Guys In The Zone: Costa Rica Real Estate

Costa Rica real estate Property.

“How much is my property worth?”

Right from the Guys in the Trenches.  Here is how we evaluate property, and where we/I think property values are going. Please note that this article is written by me, Ben, and that these ideas can vary from one real estate professional to the other, even within a single office. Rod may have contrasting ideas on these points.

Replacement Cost:

The starting point the Costa Rica real estate professional uses in order to evaluate a property in today’s market is to calculate Replacement Cost.

Raw Land: We assign a value to the land. This value is based on market knowledge – ongoing efforts to sell, and of course, actual sales of land in the area. The value of a piece of raw land will get a surprisingly consistent evaluation amongst various agents polled. However, I’ll be putting a bit of a challenge on this point in a bit.

Construction Value: After establishing the value of the land as though there were nothing on it, we then measure the square footage of the house and assign it a price per square foot. Such is the life of a Costa Rica expat real estate agent. We live in a world where land size is referred to in metric (square meters – hectares) and houses in U. S. units (square feet).

The square foot value of a house is going to be bracketed somewhere around the $100.00 (USD) per foot. Contributing factors to this evaluation are: finishes, distance up the hill, steepness of the hill.

We are assuming that the basic foundation, drainage, and wall construct are dictated by universal laws that aren’t negotiable from one house to another. In Costa Rica you’ve got a few material choices, but the prices don’t really vary that much between them.  Concrete block is likely the most common. Cement panels are gaining some traction. Structural insulated panels are used by a number of builders. The use of wood in building is growing with Balinese architecture enjoying a fashionable presence in the market.

The construction of the roof can vary quite a bit and consequently can affect the per foot value. I know of one house in the zone that has a poured cement roof. This is cool stuff – absolute quiet during heavy duty rain storms, but we are talking HEAVY.

Less expensive roofs vary from the poured cement, to insulated sandwich layers, to tin with a dropped ceiling (the noisiest).

It is, arguably, the finishes that have the most direct effect on the value of the house. Granite counter tops – really fine plumbing fixtures, tiles and the details of the pool will push the bracket into the “over $100 per foot” range.

A pool adds $20,000 to $30,000 to the price.

Here is an example evaluation that I just did yesterday in my offce:

Raw land, $110,000

A 2,600 square foot house at $120 per foot. This particular house is located in an area that requires four wheel drive, so the shuttling of materials increased the per foot price quite a bit -
$312,000
+ $110,000
$422,000.

Pool – $30,000

Replacement cost – $455,000

So, what do we do with this number? These people have dedicated a year of their lives to building this house.  They flew to Costa Rica every 6 weeks to check in on the progress and of course, make the innumerable decisions that need to be made in such a project. What is that worth?

Merciless:
Well, frankly, this is the part that the Costa Rica real estate market doesn’t really pay much heed to. The big consideration at this point is, do we offer to sell your house at replacement cost, above replacement cost, or below? In today’s world, pushing the price above replacement cost is a function of the real estate Guy’s market insight. We are in a Buyer’s Market.

The agent will consider the desirability of the property. The view, the access, the privacy, the air motion and so on – the general niceness of the property are all considered.  Based on this criteria, there can be some upward movement from the raw replacement cost.

Perplexation:
Here is where it can get a bit strange. There are some houses that are priced below replacement cost.  How can this be?!? The land has an asset value, and the construction costs are fixed and don’t vary too awfully much from one source to another.

I am working on a new theory about this phenomenon in evaluating Costa Rica real estate

In my ruminations of this topic, I have come to conclude that there are two rational areas that we might have misjudged the value of a property. There is a third that can simply be explained by the seller being intensely motivated by desperation.

The Rational Considerations

Consideration #1 – The seller ran amok with making their construction and design a declaration of their individuality and so nobody in their right mind is going to want to live in such a structure. In order to buy the property and then live in it, the buyer will be taking on some serious expenses in order to make it livable for their purpose. The sale price is going to have to be adjusted down to accommodate these expenses.

Consideration #2 – I got the value of the land wrong. It’s not really worth what I said it is. This is the one that gets me, and brings about some interesting questions. Is land value here in Costa Rica really lower than what we are willing to admit? Hmmmmm…

What is NEVER factored in:
How much the seller has into the property.

I’m going to write more on evaluation of property in our Costa Rica real estate market place. We have had some interesting discussions as of late with the vibrations of increasing buyer activity here in The Zone.

The inspiration for this post came from a recent article fed from LinkedIn.  The title was “38% of Homes Purchased in 2011 Bought with Cash.”  I thought to myself, 38%?!  That number seemed high, so I did I little more research.  According to another article in USA Today, that number was as low as 12% just three years ago thus confirming a significant jump in cash purchases. According to the article, investors in the U.S. are keenly tuned into yield or ROI.  That return on investment is realized through improving and flipping properties or some variation of a rental/income strategy.  The latter has become increasingly popular for those foreign retirees and families who are looking to relocate here.

Got Financing?

All of that got me thinking about our Costa Rica real estate market.  Land purchases financed through a Costa Rican bank (at least in The Zone) was virtually unheard of when I started back in 2006. For a variety of reasons, most buyers had cash before the downturn.  Four+ years later, the picture is very clear.  Property values around the world decreased (dramatically in some areas), and buyers couldn’t use the equity in their homes, not to mention the banks tight grip in their purse strings.

Recently (think- the past two years), we’ve seen an increase in the number of buyers who only have a portion of the purchase price.  These new buyers, typically foreign investors, need the seller to carry paper.  For those new to real estate investing, carry paper means the seller is willing to finance part of the purchase price and receive payment (often with interest) over time.  This legal arrangement is completed by a lawyer in the form of a trust or a mortgage here in Costa Rica. If the buyer defaults on the terms of deal (e.g., misses payments), a legal process can be initiated by the seller… just like a bank in a foreclosure process, although quicker. For more information on this topic, check out our article on Seller Financing Opens The Door To Home Buyers.

I don’t have a number, but I’d bet the number of non-Tico bank-financed purchases in the area is less than 1%.  Interest rates on Costa Rican bank loans, when you can get them, are more than double what you currently find in the States.  There are various reasons for it, but I’ll leave that for another article.

The good news is… buyers need financing and some sellers need to sell, so seller financing continues to increase in The Zone.  Some deals don’t even include interest, simple an extended term to complete the sale.  When there is interest and an extended term involved, the number of years almost always tops out at 5 years.  There are real estate transactions taking place in The Zone primarily because (1) land values are now around half of peak values and (2) both parties are getting creative, as described above.

There are a select few (and I mean few) who are flipping houses here in The Zone, however, many investors are looking for income generating properties, both hotels and vacation rentals.  The yield varies greatly, but there is opportunity to make a nice living in the hospitality here in The Zone.

But, What Does All Cash Mean For Buyers?

It means you need to think of Costa Rica, at least for the time being, as a place to land bank or move your cash. There are economies and currency (think- Europe and the Euro) with a cloudy future.  The current wave of concern is so real, we have recently seen an uptick in European investors and relocators contact our office.  Without getting metaphysical, I also wonder how much 2012 is playing into people’s decisions. We call this group “End Of The World Buyers.”  Good and abundant water sources, good environments for growing crops, and pleasant temperatures throughout the year draw these type of buyers to Costa Rica and our area in particular.

Whether this trend continues or declines remains to be seen.  Simple put, Costa Rica, especially the Costa Ballena, is a wonderful place to relocate for both economic and lifestyle reasons.  There are many, happy foreigners living either full time or part time in Costa Rica.  If you are interested in why so many expats are buying and relocating to The Zone, this article Why Buy Property In The Zone offers a few of the top reasons.

Even though we call it Talk Show 15, this is indeed the 16th Episode of the Guys In The Zone Talk Show. This episode delves into the topic of construction in Costa Rica. Ben, the founder of Guys In The Zone, interviews Matt Callero of Mango Construction (mangoconstruction.com). Matt offers some answers to the popular questions– Is it difficult to build? How much is construction per square foot? And, what trends he foresees unfolding in the southern Pacific zone. Enjoy!

If you as a seller are finding that an agency does not respond to repeated “nudges”, it may be time to ask the question: “do you not want this listing for some reason?  Do you feel that there is a problem with my listing or that it is overpriced?”.

Please keep in mind, dear seller, that the only way that the real estate agency makes any money for the time that they invest in your listing, is if they sell it.  The Costa Rica real estate market has recently taken a 40 – 50% reduction across the board and there are still many sellers that feel that their property is an exception.  Or they may be willing to wait until the market comes up again to sell.

Some agencies are reluctant to speak with candor about such concerns.

Boredom... or relaxation?

“You can only walk the dog on the beach and read in the hammock so much.  I miss my work” – this from an expat who achieved “the dream”. He and his wife had retired from their successful business in the U. S. and had bought land and built a gorgeous ocean view home here in Costa Rica’s southern pacific zone.

Hearing this statement set my wheels to turning. I can’t remember the last time that I was bored. Natalie either, we both need to set time aside and make sure that we spend some time every week walking the dogs on the beach and reading in a hammock.  These activities are downright good for the soul. However, I can definitely see how there is a limit to how much one can do of these activities before they get to jonesing for some activity of a more productive nature.

I work with lots of people that are re-locating or who are looking to make a connection of some kind to the zone.  In the consultation phase, I focus on helping with understanding the various aspects of life here that are different from “back home”. How to buy property, how to open a bank account, a corporation, how to learn Spanish, how to get health insurance, where is there a decent dentist and so on. In my consultations, I try and touch on the various points that are a concern to all of us as we integrate with life here in The Zone.  Up till this point, I had never really thought about boredom-management being a line item on my consultation list.

One of my dearest friends is, well how to say… along in years. Yeah, that’s it. His life has been one of extraordinary and high achievement.  He’s at the point now where they won’t sell him life insurance, (well, they will but at the price its more realistic to say they won’t.)  He tells me that a “long term” investment to him is measured in months, not years.

This dear old friend and I started doing business together some time back.  I’ll never forget when he said to me “Ben, you’re keeping me alive”.

Here again, a man who had achieved what so many set out to achieve, and now his life is being enhanced by being included in what I do on a daily basis.  I find this fascinating.  Is there something missing from “the dream”?

I’ve got to work. I have financial obligations and am not in a position to retire. So I look for ways to do this while living in this foreign land. I truly believe that working here in Costa Rica is an act of creativity. In fact, it was my efforts to be creative and to think outside of the box that initially drew my attention over to some of the potential business “assets” that I have available to me.  How about an older man that figured things out in his day back in the States?  Would he be interested in sharing his thoughts and perspectives on my business efforts? “Ben, you’re keeping me alive” he says. This is what I call a fit.

My dear old friend and my clients mentioned earlier differ in that Old Friend is happy and content here. The other is moving back to the States.  Granted, there are lots of reasons for moving back to the States. When our kids have kids we tend to lose our minds and feel that being with the grandkids is the thing that has to be done, regardless of what it takes. However, I’ve met a number of folks here that say that the kids can come here to see them, by golly.

I wonder if the difference really might be the activity/boredom balance.

Now in my real estate and relocation consulting service, I include this point about boredom in the schpiel.  Costa Rica isn’t like the States where so much of one’s time is spent shopping as a form of pastime or entertainment. You lose this habit here pronto.  Shopping here in the zone takes about 2 hours, tops, then you’re done.

You can make a day of it, and many do, if you want to go up to the San Isidro farmers market on Thursday and/or Friday. Travel time from Uvita is just under an hour each way.  It’s also quite the adventure to simply stroll the streets of San Isidro and window shop. This can be a lot of fun, but it won’t ever be more than the occasional thing that you do here.

Interesting Ideas

There are some interesting and creative efforts that have been made by folks who have chosen to make Costa Rica their home. In an upcoming article I’ll tell you about some of these efforts.  I’ve even got a favorite that I’ll share with you.

First, I’ll take the easy road and tell you what I do. I run the real estate company: Guys In The Zone.  My partner Rod Martin and I have forged one of the deepest working/friendship relationships on the planet.  Knowing that you’ve got a partner through thick and thin gives life a depth that it otherwise doesn’t have and I’ve got this in Rod.

So, we call it the business of real estate, but the funny thing is, we spend the majority of our time doing things that really aren’t “real estate” by definition.

All those points that I mentioned above, the points about bank accounts, learning Spanish and so on? We consider these topics regularly as we work with people on real estate.  Who would’a thunk that a discussion about how to learn Spanish or quieting the internal dialogue would be involved with the business of real estate?  Well, it’s all part of the package.  When you sell real estate in Costa Rica, you become the single point of contact for folks that are interested in The Zone either as a place to vacation, invest, migrate to for half the year, or full blown live here. I gotta say, this makes life interesting.

In addition to this I enjoy writing articles such as this one for our blog (www.thezoneblog.com), as well as publishing articles in the local Montañas al Mar magazine.  I’m involved with CAP (Crime Awareness and Prevention) and just try and find things that need doing. The Guys in the Zone also run a couple of the local web site portals  that serve as visitors guides to the area (www.dominical.biz and www.uvita.biz).

I say all that to demonstrate why the thought of boredom is a strange one in my world.

I’ll be posting some examples of the creative ways that expats not only fill time, but support their lives while living here in this sparsely populated area of the world.

“Innovation distinguishes between a leader and a follower.”  – Steve Jobs

I bet your wondering how that idea relates to real estate in Costa Rica?  Well, simply put… if there was ever a time for property owners and real estate agents in this marketplace to be “innovative,” it’s now.

We all need to think outside the box...

LISTING IS ONLY THE FIRST STEP

Here’s how listing a property usually unfolds in The Zone—

• Step One: Call up The Guys and set up an appointment to preview the property.
• Step Two: Determine if an Open Listing or a Modified Exclusive Listing is appropriate for you.
• Step Three: Wait for The Guys to bring you a buyer.

The problem is that Step Three is taking much longer than most Sellers anticipated.

LOOKING BEYOND PRICE

We all know reducing the list price is the easiest way to increase property showings, offers, and sales.  However, if your property is in the ballpark of current market value and it is being shown but not selling, there could be other reasons limiting the sale.

Here at the Guys office, we continue to ask ourselves what can we do to speed up the sales process?  At the risk of sounding trite, one answer is: “think outside the box.”  Here’s an example of how The Guys have applied this idea.

Ben started his Costa Rica blog in 2003 (before many of us knew what a blog was) Continue Reading

“Four percent of the sale price on top of your commission?!” exclaimed our client, a long time resident in The Zone. (In keeping with an old Guys’ tradition, I’ll refer to him as Mr. Zellbren throughout this article.) Ben and I first explained that we are currently dealing with a severely down market (approximately 50% off the peak value of three years ago) and an excellent time to wait for the market to rebound. Mr. Zellbren wasn’t interested in waiting, so we continued to explain the standard closing costs of a Costa Rica real estate deal. Some of the data he was familiar with; some of the finer points had to be clarified.

Traditional Closing Costs

Closing costs, when you add up the transfer tax, stamps, and legal fees, usually equate to approximately 4% of the sale price. Mr. Zellbren told us he would accept a $550,000 offer for his house equaling $22,000 in closing costs. In 99% of the deals we are part of, Buyers and Sellers split closing costs 50-50. It’s what we do here in Costa Rica. Additional costs—re-surveys, title insurance, new corporations—are typically paid by the Buyer.

Interestingly, there are a variety of stamps required to transfer a property in Costa Rica. They are– the Legal Bar Association Stamp (Timbre del Colegio de Abogados), the Municipal Stamp (Timbre Municipal), the Fiscal Stamp (Especie Fiscal), the National Archives Stamp (Timbe del Archivo Nacional) and the Agriculture Stamp (Timbre Agrario). Like everything else, your lawyer will take care of the licking and sticking of these stamps, which equate to roughly .05% of the sale price.

Legal fees, also known as notary fees here in Costa Rica, are calculated at 1.5% of the sale price. This is what is paid to the lawyer/notary for setting up the Sales and Purchase Agreement, as well as, researching and filing all of the necessary documents in the sale. These standard legal fees do not include any additional legal work (e.g., a new corporations, establishing an easement, etc.). One last point regarding lawyers that I would like to add is… you often get what you pay for. Continue Reading

This series of articles is all about selling a property in Costa Rica.

Decide what the marketing fee will be.

• Part 1 dealt with the most common type of listing that sellers use in Costa Rica: the Open Listing.
• Part 2 discussed how agencies here in The Zone imitate the MLS (Multiple Listing Service) of the U. S. and other countries by offering Exclusive listings.

Now here, in Part 3, we are going to discuss an un-orthodox approach to selling a property in Costa Rica’s non-MLS marketplace. The incentive for doing this is the weaknesses, or flaws that were reviewed in Part 2 of our attempts to imitate the MLS of other countries.
I have been working in real estate here in Costa Rica’s southern pacific zone for years, and have always felt that the exclusive listing was a nearly sacred thing. It puts a tremendous responsibility on the agency that has the exclusive, but is also demanding on all of the agencies in that they must ignore the fact that the commission on this property is shared, when the majority of properties in their inventory are not.

I have been scratching and thinking about this topic and here is what I’ve come up with.

The Real Estate Agency’s Objective:
What we want to do is offer to sellers a better service, and in the process improve the professionalism of our industry. This is particularly appropriate when Continue Reading

A look at 2011 Costa Rica real estate trends as perceived and shared by Ben Vaughn and Rod Martin, the Guys In The Zone.

Guys In The Zone Talk Show – Episode 11 by GuysInTheZone

If you haven’t read Part 1 of this topic yet, you might want to. You can do so by clicking here.  You don’t have to if you don’t want to.  This article stands up fine all by itself.  However, to get a good understanding of the open listing, which is the most common type of listing here in Costa Rica, you’ll probably want to.  All right?

The quandary of how to best sell a property in Costa Rica

When we last visited, we were left with the cliff hanger – “what is a seller to do if they don’t live in Costa Rica?”  The absentee owners don’t have time to go to each real estate agency and distribute photos, write-up, survey and contract with every real estate agency.  This could really mess up a family vacation.  Not to mention the follow-up-regular-visits to see how it’s going with showings of the listing.

Before going into that and satisfying the “edge of your seat” drama that I have created here with this compelling topic, I’d like to give you a glimpse inside the mind of this Costa Rica real estate agent and share with you an alternate option to what has been the standard practice in Costa Rica for the exclusive listing of a property.

We have always known that the MLS (Multiple Listing Service) market place of the US is superior to the Costa Rica open listing model.  In our (Zone real estate agencies) efforts to improve our market, and to offer a better service to both buyer and seller, we have defaulted to imitating the MLS market place, without having an actual MLS.  The reasoning is simple: the MLS is a superior model that has evolved over time in response to gazillions of problems and concerns and has resulted in what we see there now: a mature business model that offers representation to both buyer and seller of a given piece of property.  So, we try and come as close to working like and MLS without having the actual infrastructure of an MLS.

For various reasons, I’m starting to think that this premise might be flawed.  AND it may be that, if we think outside of this box we’re in here, we might even come up with a solution that rivals, or perhaps (could it be?!?) even exceeds the MLS model of other countries.  Bear with me here.

How Costa Rica imitates the MLS model… Continue Reading