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 call the first-wave of intrepid and visionary investors – the Mavericks. We’ll continue on in the next article with Bob’s next steps and incredible gains on his visionary act.

Buy a Property With Seller Financing

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.

How seller financing works in Costa Rica.

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

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.