your lawyer will recommend an escrow company he or she has worked with successfully.

These representatives typically speak English, and here’s what your escrow agent is required to ask for—

  • Two Forms of Identification (think- passport number and driver’s license)
  • Escrow Agreement (Stewart Title said it was 6 pages and basically summarizes terms of the deal)
  • KYC (Know Your Customer) Form (applies to individual shareholders of acquiring corporation with at least 10% of the shares)
  • Proof of Income (Tax Returns, W2 Form, CPA Letter, etc.)

The last one, Proof of Income, often raises the eyebrows of prospective buyers, but escrow companies have to ask for it since the Bank Secrecy Act was tightened when the Patriot Act was passed.  The IRS and other government agencies just want to make sure people are not laundering money in a foreign country like Costa Rica.  Simply put, banks in Costa Rica now require a legal document for private transfers of large amounts of money.  They will not release the funds to the seller if it is not provided.

There are still instances when property transactions and large amounts of money are kept out of the banks, but understandably most people don’t feel comfortable living with a stack of money in their house (even in a safe,) and I don’t blame them.

Depositing Monies In Earnest

Most sellers require a minimum of 10% of the purchase price to be held in escrow.  This is the earnest deposit.  This deposit is sent to the recently opened escrow account and tied to the terms in the contract.  If there is an issue that wasn’t disclosed or degrades the property in a significant way, the buyer can elect to cancel the deal and have their deposit returned.  Other common “terms “ that can result in a seller requesting their deposit back are—

  • Title- Issues can include improper registration in the National Registry (Registro Nacional), clouded ownership, probate, etc.
  • Property Size- Normally, contracts stipulate that “the size (in square meters) of X property will not differ more than 3% from register survey; however, I have never experienced a deal that did not close because of this issue.
  • Liens/Encumberances- Restrictions on the title/property that can be financial, environmental, or legal.

The vast majority of times, a good lawyer will uncover some aspect of the property (referenced above) that requires clarification and/or fixing.  In rare cases when there is no solution to the problem during due diligence, the buyer is able to request their deposit be returned.  Escrow isn’t the most exciting aspect of buying Costa Rica real estate, but it is important and it does work to the benefit of sincere parties.  Pura vida.

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.