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.

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.