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.

Does and early retirement to Costa Rica cut expenses in half?

Please see part 1 if you haven’t already.

My e-mail inbox, and Facebook, and LinkedIn messages, repeatedly urged me to go to the Wall Street Journal to read this article. It appears that my friends know my interests.

I spend much of my days talking with people who are interested in making Costa Rica their home. Real estate occupies a fundamental place in this decision hence, the referrals to this article, written by a couple of 60-some gals that relocated to Playa Naranjo on the Gulf of Nicoya, 5 hours north of where I live in Uvita Costa Rica.

Cost of Living in Costa Rica

In detailing out living expenses here, the author (Vicki) says that she has cut her living expenses in half:

We spend about $50 a week on food (for two people). Native fare is rice and beans (about $2 for about two pounds), potatoes, yucca, onions, red peppers and carrots (about 25 cents each). For $1 you can buy three cantaloupes, or two avocados, or four mangos, or three oranges (in season), a watermelon, or a whole pineapple and enough fish to feed two. Two pounds of ground beef (86% lean) or boneless chicken cost about $4. On occasion, I’ll splurge, paying about $6 for a bag of Cheetos or miniature chocolates.

I am one of those guys that doesn’t pay much attention to what stuff costs at the grocery store. This is not due to vast wealth, although I suspect that the wealthy are among the most vigilant of such things. That is likely one of the reasons why they are wealthy.

What I do pay attention to is when something is outrageously expensive, like walnuts, and cheese. Peanut butter is prohibitive and only the not-good-for-you-hydrogenated-oils-added type is available anyway. This is a bummer for those of us that thrive on peanut butter on bananas. Here we live where bananas grow like weeds, and there isn’t a decent source for quality peanut butter. Give me a break! Such are the ironies of life.

So, I’ll go with Vickie’s report on the costs of various staples.

Housing prices are off their highs of two or three years ago. You can buy a nice two-bedroom home on about an acre of land for between $100,000 and $300,000. My utility bill is $50 to $150 a month, depending on how much I use the air conditioning. My property tax last year was under $100.

You can get a good idea of housing prices in The Zone by looking around this blog. It would seem that houses are a bit less expensive in Playa Naranjo if Vicki has her numbers right. Although, maybe not. I understand that up north there are lots of small, 1/4 acre, piano key style housing developments. Since we don’t have this type of property here, we are not comparing mangoes with mangoes. Most lot sizes here are multi-acres and have ocean views.

Having said that, we do have one house that is actually quite nice starting out our housing options at $150,000.

This is a bit of an anomaly. I would typify our house options as starting at around the $250,000 – $300,000 range, and go up from there.

Expense: Electricity – Pools and Air Conditioning

So much depends on how you want to live. I don’t have air conditioning, but I find that a pool is nearly indispensable here in Costa Rica.

Electricity is expensive here. As with so many things here in Costa Rica, the powers that be are saddled with the challenge of two extremely different economic strata living together in one country. There is a graduated use scale for billing electricity consumption. They seem to have done a pretty good job of determining how to really nail the primary consumers and leave the simple, non-consuming farmers alone.

Unfortunately, the high cost of “luz” as electricity is called in Costa Rica, affects the price of food. The cost of running all those refrigeration boxes in a grocery store is the primary expense of running such a business and affects the price on the non-refrigerated peanut butter, which is the real tragedy of this story.

There are a number of different strategies for dealing with the high cost of electricity here in Costa Rica. One couple I know feel that there is a time of day, when the demand is low, when you get more kilowatt bang for the buck. So they set up to do their laundry in the wee hours of the morning. Others say that this is simply not true and that there is no timing involved with the billing of electricity.

On properties where there is more than one structure, like a main house with a guest house, you can run two meters, one for each building. This helps economize on the scaled, consumption based billing of ICE (EE-say, not ice) the electric company.

Pools, refrigerators and air conditioning are the primary contenders for causing a shock with the monthly electric bill. One trick that I learned from a veteran expat pool owner, is to ignore the traditional pool care procedures and instead do this.

Run your filter for a couple hours a day only. This will obviously cut down on electrical consumption. However, the thought is that you need to filter all of your water, once a day. So, you calculate the amount of water you’ve got, with the amount of water that your filter filters per hour, and you’ll likely come up with the need to run your filter for 4 hours.

Well, ignore that.

Go with the two hours. Use your tester to make sure that you always have the right amount of chlorine in your pool. I switched from a salt pool over to chlorine for economic reasons, so I’m not talking here about salt. You’ve got to run the filter to get the salt/chlorine conversion, and that requires longer runs of the filter, which makes economizing on electricity difficult if not impossible.

When the 2 hour cycle starts, gradually pour a half cup to a cup of granulated chlorine into your pool’s skimmer. I have gone for months with this program with no problem. We do, on occasion have problems, but not any more than the normal amount for pool owners, and our electricity bills went down.

Disclaimer: I am no pool expert. We have had problems now that have required professional help to clear up, but I think that most people with pools have such concerns, even when they are doing the conventional, electricity-gobbling pool care system. Also, if you decide you want to try this program, really keep an eye on your pool. Learn how to use additives like “Shock” and “PH” powders. If you see any discoloration in your tile or grout, you’ve probably got algae. Get rid of it. I use a steel brush and swim around with a mask and snorkel prowling for any irregularities.

My but I do carry on. There is so much more to say on this topic of retiring to Costa Rica.

Gratuitous use of my primary search term for Google purposes: Costa Rica Real Estate

More Retire Early to Costa Rica coming soon.

I was excited to find the Poll functionality on LinkedIn a couple of weeks ago. The question I came up with “What is the top reason to buy land in Costa Rica’s southern Pacific zone?” seemed like a good jumping off point for this regular feature on the blog. Although the sample size was small, the responses were revealing.

Low Property Tax
Costa Rica’s property tax rate is .25% on registered value. That means if you buy a $400,000 house in Uvita, you will pay $1,000 in property tax, plus another $1,000 (or .25%) for the new Luxury Tax passed in 2010. Your total annual property tax bill will be $2,000 which is a third of what you will pay in Houston, Texas.

Investment Value
If we can agree that people want safe, beautiful, and affordable environments to live in, then the southern Pacific zone of Costa Rica has to make that list. Clearly, “affordable” is a relative term. Some clients have $50,000 for a house, some have $1.5 million; however, this market has dipped according to the simple dynamics of Supply and Demand. An ocean view property (only 8 minutes from Uvita) listed for $30,000 was unheard of five years ago, yet now we have it (Sunny Josecito). In fact, we have access to just about every type of investment in every property category.

Growth Potential
I can’t tell you how many times per week people ask me when the International Airport will be completed in Palmar. Given the fact that construction has not started, it is a difficult question to answer. Eventually, it will be constructed (for better or for worse), and the area and property values will grow as a result. I state this with a fair degree of conviction because I’ve seen what paving the Costanera (Coastal Highway) and re-paving the road between San Isidro and Dominical has done for the area. I believe if it weren’t for those two improvements, the downturn would have hit our area much harder.

Walking the dog on your favorite beach.

Weather and Beaches
Today (Sept. 29th, 2011) marks the middle of the rainy season, yet we had sun with its accompanying ocean breeze all day long. The evenings are typically cool, especially if your house is strategically located facing the Pacific Ocean and its beaches. Speaking of beaches, The Zone has something for every sun lover. You want to surf or watch surfing, go to Dominical. You want a good dog-walking beach, go to Playa Hermosa. You want to do some cave exploring, go to Playa Ventanas. I’ve spent more time on the ocean the past 4 years than in my entire life in California, because the water is warm, dare I say perfect, year round.

Relaxing Lifestyle
According to our voters, this is the top reason to buy land in Costa Rica. You don’t realize how stressful life is in the progressive Western world, until you move here. Both Ben and I came from Santa Cruz and Aspen, gorgeous towns in California and Colorado, respectively. We lived the typical cycle of working hard and playing hard, and then right back to working hard again. We were surrounded by friends, family and neighbors who were stressed by this same cycle and material pressures. It all added up to a simple yet consistent desire for change. Without question, Costa Rica presents an opportunity to slooooow down and simplify. Sometimes I surf in the morning, sometimes I walk a big farm. There’s no rushing to Starbucks on the way to pick up the dry cleaning. Here, we sit down and enjoy our coffee. We wear shorts and flip flops. If anything, life in The Zone is indeed relaxing.

So, yes there are many reasons to buy land in Costa Rica. Whether as an investment, as a relocation destination, or simply as a place to visit and unplug for a couple of weeks in the winter… The Zone will not disappoint.

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.

“Few people actually stumble into wealth.”
- Smith Barney (although I couldn’t determine if it was Mr. Smith or Mr. Barney?)

In Part One of this article, I outlined how million dollar houses fit into the Costa Rica real estate landscape, specifically in the southern Pacific zone (The Zone).  There are a few obvious reasons to buy a luxury home in Costa Rica—

*  It’s A Buyer’s Market (Prices are down approx. 50% from the peak in 2008.)
*  Desirable Area (International Living Magazine rated The Zone as, “one of the top three real estate destinations in 2010.”)
*  Stable Prices For Construction Materials And Labor

The three-year Costa Rica real estate trend has reflected a significant drop in value, including property in the luxury home category.  Although there are some very nice million dollar homes in the area, this young market enables another popular strategy— Buy-And-Build.

Buy and Build

The majority of buyers who come down to the greater Dominical area with a plan to purchase a house, often end up purchasing raw land instead.  The reason is the area has a relatively small inventory of quality homes with floor plans and finishes that appeal to most North American and European home buyers.  So, they end up buy raw land or a lot in an established development, design their home with the help of a Costa Rican architect, select a builder, and then start the building process. Read the full story

In Northern California’s Bay Area, million dollar homes are very common.  They typically combine elements like— a desirable location, a large floorplan, upscale finishes, and/or estate-sized acreage.  My first position in real estate was in a beach area near Santa Cruz, and the power agent I worked for had no less than five million dollar listings when I joined her.  I just checked that broker’s website, and they currently have 307 houses listed between $1 million to $10 million.  Conversely, the Southern Pacific Zone of Costa Rica has a young real estate market and million dollar houses are less common.

Luxury Estate in Escaleras, Costa Rica.

As recent as 2006, this area was considered the new frontier in Costa Rica.  Access was difficult and more exhaustive than it is now.  Developments were few and far between.  Then, the real estate boom hit.  This boom affected all aspects of real estate—raw land, developing, construction, rentals and associated services.  All of the key elements for million dollar homes—desirable location, sweeping ocean views, large building sites, and affordable construction—were easily realized for a relatively affordable price.

Let’s start with the land… Read the full story

Half of my family is from Canada, eh.  My mother grew up in Newfoundland until the age of 13 when my grandfather found work in California.  The extended family that stayed behind, some later moving to Ottawa, would frequently visit us in the San Francisco Bay Area, especially during the cold, winter months.

A few years ago, when I moved down to Costa Rica full time, I realized there are a lot of Canadians visiting (102,471 in 2009*) and living the area.  One of the main reason Canadians (virtually all nationalities for that matter) visit, buy land, and in some cases, relocate to Costa Rica is the weather.  As one client put it, “Shoveling snow sucks.”  I have only experienced it a couple of times in Lake Tahoe, California, and I’d have to agree.

Canadians in Costa Rica

Shorts, No Shoes
The Southern Pacific Zone (The Zone) is the tropics.  Those living near the beach are rarely (if ever) cold here, and most people walk around in shorts 365 days out of the year.  For those who “melt in the heat”, The Zone’s unique geography offers many cooler locations up in the mountains, most offering spectacular views, waterfalls, and close proximity to the beaches and/or San Isidro, one of the fastest growing cities in Central America.  It rains 6 months out of the year, but even in September most mornings begin with blue skies and sunshine.

Active Adult Communities
The landscape and its wildlife are spectacular.  In fact, I’ve seen it written that the Corcovado National Park on the Osa Peninsula is “home to more plant & animal species than all of North America combined.”  Add in the many outdoor activities available in the area— world class sport fishing, whale watching, bird watching, hiking, golf, tennis, and surfing to name a few — and retirement in Costa Rica is actually when many expat residents really start living.  In fact, I just left two clients who were headed to a waterfall, then to the Whale’s Tail in Uvita for a low-tide beach walk and snorkeling session.

Another reason Canadians love Costa Rica is the cultural adventure.  It starts with the ticos.  On the whole, the polite locals are family and community-focused, and even the toughest-looking hombre will break into a smile if you smile.  Yes, there are a few cultural nuances to adapt to—“yes” doesn’t always mean “yes”, “tico time” means being late, strange driving habits— but ultimately these are all opportunities to take a deep breath and grow a little.  The Zone has a safe, laid back feel to it… add a hammock and a good book into the mix, and it is relaxation-defined.

A “Lot” For A Little
Foreign investors continue to visit and invest in The Zone.  Add in the fact that annual property tax in Costa Rica is .25% and there is no Capital Gains Tax, and the investment picture is even more appealing.  Canadian citizens who claim non-resident status and have residency in Costa Rica are not double taxed by the Canadian government on their Costa Rica income.  If you’ve always wanted to make Costa Rica your home, please consult your tax attorney for more details.  But, in summary, to be a non-resident Canadian you must—

1. live in Canada for less than 183 days in the tax year
2. not have any residential ties (e.g., cars, houses, a spouse or dependents) in Canada.

We see a lot of people visiting, buying and relocating to The Zone.  There is so much room for growth here, success only requires imagination, a little research, and some good connections.

Beautiful weather, abundant wildlife, friendly people, and good investment opportunities… no wonder so many Canadians are buying real estate in the Southern Pacific Zone of Costa Rica!

*http://www.visitcostarica.com/ict/paginas/modEst/estadisticas.asp?idIdioma=1

Disclaimer: the following is not necessarily what some sellers of Costa Rica real estate want to hear.

It was sometime in 2008 when the world changed.  Our globalized economy demonstrated, for the first time, the extent to which we (all us humans) are interconnected.  When one falls, we all lose our balance.

Some of the bigger economic minds in the US got going with an illusionary slight of hand called “derivatives” and in so doing, yanked the rug out from under the U.S.’s, and then the world’s economies.

Costa Rica land sales stopped.  Here in the southern pacific zone many of the agencies have closed up shop, and the surviving agencies went 9 months with no business.

Why “no” business instead of “low” business?

2 reasons:

1. High prices
2. No credit

The fall of the world economies was rather sudden.  The prices on our real estate here in The Zone were high.  All of a sudden our prospective buyers were standing flat footed with not much money, no real way to get money, and even if they could get money, land was expensive.

The above 2 reasons that explain our 9 month freeze on the real estate business here in The Zone have both seen some activity and change.   Prices have come down by 30% – 50% across the board, and this has stimulated the market. If this isn’t obvious to you, dear reader, it may be that you have been cruising websites and listings by sellers that don’t want to lower their price, but instead wish to wait for the market to come back up.  (or you may have seen one of the numerous and un-maintained sites from now defunct Costa Rica real estate agencies)

About the “Hold Out” or  “Old World” Sellers:

Their listings in the various real estate agency’s web site databases likely pre-date the fall of the world markets.  Sellers who insist on pre-fall pricing are finding it harder and harder to find an agency to list their property.  (One of my peers at a competing agency told me recently that they had rejected 9 listings in 3 days.) Read the full story

Water is a necessity.

If you ask the World Bank or one of the mega-water corporations (e.g., Coke, Nestle, Vivendi), fresh drinking water is a commodity.  If you ask virtually everyone else in the world (including the United Nations), fresh drinking water is a basic human right.  Whether it is the encroachment of privatization or Nicaragua’s plan to divert the San Juan River[1], water in Costa Rica is an increasingly lively topic.

One of the most popular questions for potential property owners is, “What is the water situation for this property?” Most of these new investors come from North America and Europe, areas that have hundreds of years of infrastructure development.  However, this southern Pacific region of Costa Rica is still early in the cycle of development.  We continue to see rapid growth in communications (cell phones and high speed internet), power (high tension power lines), and roads (the newly paved Costanera between Quepos and Dominical).  That being said, cell phones are a luxury, but water… is a necessity.

Property In A Development

Most quality developments have a water system that has been installed by the developer.  The most common sources for these systems are high flowing springs, and in some cases surface water (e.g., creeks and rivers).  Some developments, like Osa Estates in Uvita, even have back-up systems and extensive water storage capabilities.  The interesting thing is very few developments actually have a concession (permission to extract water from the ground).  The good news is the majority of them are “in process”.  Either way, the developer usually provides the property owner a prevista (water right document) which guarantees use of water into the future (assuming the property owner is in compliance with established CC&Rs and other laws).  Proof of a water document, like a prevista, is also required by the local Municipality before they will approve any construction project on a property. Read the full story

What does the future hold for The Zone?

The crystal ball… standard equipment for psychics and investors, alike. Ben and I are constantly observing the trends and then peering into the future of our little Costa Rican real estate market.

The First Wave

Around 1995, the first wave of developers arrived to the area. These early mavericks (let’s call them environmental-preneurs) benefited from a combination of vision and cheap land. Development was easier back then. Buy a big farm and segregate it into smaller farms (or lots). As the news of cheap land and low costs for materials and labor trickled out to the world, there was a 10-12 year rush on land that led to spiking prices for ocean view home sites. At the beginning of 2007, there were no quality ocean view lots left under $100K, at least not any in developments with good infrastructure (roads, water and electricity). Well, it’s now 2010 and we suddenly have many ocean view properties that can be purchased for under $100K. This quick “land in The Zone” recap is an attempt to set the table for the next trend I believe we experience, moving forward—Houses in The Zone.

Ben and I estimate over 60% of the people who inquire about property want to buy a house; however, over 60% of those house hunters end up buying raw land. There is a very obvious lack of supply in this economic equation, and the reason is we are simply at an early stage of the development cycle. According to CFIA (Colegio Federado de Ingenieros y de Arquitectos de Costa Rica), compared to 2007, the province of Puntarenas experienced decrease of -67% in total square meters constructed compared to the January–April of 2008.[1] Safe to say, the global economic downturn effected everyone investing in Costa Rica.

Gorgeous villa in San Buenaventura.

Yet toward the end of 2009 to present, we find ourselves busier than ever! We currently have 40 house listings on the coast (which means not including the mountain towns of Platanillo, Tinamastes, and the regional capital of San Isidro) ranging from $66,000 to $3.2 million. And, it’s no surprise that 90% of home buyers want an ocean view.

For those with construction experience and a desire to build houses in a foreign country, this where there may be money to be made. The crystal ball formula is– buy a cheap ocean view lot, no more than 10 minutes from the Costanera (our paved coastal highway), and build an affordable house with a swimming pool. The main question we anticipate from potential builders’ is “What kind of house do I need to build to guarantee a sale?” Unfortunately, we cannot provide a “guarantee” only guidance based on our personal, feet-on-the-ground perspective.

Price

The $weet $pot in our house market is between $200-250K. There are folks looking for houses on the coast in the $100K range, but they quickly realize those days are over. If you their budget is fixed at $100K, then we show houses up the mountain in towns like Platanillo and Tinamastes. We do have a couple of nice coastal properties with old tico houses on them for under $100K, but most of these are “tear downs” and re-building on these footprints is generally un-advisable.

Floorplan

Swimming pools sell property.

In this $250K price range, one effective floor plan is the 2&2 en suite (e.g., double master), central kitchen and small living area, and a large patio outside to enjoy the view. Most of the living experience in Costa Rica is done outside. Without question, one of the key rental amenities is the swimming pool.

IT doesn’t need to be huge, or have an infinity edge. But, it really helps a sale because it really helps rent-ability. Even thought there is a bathtub-warm ocean with miles of empty, gorgeous beaches just sitting there for people to enjoy, vacationing groups, couples, and especially families, love the pool.

I could offer a few more building suggestions, but I’ll leave those details to those with far more experience in spec building. What I do know is… Ben and I need houses, and I see them in our future. Thanks for reading.