Guys In The Zone: Costa Rica Real Estate

As a result of the current economy, I’ve had an offshoot business grow out of my real estate business. The business is called hard money lending and it has been going on in Costa Rica for a long time.  Hard money lending provides funding to people in need, but the catch is that it is usually more expensive than conventional bank loans.  The resulting payments can be difficult to manage, and the borrower is exposed to losing whatever property they have put up against the loan as collateral.

There are no usury laws in Costa Rica.  Hard money lending is typically done on the street at about a 3% monthly rate of interest, an astounding 36% annual rate of interest – and this is common!

It is very difficult to get a bank loan in Costa Rica at this time.

Consider this scenario:

A fellow has a restaurant & bar.  His bar is shut down due to its not having the handicap access features up to code.  He doesn’t have the money to fix the problems to get his bar running.  His restaurant is barely covering its expenses.

He is a typical Costa Rican that has land, and he has already used that land as collateral on some typical hard money loans.  At the street rates of 3% monthly, he finds himself in trouble.

Solution: A $60,000 hard money loan at 18% annual interest, with quarterly, interest only payments, and a 2 year term.

$60,000 flows to this gentleman via a loan collateralized with a farm valued at $300,000.  With that $60,000 he is able to pay off the former usurious loan, as well as make the necessary repairs to his bar so that he can be open for business and generate income.
We have effectively cut his monthly outgo in half, and increased his monthly income by whatever the bar generates.
The lender receives$2,700 interest payments every 3 months for a 2 year term, at which time he receives the final interest payment plus his principal back.

Personality Spectrum:
I have now seen a wide spectrum of personality types in working this business.

• Lenders who hope that there is a default so that they can own a piece of land for cheap.
• Lenders who simply want the income from the loan.   They don’t mind getting the land, but it’s not their preference.
• Lenders who absolutely don’t want to foreclose, either because they don’t want to mess with land, or they feel philosophically opposed to taking a man’s land.

For this last type of lender, we make doubly sure that the borrower can service the loan, and perhaps even lower the percentage to 12% or 14% to ensure this.

Factors are Aligned:
The international free market is like water. It flows to to the low points and fills the depressions until it reaches the same level as the rest of itself.  The very existence of this business and the fact that it presented itself to me here in Costa Rica, at this time, bears this out.

I have heard about 0% interest Treasury Bills selling in the States. Expressions like “under the mattress” and ” in a coffee can” are now in the vernacular of money management strategies. Cash may be king, but knowing what to do with cash in an uncertain world economy is often unclear.

We have had properties listed by Tico (Costa Rican) land sellers forever.  With the economic downturn, these Tico land sellers have approached us suggesting that we lower the price on their properties to stimulate a sale.  When a sale wasn’t forthcoming, they started talking about borrowing money and inquiring if there are foreign sources of lending that they can tap into.

At this point (the point where they actually approach me about their situation), these land owners have no doubt already put one or two of these high interest loans on the securing property.  So, the purpose of the funding is generally to get them out from under these expensive loans, as well as providing some liquidity for their own commercial venture.  The theory being, again, that we have reduced their outgo and increased their income, so that they can make it through this down time.

My involvement in the deals is to be the “everything guy”. I translate, communicate, research the property in question, communicate (there twice intentionally), evaluate the borrower’s ability to:

1. service the note, and
2. pay the principal back at term

When I have a full grasp on what the parties think are the details of the deal, I write up what I call the “Story” of the deal.  This is done in both Spanish & English if necessary.  I go over the written story with each person and adjust for clarity.  Once that’s done, I have each side sign the story, or deal document.  This is not a legal step, but a clarity step.  I present this document to the lawyer for the deal and he/she writes up the contract.

The normal terms and conditions of our loan deals are:

• 1 to 2 year term
• 18% annual interest
• monthly or quarterly, interest only payments
• descending pre-payment penalty

We have also now done a number of bridge, or emergency short term loans.  These are usually done in about 48 hours and are for lesser amounts, but higher interest, like 2% a month.  The term on such loans varies but are usually 3 – 6 months.

I am available to discuss any questions you might have regarding this business idea.  Please use the form just below here to drop me a line.  I’ll get back in touch with you shortly.

Ben Vaughn

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