Financing property in Costa Rica–What are the options?

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. 

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 minds 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 20% 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 Secure 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 50% of the sale price.  The balance of $200,000 was amortized over 20 years at 5% with a balloon payment in 24 months.  So the buyers pay a small monthly mortgage payment to the seller every month of $907.44.  In 2 years the seller will pay a balloon payment of $129,075.00 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 2 years allows them time to sell this house or retire and get to their retirement funds.

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 property they want will be gone here in Costa Rica.  The market is very strong, all over the world. So this allows them to take advantage of getting into the market while there are still some good deals left.  And with the rental market being so strong here in Costa Rica, most people can very easily cover their monthly carrying cost 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, knowing that at some point it will have to slow down, and the fact that most people’s 401k’s are at an all-time high, 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 a 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 have always had it good.  Canada did not experience the same recession as its 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 has stayed quite strong and most homeowners 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. With the USA real estate market going absolutely bonkers, there is now, also, a ton of equity in most American’s homes as well. So most of my clients now, just take out a HELOC and pay cash here in paradise. The interest rates are so favorable right now. That is one of the simplest ways to work around financing property in Costa Rica.

Many North American based financial firms, like Schwab, will loan money against your stock or investment portfolio, at extremely low rates. Again, with the stock market at record highs, this is a road many of my clients choose as an option to obtain the cash to purchase in Costa Rica.

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 strong 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!