What Are The Options?
In the history of Costa Rica, not one single bank has ever failed.
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. We have been selling real estate in Costa Rica 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 documentation required and the costs involved, 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 U.S. or Canada. It can take months for an answer, which usually winds up being “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.
Loans hard to come by
So, when most buyers see the hurdles and the 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 is because its financial institutions don’t lend money very easily and are very conservative when they do. We all know that the problem with the subprime mortgage fiasco in the U.S. was the banks’ poor lending practices. In the history of Costa Rica, 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.
The people who own property in Costa Rica tend to be financially stable individuals because they usually had to pay cash for their property. That’s one of the reasons why we don’t see wide-scale foreclosures and very little slide in property values when the market takes a turn.
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. There are select developers who offer house financing, so if you are buying directly from the developer itself this could be a good option. As with any property, it is important to verify the developer’s financial stability and the quality of its product. This, of course, is something your real estate agent can advise you about as not all developer properties are what is advertised 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 directly from the developer and don’t use the developer’s attorney.
Private seller financing
Some private sellers in today’s market are open to providing some sort of owner financing. Roughly 20% of the transactions we have done the last few years have involved some sort of short-term seller financing. 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 Costa Rica for example. 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. Sellers are also aware that buyers sometimes just need a short period of breathing room to adjust their portfolio to release some liquidity without incurring too many taxes. These sellers are willing to be flexible with carrying short-term papers.
A few months ago, a house sold 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 due in 24 months. The buyers pay a small monthly mortgage payment to the seller every month of $907.44. In two 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 the money early.
Many of the buyers today have assets, usually a property they are trying to sell in the U.S. or Canada. Having these two years allows them time to sell this house or retire and access their retirement funds.
The cost to register a mortgage in Costa Rica is approximately 1.64% of the total mortgage amount. 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. Getting creative with short-term financing 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.
We have many clients tell us that they are willing to cash in their 401k, or other stock market investments, and use that money to pay cash for the property. With uncertainty in the market, knowing that at some point it will have to slow down, and the fact that most people’s 401ks 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.
One of the easiest ways to purchase an investment 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 a self-directed IRA — meaning they themselves can control what it’s invested in. It is actually a very simple process and most trust companies can do the rollover in 30 days.
We have had dozens of U.S. citizens buy an investment house or condo this way in the last three or four years. If you would like more information on purchasing a property in Costa Rica with your IRA, please contact one of our agents and they can put you in touch with some good companies in the U.S. who can answer all your questions regarding self-directed IRAs.
Equity line of credit
One of the simplest financing options is to tap the equity you have in property back in North America. Many buyers are able to obtain an equity line of credit with their bank back home. With the current interest rates as low as they are and with home values rising, buyers now have a tremendous amount of equity they can unlock to use to pay cash for their property purchase here in paradise.
Many 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 our buyers understand that it might be three to five 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 five 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.
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 find something you fall in love with, sit down with your agent and get creative to 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.