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.

 


How Properties are Priced in Costa Rica


When I told a seller recently what his expenses would be in selling a property, he responded by saying “I’ll need to ask more for my property then to cover these expenses”, to which I responded “exactly!”.

The following is a conversation I recently had with this seller here in Uvita. He admitted to me that he had no experience with selling a property in Costa Rica. His entire knowledge of real estate here was limited to buying his own property in Uvita many years ago directly from the original owner.

Property prices in Costa Rica

How is property priced in Costa Rica? There are a couple of answers to this question. Read on…

He had put a price on the property that was based on what he needs from the sale. This is a common practice among sellers, but alas… well, more on this below. He had not taken into account the costs of doing the sale.
What are Seller’s Costs to sell a property in Costa Rica? Here is a snippet of what I wrote him regarding the costs:
My commission is 8%. This is split between myself and the owners of my office. 
 
As for your expenses as seller, calculate 11%. This will cover your expenses and avoid any unpleasant surprises. You have my commission at 8%, and the transaction fees of 4%, which are split 50/50 buyer/seller, so this adds 2% to the 8% commission. Then there is a Costa Rica tax to sellers on the sale of a property which is calculated based on the amount of commission you pay. This generally adds another 1%(ish).
(note: the commission rate varies in different parts of Costa Rica. I understand that 5% is the norm in San José. The expenses of the deal however will remain constant.)
He felt that since the buyer benefits from the presence of the real estate agent in the deal, they (the buyer) should participate in paying the commission. (I guess he didn’t realize that he too would benefit from my presence in the deal, such as being available for this type of information.)
Here is his response:
If I would have had known before, I would have to charge those 11% on top of what I need. That means I need to add $33.000 to stay with  the $300k for my needs. If this is the only way it works for you and with your clients, please change the price for future clients.
I still think from a sellers prospective the buyer should participate at least 50% to what you want to earn. Why should we take that all if the buyer is contracting you? He should at least pay 50 % of your cost. 
 
This might not seem common or ordinary, but who cares? It seems more than fair to me.
My response:
Hello Borenchenkoface (name has been changed),
About the commission: actually in all deals it is the buyer who pays the commission. I say this because the seller is informed about the expenses related to selling a property in Costa Rica and their asking price reflects this. The commission is paid out of the amount paid for the property. So, knowing the costs results in what you have suggested, that the price of the property be made to accommodate the expenses of the deal. It is the cost of using a real estate service as well as Costa Rica’s titling, taxing & legal services. 
The other option is to not use a realtor and just go it alone. However, by law you would still have the additional 3% in fees & taxes.
One other “expense” you might have in mind is the fact that most buyers are going to make an offer below what you are asking. This can also affect the asking price. Many sellers will take into consideration that an average discount here is around an average 10 – 15%. The buyer may be able to adjust their asking price accordingly.

As for the actual value of the property coinciding with what the seller needs from the deal, this is what we real estate people hope for. However, the seller’s needs, and even what they paid for their property are not considered in the evaluation. These points have nothing to do with the value of the property.

A buyer will be looking at several different properties that are appropriate for his/her criteria. He/she will have a feel for values of property and so if one property stands out as higher than the norm, he/she will likely pass on the property. Or he/she may ask why this one is so high, to which the honest realtor will respond: “because it is what the seller needs”, or “because that’s how much he has into the property” – and obviously, there will be no sale.
Again, as a realtor, what I hope to have happen when I evaluate a property is that the value that I put on the property also covers the seller’s needs. It may, or it may not, but if it does we are in good shape. 
If the value I put on the property does not cover seller’s needs, the seller may go ahead and try and list it with the realtors at the high price and hope that it sells. Generally it won’t. And it may even be difficult to get a realtor to list a property that is priced above market value. The reason for this is that to properly list a property and promote it for sale, takes some time and effort.
If a seller is asking too much for their property it is unlikely to get many, if any, showings. Most of our clients here do quite a bit of Internet research prior to coming down to view. So they will likely not even inquire about a property if it is overpriced for what it is. If showings do take place and an offer is made, the offer will probably be in line with the actual market value of the property. I’m speaking from experience here. Seen it many times.
I should add about this particular seller that he is not asking too much for the property, even with the allowances made for the deal’s expenses. So I wrote the above to him solely for his information about how the real estate market works here in Costa Rica’s southern Pacific zone. He thanked me.
So how is property priced in Costa Rica? Not to be glib but, it is the same here as anywhere else. A Property is priced at what someone will pay for it. Just as water seeks its own level, the characteristics of a property: view, access, privacy (or not), security, size, usable area, air motion, and general niceness all play a factor in what a property will bring in the open market. Somehow there is a consistency to the pricing. When you are on a property that knocks your socks off, you will then understand why it is a bit higher priced than a property of the same, or perhaps even larger size.
Suggestion for buyers: Do your homework. Browse the various websites using the search function to isolate properties in your budget and with the features you want. You’ll get a feel for what your property is valued at. And, you’ll be able to spot the occasional overpriced piece. This truly is occasional due to the market’s natural filtering of savvy buyers, as well as real estate agents that don’t want to waste their time listing a property that won’t sell.
We’ll see where the above cited seller correspondence goes, but I thought that the interchange between this real estate guy, and the seller would be helpful and informative to those looking to buy or sell a property in Costa Rica.