Financing property in Costa Rica–What are the options?

Written by Michael Simons on . Posted in Buying and Selling Property in Costa Rica, Costa Rica Service Providers, FAQ's, Investing in Costa Rica

You will see all kinds of information on the internet about financing property in Costa Rica.  Many websites tell you that they have financing options available through the National or Local banks.  I have been selling real estate in this country since 2003 and only a handful of my clients have been able to obtain a loan with a Costa Rican bank. 

Financing property in Costa Rica can make this your home in paradise

It’s not that you can’t get a loan, it’s that most foreigners, after reviewing all the documents and costs, don’t take the loan.  First off, it is very difficult to qualify for a loan if you are not a permanent resident of this country.  The paperwork is mind boggling and the banks do not operate with the efficiency that you are used to in the USA or Canada.  It can take months for an answer which is usually NO anyway.  Second, the fees are very high; usually 3 to 5 % higher than a traditional loan in North America and the closing costs are as much as 3% of the loan, on top of the normal closing costs.

So when most buyers see these numbers, they change their mind and search for an alternate way to purchase their little piece of paradise.  One of the reasons Costa Rica is so stable, in my opinion, is because they don’t lend money.  We all know that the problem with the USA was the banks’ poor lending practices.  In the history of this country not one single bank has ever failed.  That is an amazing statistic.  It’s because they don’t frivolously lend money, and they almost NEVER lend money to foreigners.  As a client of mine from Tallahassee says, “you gotta pay to play”.

The people who own property in Costa Rica are very financially stable individuals because they usually had to pay cash for their property – one of the reasons we saw no foreclosures and very little slide in our values after the big crash a few years ago.

So how can I buy in Costa Rica, if I don’t have all the cash you ask?

There are a few options for financing a home in Costa Rica.  Let’s explore them here for a moment.  Many of the developers will actually carry in house financing, so if you are buying directly from the developer himself, this could be a good option.  As with any property, it is important to verify the financial stability of the developer and the quality of their product.  This of course is something your real estate agent can advise you about on your trip to Costa Rica as not all developer properties are what they advertise on the internet.  So do your due diligence and always work with a reputable licensed real estate agent and a first class law firm.  Don’t ever buy direct from the developer and don’t use their attorney.

Most private sellers in today’s market are selling because they need the money, and they are open to any reasonable offer.  Probably 50% of the transactions we have done the last few years have involved some sort of seller financing short term.  The mortgage laws in Costa Rica are very strong so both the buyer and seller are protected if a seller agrees to carry a note.  The buyer will close on the property, so they are the legal owners, and the seller will carry a mortgage or a legal trust against the property until the balance is paid off.  We use very secure third parties to handle this transaction, like Stewart Title for instance.  The seller is assured that the buyer can’t sell the property without their loan being paid off and the buyer is assured that when he does pay off the loan, the lien will be removed.  So we have to be creative in writing the offer for the buyers.

Recently I sold a condo for $300,000.  The buyers put down $100k and agreed to pay $100k in 12 months and $100k in 24 months with some small interest.  The seller was happy to accept.

I sold a house a few months ago for $400,000.  The buyer put down 30% of the sale price.  The balance of $280,000 was amortized over 30 years at 6% with a balloon payment in 48 months.  So the buyers pay a small monthly mortgage payment to the seller every month of $1678.74.  In 4 years the seller will pay a balloon payment of $264,920.69 and the loan will be paid in full.  If the buyer chooses to pay the balance off early, there is no prepayment penalty and the seller is always happy to get their money early.  Many of the buyers today have assets, usually a property they are trying to sell in the USA or Canada.  Having these 4 years allows them time to sell this house without having to drastically reduce their selling price and take a loss.  Many people are property rich and cash poor so this is a good option for them, as the time to buy has never been better. 

The cost to register a mortgage in Costa Rica is approximately 1.64% of the total mortgage amount.  So if you are asking the seller to carry a note of $200,000 it will cost you an additional $3,294 on top of your normal closing fees. It is standard for the buyer to pay the mortgage fees.

Most buyers realize that if they wait until they sell their property back home, the deals will be gone here in Costa Rica.  So this allows them to take advantage of the buyers market without taking a huge hit on their existing real estate portfolio back home.  And with the rental market being so strong here in Costa Rica, most people can very easily cover their monthly nut doing vacation rentals through a local property manager.

I have also had many clients tell me that they were more than happy to cash in their 401k or other stock market investments and use that money to pay cash for the property.  With the uncertainty in the market and the fact that most people’s 401k’s are as flat as a Nebraska corn field, using that money to purchase a home or condo in a growing Costa Rica real estate market just makes more sense.

But one of the easiest ways to purchase your dream property in Costa Rica is by using what’s called a Self Directed IRA.  Many people do not realize that they can convert their current IRA or 401k into an IRA that they themselves control.  It is actually a very simple process and most companies can process it in less than 30 days.  I have had dozens of US citizens buy their house or condo this way in the last 3 or 4 years.  If you would like more information on purchasing property in Costa Rica with your IRA please send me an email and I can put you in touch with some good companies in the USA who can answer all your questions.

Canadians actually have it the best.  Canada did not experience the same recession as their southern neighbors for the simple fact that they have always followed proper lending practices.  You must have a good credit rating, a solid verifiable income and put down a minimum of 30% to even obtain a loan in Canada.  Obviously, the USA should have been following these same rules.  But when you give home loans to Burger King Employees, with no money down, we should have known we were destined to fail.  Due to their diligence, the Canadian market is still quite strong and most home owners have a tremendous amount of equity in their homes.  So most of my buyers from the Great White North, just walk into their local Scotia Bank back home and apply for a simple Equity Line of Credit.  With the current interest rates as low as they are, this makes tremendous sense, so the majority of my Canadian buyers use the value in their personal home, to purchase their second home or future retirement property. That’s one of the simplest ways to work around financing property in Costa Rica.

FAQ small

Many of my buyers understand that it might be 3 to 5 years until they can actually start spending time in Costa Rica.  But they want to take advantage of the buyers market before all the deals are gone.  So many clients end up purchasing a vacant lot instead of a condo or house.  This of course costs substantially less and they have practically no carrying costs on the lot.  Then in 5 years when they have the cash and are ready to make the leap, they can hire a builder and have him build their dream home exactly as they envisioned.

So you can see there are actually many options for financing property in Costa Rica and making your dream come true.

We have even negotiated a few trades in the last few years.  One person traded their yacht for a Costa Rican home and we have had condo swaps as well from people in Miami trading their condo for a property here in Costa Rica.  Again, it is about being creative and that is something we are very good at.  But the best advice I can give you, is that these opportunities are not going to last.  We are seeing inventory disappear quickly and I think we only have another year or so and they will be gone.  So don’t wait for your house in Atlanta to sell before making the leap to Costa Rica.

Don’t let the challenge of financing property in Costa Rica get in your way.  Come down, spend a few days looking around and see if you can find that little piece of paradise.  If you do, let’s sit down, and be creative and see if we can put something together that works for you, that you are comfortable with and a plan that won’t put stress on your financial situation. In the end, this is a dream you are trying to achieve and the last thing we want is for you to feel pressured.  But at the same time, we don’t want you to miss out on the buying opportunities that this market presents.  So don’t procrastinate too long or all the deals might be gone.

Pura Vida,

Michael Simons

COME ON DOWN BABY!

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Comments (6)

  • Al

    |

    Michael,

    Very informative, and well written…know anyone who want’s to swap a Costa Rican condo, for a Philadelphia, Pennsylvania townhouse.(smile)

    Al

    Reply

  • Bill

    |

    Good article Michael but it would not hurt to expand a bit on why getting a mortgage from a local bank is a non starter.

    We are all too familiar with the global banks and their image on Wall Street these days. In the developed world the simple formula for lending rates is: deposit rate + cost of doing business + profit margin = lending rate. These lending rates are at an all time low and yet banks are not lending like they used to.

    Costa Rica has a different set of issues. The “deposit rate” is higher since Costa Rica debt is one step below investment grade at BB+.

    Costa Rican banks are fat, bloated, bureaucratic and inefficient institutions and hence the “cost of doing business” part of the formula is much higher than can be justified under any measure of “good business practices” and yet still, as you point out, they charge high fees and closing costs to cover their inefficiencies.

    Furthermore, let’s be nice and say “fudge factor” for “profit margin”. Where else do banks get away with mortgage rates in the 20%+ range as they have in recent years here. Granted they are currently closer to the 10% range, low by Costa Rica standards, but from a global perspective it is no surprise why the Costa Rica economy has a hard time growing and has a national housing deficit in the 350,000+ home range. Before a bank will lend they will ask for personal guarantees and try to secure as many of your assets as they can get away with. Hence many businesses shy away from local financing and many families simply cannot afford the mortgage rates, fees and 20% down payments typically required.

    Banks will lure customers into mortgages at “introductory rates” which may be a few points less than the going rate for starters but are fixed for only the first 3 to 5 years of the term if you are lucky. They will offer a 30 year term but once the introductory period is over the mortgage typically becomes a “floating” rate mortgage and is adjusted monthly at the whim of the banks. Both the state banks and the private banks collude with the process.

    There have been several articles written about this in the editorial pages of the local newspapers and a move afoot to at least require banks to offer a fixed rate for the first 10 years but the pace of Costa Rican reform will ensure that no change will be forthcoming in the near future. In the end it is simply a form of economic repression. Compare to Panama where a typical middle class family can get a 30 year fixed rate 4.75% mortgage and pay 2% down.

    Bottom line? People do not come here for the low cost of money, stay away from the local banks and let Michael steer you in the right direction and enjoy the country for all its positive aspects!

    Pura Vida,

    Bill

    Reply

  • Nova Everson

    |

    I sell real estate too, and in my experience, everything Michael says here is still true today. Actually it’s even tougher to get a loan now if you’re not a resident in Costa Rica, if not impossible. Better to look to other sources for the money to buy property in Costa Rica, best bet is a home equity loan from your home country.
    Thanks for sharing Micheal.

    Reply

    • Michael Simons

      |

      Thanks for your comment Nova.

      Reply

  • Bruce

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    Hi Michael. My name is Bruce. Referred to you by Jack Wooten.
    Who and How do you suggest for Self directed IRA.
    Thanks in advance.
    Bruce

    Reply

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