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.

 


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.