Sales Process Overview Part I

Down and Dirty:

• Pick your real estate agency


• Pick and Consult with your agent


• View properties


• Make an offer either in writing or verbally through your agent to the seller


• Negotiate the price and terms


• Get signed Offer To Purchase document to lawyer that outlines the details of the deal so that he/she can draft the Purchase and Sale agreement


• Deposit 10% with the accepted offer. The deposit is “non-refundable” with the exceptions of the contingencies mentioned in the offer. The deposit is held in escrow until closing.


• Due Diligence period


• Close

If you want to know specifically about any of the above details without reading through this entire 3 part article, please click on the bulleted point above to go directly to that information.

Pick your real estate agency

I’m not really sure how this happens. Some may pick an agency that they are familiar with already. This may be a large known name brand real estate agency such as ReMax, or Century 21 or some such thing. I benefit from having this blog and receive a good number of clients to my non-brand name agency by those that have read information here. Sometimes it’s a matter of walking by and spontaneously stopping in.

The usual guidelines apply in Costa Rica that apply anywhere as regards “good business”. You want an agency that has a good reputation, has been around for awhile, and that you feel treats you right. Going with a known brand-name is no different in Costa Rica than going with any other agency. There is no licensing of real estate agents in Costa Rica, and all agencies should be concerned about their reputation. Getting a referral from someone that has had a good experience in real estate here would be a help.

Pick your agent

Within the agency that you choose there will likely be several agents. It’s a little tough at this point to have had a discussion with one agent, realize that there is no chemistry, and ask to talk to another one, but I don’t think that it is prudent to proceed with an individual that you don’t feel comfortable with, or that you feel doesn’t have your best interest at heart. Some simply decide to move on to the next agency and try there.

Consult

When you have your agent, there needs to be some talk talk. He/she will need to understand the purpose for the purchase and your budget.

Generally, we will start with a consultation that involves sitting in our office in Uvita, but it can be over a cup of coffee in a soda, and discussing the objective of the client. Why are they here in Costa Rica looking to buy a property? Most investors in Costa Rica real estate fall into one of about 4 different categories:

1. Re-locators


2. Land-bank investors


3. Income generating investors


4. Migrators


5. End of the world escapists (Ok, so there’s 5)

Relocators:

These are those who are looking to live in Costa Rica. It may be immediate, or at some point in the future. Most of my relocation clients are looking to move down in the future. They may be about to retire in a few years and want to secure their property now, while prices are still affordable. Or they may be a couple that simply want the Costa Rican lifestyle and perhaps are financially independent, or are able to work on the Internet, or tele-commute in some fashion. This may or may not involve children. Relocators may be part of a larger group of friends and/or family that want to put together a compound and live a simpler life. Then there are the escapists that are looking to secure a remote part of Planet Earth for what they feel is the coming fall of society.

Migrators:

These are the retired and/or independently wealthy, or the tele-commuters that will spend their homeland winter months here in Costa Rica, and the other 6 months back in their homeland. (I know that the term “homeland” has taken on a negative connotation in recent years in the States, but for the purpose of this document it is used to identify the client’s land of origin.) The migrators may or may not want to rent out their property while they are not in Costa Rica.

Land Bank Investors:

“To purchase land for the express and sole purpose of storing money until such time as it may be sold for a decent rate of appreciation.”

The above definition, as eloquent and literally astute as it sounds, is not copied from some academic reference. I made it up. This is the easiest way to be involved in Costa Rica real estate. All it involves is making an informed decision, buying the property, and waiting. This has made up a large part of our business in the southern zone of Costa Rica. It is now starting to change more with the number of migratory types and re-locators coming in which is resulting in a huge wave of construction.

Income Generating Investors:

Purchase a piece of land that will generate income on a regular basis. Purchasing an ocean view lot and building a nice home on it of, say, 2,400 square feet, and furnishing it nicely, can generate some pretty decent vacation rental income. In the Dominical, Uvita and Ojochal area, the vacation rental prices range from $1,200 - $7,000 a week. I’d say that $2,500 per week is common. You can see what these look like by visiting the Dominical.biz Vacation Rental page. This is a popular purchase purpose since the investment can return a cash on cash of 8 – 12% while the asset appreciation is running somewhere around 20% annually, AND that’s not all. Here is the Ginsu knives add-on that can come with an income generating real estate investment in Costa Rica: you own a beautiful vacation spot for yourself, friends and family.

End of the World Escapists

These are kinda rare, but they do happen, and they do seem to look towards Costa Rica with regularity. These usually want a large piece of land with water on it. They aren’t that concerned with investment potential.

Sales Process Overview, Part II:

Go and View Properties:

Once we have identified the purpose that the person(s) have in looking to buy land in Costa Rica, the agent will consider this as he directs them to the available properties that suit their interest.

I have always found it interesting to watch the process of land selection. I think that we all come down to Costa Rica with some pre-conceived notions of what we want, and for most of us, these change after we’ve stood on a few properties. Our marketplace is, for the most part, coastal mountain terrain. It’s hard to arrive here knowing what these properties are like; they are quite unique, even on a global scale.

Throughout the consultation and property viewing, the buyer is asking questions, getting informed, and making decisions. They are considering the various value affecting features of the property such as: the view, the access, proximity to neighbors, proximity to the beach, golf course, waterfall, how much breeze there is, the jungle, and so on.

Most buyers of land in Costa Rica are not all that familiar with the peculiarities of the land. However, most have had experience in land transactions somewhere, and that familiarity of basic good business is helpful. Basic good business practices are the same everywhere. The broker should be an open book with respect to the properties, “full disclosure” being the key words here. You should get the sense that your broker wants you to know everything that he knows about the property, good, bad, and indifferent. If you don’t get that sense from your broker, get rid of him/her and find another one.

When their property is found, it is time to move on to –

Making an offer:

When I recognize the moment that my client has “found” their property, I view it as imperative to get the property off of the market as quickly as possible. There is some cosmic mechanism in place that alerts all prospective buyers about that particular piece once one of my clients decides they want it. It has happened more than once that the day that I submit an offer on a piece of land, the seller receives another one within hours. Or an offer comes in just before I can get my client’s offer in. And this can happen on a piece that has been on the market for over a year!

Costa Rica real estate agents don’t “represent” buyer, nor seller as they do in the States. But as for services rendered, I think that our representation leans more towards the buyer. The seller holds the title to that property and so is pretty safe and doesn’t need as much care as the buyer. The buyer needs good guidance through the process, needs to know what to look for.

Having said that, “the offer” is the point where our representation of the seller kicks in. We can’t ask a seller to take a property off of the market, without it being a PDSD (Pretty Darn Sure Deal). The moment that they take the property off of the market by means of a signed OTP (Offer To Purchase), they will say “no” to any further offers, even if they are higher priced or have more favorable terms for the seller. So the real estate agent needs to make this clear to the buyer.

As for price negotiations, all things are negotiable. In the majority of the deals that I have brokered here in Costa Rica, the selling price has been at, or close to, the asking price. There have been some exceptions where the seller is particularly motivated and the buyer comes to understand this by the process of negotiations. When asked if the seller will listen to offers, I generally respond using the line that I learned from my real estate peers in the States: "I'll present any offer you wish to make".

There are basically two categories of concerns to a buyer that must be satisfied: subjective, and non-subjective.

• The subjective concerns are: Do I like the property? Is it in my budget? Is it where I want to own property, etc…


• The non-subjective concerns are: Is the land buy-able? Is it free and clear? Does the seller have the right to sell it? Are there any potential pitfalls to the title on this property being transferred to me? Can I build what I want on this property?

When we submit an OTP, all subjective concerns have been addressed. The buyer knows that they want to property and have the necessary funds to buy it. The offer cannot allow for subjective concerns since we are going to legally restrict the seller from being able to accept another offer on the property.

The non-subjective concerns:

The big 3 considerations in the non-subjective category are: Road, Water, and Electric. A typical land transaction in Costa Rica has the water and electric run to the property, and a community arrangement for road care.

The topic of soil stability is one that raises a lot of questions. As a real estate agent here in Costa Rica, I am way out of my comfort zone speaking to this topic at all. I’m certainly not qualified to be able to look at a property and recommend, or not, a soil analysis. A test of three perforations in our zone costs around $1,200 and falls to the buyer to pay for. Some developers have mentioned that they’d like to go ahead and have this done prior to listing the property for sale, but as of yet I’ve not ever handled a property with an existing soil analysis. This topic is extensive enough that I’ll likely make it the basis for a future article. So, for the purpose of this article, let’s just throw it in the mix of things to have in mind in the non-subjective concern category.

Frequently the “make an offer” stage happens verbally between the real estate agent and the buyer, the net result being that the terms of the deal, the price, the deposit, and the term of due diligence leading up to the close, are established.

The deposit is normally 10% of the purchase price. The property is not taken off of the market by the seller until hard money (non-refundable) is deposited. Keep in mind though that “non-refundable” refers to the subjective concerns. The non-subjective concerns can be put in as line item contingencies, and if these contingencies are not satisfied prior to the end of due diligence, the buyer can get their deposit back.

“Buyer will have the property re-surveyed and accept the new survey if it is within 3% of the original survey”, would be a non-subjective contingency. This particular contingency would be done at buyer’s expense and would be arranged by the agent. It would have to take place before the end of due diligence.

Getting the deposit into the lawyer’s escrow account is frequently one of the most challenging steps of the transaction. If you are buying a $200,000 piece of land, you need to come up with $20,000, obviously. This isn’t always so easy to do if it is a weekend, or even if its not. Generally you can get a $5,000 cash advance on each credit card by going into a bank. Frequently a call to the issuing bank is necessary. But it’s all do-able and I’ve seen it work many times. Even if the buyer is unable to come up with the full deposit while still in Costa Rica, they can always come up with enough to convince the seller that they aren’t going anywhere and that this deal is solid. The amount needs to be enough to assure the seller that he has a deal. How much this is varies, but it would be the rare buyer that would put $10,000 into a deal and then not see it through. This amount, or some other, will buy the buyer time to get back home and wire the balance of the deposit into the lawyer’s escrow account.

Sales Process Overview, Part III:

Due Diligence

The term for due diligence is normally 3 weeks, and closing is usually in 4. Due diligence starts when the deposit is made, and the written offer has been signed by buyer and seller. This document will have the contingency points detailed out. Some properties have no contingency points, some have several, it depends on the property. This is one of the more important areas where you, the buyer, has to rely on the expertise of your broker.

Your broker may have an intimate understanding of the property. He/she may not due to the amount of inventory available in the area.It just isn’t possible to know each property that well. I have some properties that I know extremely well, perhaps having sold a number of lots in the development already, and so I can authoritatively speak to the specific contingencies that should be itemized on the Offer To Purchase (OTP) form. When I don’t have this familiarity with the property, it still works out since I know what the basic concerns are. Road, water, electric, soil stability, and knowing for sure that the buyer will be able to use the property as they wish.

There are boiler-plate concerns that the lawyer will study on every deal, and these don’t need to be itemized. The most basic is, can the seller sell the property? Does he/she own it free and clear?Are there any encumbrances? The lawyer will make a study of the National Registry (www.registronacional.go.cr) for most of this information. What, if any, easements are there on the property?If the property is part of a development, are there any Codes, Covenants & Restrictions (CC & Rs)? Buyer will know what monthly and annual fees are required in ownership of the property.Annual taxes are ¼ of 1% of declared purchase price. Click here to read an article on how to declare the value of your land purchase in Costa Rica.

All of the above considerations will be dealt with on the OTP. Full disclosure of all things pertinent to the property are the breath and spirit of good real estate brokering in Costa Rica. If you, the buyer, get the sense that you are not getting the whole story, and that maybe your broker is not offering all that there is with respect to a property, you might want to look for another broker. You don’t want to feel that you are having to ask all the right questions, but instead that your broker is offering all that he knows about the property.

The term of due diligence and closing can vary from one property to another, but the periods mentioned above are the customary. As mentioned in Part II of this series, there are no “subjective” concerns. The only thing that can derail the deal are the contingency line items, and these line items must be satisfied during due diligence.

If there is a legitimate reason for extending either the due diligence period, or the closing, you should express the concern to your broker.Your broker will have the needs of both parties in mind and so will be able to facilitate the best scenario for both parties.The seller wants to sell and the buyer wants to buy, so all things are negotiable and do-able.

It may be that you aren’t sure if you can get the new survey done in time to meet the obligation of the due diligence period, or you may not be sure that you can get all of your funding for the deal by closing. In such situations, your broker can discuss the concerns with the seller and come to an equitable arrangement. I like the use of “option to extend” clauses, when necessary. I have had cases where we were unsure that we could get a property re-surveyed by the end of due diligence.In such case, we simply mention in the OTP that every effort to get it done by the term of due diligence will be made, but may ask for a 2 week extension, or some such arrangement, leaving it less binding. The seller may reject or accept, it depends on the seller. I have seen cases where the seller will reject such a clause, but then assist in getting the item satisfied, perhaps using his influence with the topographer to guarantee that the new survey is done by term. I have also seen situations where we get to term, without such an extension clause, and an extension has been granted when we provided the explanation of what all had transpired. By the way, I’m not emphasizing the re-surveying of land as a contingency. This is done with some regularity but isn’t always necessary.

After the deposit is made, if the buyer changes his mind for some non-mentioned cause, and decides to not purchase the property, he/she will lose their deposit. However, if something is uncovered during due diligence that fails to satisfy one of the contingencies, the buyer will have the option of having the deposit returned to them.

The Closing

Almost all land transactions in Costa Rica are done using a corporation. It is likely that you will purchase a “shelf” corporation from the same attorney that is doing the deal. The attorney likely has any number of such corporations available in his/her office for just this purpose.

A word about corporations in Costa Rica.

Buying an existing corporation in Costa Rica is generally not advisable.Using this “shelf” arrangement is common and safe. But, if the seller of a property is suggesting that you purchase his corporation that owns the property, thereby avoiding the transfer of title fees, which can add up to thousands of dollars, you are taking a risk. There is no way to thoroughly study the history of an existing corporation. Agreements can be made in the name of a corporation, binding the owner of that corporation to the obligation. When the corporation is sold, that obligation goes along with the corporation and you find out down the road that you’ve got to pay for the previous corporation owner’s obligation. Besides the “shelf” arrangement, there is one other that works well also. A developer of multiple lots may go ahead and put each lot in the name of a separate corporation, thus making the sale of the property both less expensive and easier for the buyer, the broker can vouch for the integrity of the developer. This can be a very clean way to do a deal as well.

You don’t have to be present for the closing. You can allow your lawyer power of attorney in the corporation that is buying the property. This power is very specific and allows him/her to buy one time in the name of the corporation. Most shelf corporations have this provision built in. On your next visit to Costa Rica after closing, you can remove this power, or the original power statement can state that it (the power) dies after being used one time. If you think about it, it would be very difficult to harm a corporation by “buying” in the name of the corporation. It would be the power to “sell” in the name of the corporation where some damage could be done.

So with this power to buy one time, the closing can happen with, or without the buyer needing to be present. This is immensely helpful in Costa Rica since the buyers have gone home 4 weeks prior to closing and are likely not in the position to get back down for closing.

The buyer should transfer funds into the lawyer’s escrow account several days before closing, to be sure that the international transfer gets there in time. Usually a wire transfer initiated in the morning in the States will arrive to Costa Rica in the afternoon, but I have seen these take up to five days to arrive.

So closing takes place, funds are disbursed, and there is a celebration on the part of all involved.