Why the Costa Rica Real Estate Market outperforms U.S Real Estate
From the Desk of Michael Simons
People always ask me how the Costa Rica real estate market is doing, is it stable, did we see a big fall out like the USA? I believe Costa Rica has one of the most stable markets in the world for a couple of reasons.
1. 99% of our clients paid cash
2. There is no formal MLS in Costa Rica
People can blame whoever they want for the crash of the real estate market in the USA. You can say it was greedy real estate agents, pushy mortgage brokers, banks looking the other way. You can blame it on one President or another or the law that was passed to allow easier access to housing which opened the door to non-qualifying loans. And all of these might be true. But the real reason for the decline of the housing market, were individuals buying homes, who should NEVER have been buying those homes.
How come nobody blames the buyers? How come nobody takes responsibility any more? When you sign a contract it is your responsibility to make sure you can live up to that contract. Not the mortgage broker’s. He didn’t put a gun to your head. So when those mortgage payments came due, and people couldn’t pay them, they just walked away. Of course they would they only had 5% in the game. But when you have 100% skin in the game, you don’t walk away. You are going to be much more reluctant to unload that property. Since almost all of our clients paid cash for their properties here in Costa Rica, they were going to be much more resilient in finding a way to keep it. Since carrying costs are so low here, about 20% of what it is in the USA, people are able to ride the storm out much easier than they would if they owned the same priced property in Florida for example. For that reason we didn’t see a huge drop in prices and we didn’t have near as many foreclosures to drive the values down.
I have always said that the biggest problem in the United States of America is the formal MLS system. Who says that the purchase price of homes should be common knowledge and that 20 years from now someone will still be able to know what a person bought their home for today? This is killing the real estate market! Let me explain. Let’s take a community of track homes in a suburb of a city. There are 40 homes in the community. Every home is exactly the same; same size, same floor plan, same design. They were all worth $400,000 a few years ago. But when the recession hit, 10 of those homes went into foreclosure and the banks took them back. The banks don’t want them obviously, so they dump those homes for 50 cents on the dollar. Thanks to the formal MLS, and the system of appraisals and comparative analyses, now every other home in the neighborhood is worth $200,000. Even though 30 of the people made intelligent decisions, they get screwed. They bought a house they could afford. They put 30% down. They took out a mortgage they could afford and busted their butts every month to pay the payment on time. In other words, they played by the rules.
But because 25% of the people tried to cheat the system and buy a house they couldn’t afford, with no money down, the rest of home owners have to pay the price. And for the rest of history, the next buyer will always be able to know that the home could have been bought today for $200,000. Ten years from now a buyer is going to have a hard time paying $300,000 knowing he could have bought it today for $100k less. I have a client who is worth about a half a billion dollars. I asked him how he became so successful. He told me two reasons. The first is that he listens and follows successful people. That is why he bought land in Costa Rica, because he said “Anywhere that’s good enough for the Four Seasons is good enough for me”. The second reason he said is that too many people concern themselves with what the seller is making. They get too hung up on what they COULD have bought something for a few years ago. The greed factor will kick in and they just won’t want to pay more for something knowing what it was selling for previously.
So why does this make the Costa Rica real estate market such a good investment you ask? It’s quite simple. Almost all of our buyers paid cash. People, who buy their retirement home, or a second home as a vacation property or investment property, tend to be more stable than the average buyer of a home in the USA. They only buy a home they can afford. They plan it out. They have done their due diligence and decided that Costa Rica is where they want to own. They are not in any hurry to sell. This is their PIECE OF PARADISE.
Let’s take that same scenario I used previously. Let’s say we have a Condominium building with 10 units in it. They are all exactly the same. Same size; same floor plan; same view and they sold for $400k. First off, 7 of those people won’t sell their condo. This is their baby. This is what they have worked so hard to buy. But 3 units are for sale at the moment. Two of those units don’t need to sell. Maybe they would like to sell, but are really in no hurry. Maybe they want to move up to a house instead of a condo or they are ready for a change and want to move somewhere else. Whatever the scenario, they won’t sell their condo for less than $400,000. But one person really needs to sell. For reasons beyond his control, he has to move his unit. Maybe he is really hurting thanks to the turn in the economy back home. Maybe his plan to retire has been put on hold, thanks to the financial disaster in the USA. Maybe he lost his job. Maybe he really needs the cash to put his children through college. Whatever the reason, he is highly motivated to sell. And unfortunately, this is NOT a good time to be a seller. Every buyer that gets in my car tells me the same thing. “We want to see the fire sales. We want to see the seller who is 24 hours from bankruptcy. We want to steal a deal.” So in order to move this unit, in today’s market, the seller must have a compelling price to move this unit. So he lists it at $300,000.
That of course is the unit I will be showing my buyers today. The best deals in the area. And the buyer can see, that this is a fantastic deal, because there are only 2 other units for sale and they wont budge much below the $400k price point. So when that unit sells, EVERYBODY is happy. The buyers are very excited as they can see immediately that they have equity in their unit. They know in their hearts that they just made $100,000 on the condo. I am not saying they can sell it tomorrow for $400k, but they know that they have made a fantastic purchase. The seller is happy, as he now has the cash he needs to help his unfortunate situation back home. But most important, the other 9 condo owners are happy too. Why? Because there is no MLS! No one will ever know that this unit sold for $300,000.
There is nowhere that a future buyer can go to see the sale prices of today. The other owners surely aren’t going to tell anyone. So the future sale price will be whatever the seller is willing to sell it for and the buyer is willing to pay. The rest of the real estate owners are not affected because one person is in a bad situation. Why should we all suffer in our investments because of other persons bad decisions? This is also the reason that it is imperative you work with a knowledgeable, experienced real estate company, who has been involved in the market for a long time. They will be able to tell you what the best deals are, as they know the history of every property. A new company, just starting out, is going to have a tough time as there won’t be the MLS to make it easy for them.
Now keep in mind, most of our property owners don’t need to sell. So there is a limited amount of inventory that is on the market at a really good price. I believe we have maybe 9 to 15 months left, where a buyer can really steal a property, and then they will just be gone. And you will be dealing with sellers who don’t need to sell. This is not the optimum situation for a buyer. We have sold more property in the last 9 months than we did in the 3 years before combined. So these great deals are disappearing fast. We are chipping away at the bottom and the prices are slowly climbing back to where we all want them to be. On top of that, more and more people are coming to Costa Rica everyday to look at making this their home.
We all talk of the Baby Boomers who are retiring in the next 10 years, and of course this makes up a lot of our buyers. But it isn’t just retirees. More and more people have decided that living in Costa Rica is for them. We are seeing many younger people, in their 30s, 40s and 50s who are moving here to start businesses, put their children into bilingual schools and just have a new adventure in life, as they are tired of the rat race back home. Also, we are seeing record numbers of investors putting their money in to properties outside the USA, especially with the uncertainty of the market back home. Think about it. If you have some cash, where are you going to put it? Banks pay 1%. The stock market is very volatile; it goes up and down 5 times a week. Scary!
The real estate market in the United States is going to take a very very long time to see equity again. The Costa Rica real estate market is different. Investors are looking at this and that is what is driving them to Costa Rica. Maybe this is why many of them ARE real estate agents themselves. And REMEMBER it’s always 88 degrees in Guanacaste, 365 days a year.
Guanacaste Costa Rica is on fire again, especially in the Papagayo region. There is an $18 million expansion of the Liberia airport. Two new state of the art hospitals catering to medical tourism; Dozens of high end resorts and marinas; New piers and boardwalks; Improvements in infrastructure; Upgrades in telecommunications; All this to continue to bring tourists and foreign investment to this beautiful country. But there is a limited amount of residential inventory and it gets harder and harder to get these projects approved, as Costa Rica wants to stay an Eco Destination and not become a Cancun Mexico. So you are going to have more and more buyers, with less and less inventory and sellers who don’t need to sell. That’s why the Costa Rica real estate market outperforms the U.S.
Hope to see you down here soon. Don’t be one of those people who ten years from now looks back and realizes they missed out on the greatest opportunity of their lifetime. To top it off, this is truly one of the greatest places you could ever live, it is pure paradise!