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Costa Rica Real Estate Investing Advice

Montezuma Real Estate By Geoff McCabe
November 7, 2009

I finally sat down to write an article that I've been thinking about for years, to provide advice to people who are interested in buying real estate in Costa Rica that goes beyond the usual details that one will find on nearly every real estate website. I'm writing this to clear up several misconceptions about the market here, as well as listing many of the common and not-so-common pitfalls that I've seen. The best important advice that I can give you first of all I'll list here, ranked in order of importance.

Best Advice:

1. Hire a great lawyer with glowing recommendations, who speaks English and really represents you.
2. Pick a realtor with integrity who knows the area and has lots of listings. Go see properties with multiple realtors... don't worry about "loyalty" to a realtor. But always buy through the one who showed you the property you want first, even if you liked the personality of another realtor better! You might think it's funny that I'm recommending you to go to other realtors, but I'm confident that we have by far the most listings and a great reputation, so if you work with me first, you're unlikely to find a good property through anyone else that I haven't already shown you.
3. Talk to a lot of people who live here, to get their advice about the property, and find out about the reputation of your realtor.
4. Make sure your property is TITLED or if it's a beach property, that it has its concession.
5. Think a lot about what the area around your property is going to be like in 5 years when you may want to sell it. Will trees grow up and block the view? Will this bad road be improved, or electricity be brought in, making the property more valuable?

Costa Rica Real Estate Misconceptions:

1. Ticos have the best prices. There may have been a time that you could find a Tico farmer who would sell you a piece of land cheap, but that is now far in the past. Most Ticos now have absurdly high expectations of the value of their land and their properties are greatly overpriced. Our company has hundreds of listings from both foreigners and Ticos, and across the board, the prices of land owned by foreigners are lower. This is because prices have risen so steadily over the last ten years, that Ticos apparently believe that prices will keep going up forever, while in fact, prices have hit a plateau over the last two years. Everyone believes that prices will continue to go up eventually, but for now the worldwide financial crisis has stalled the prices, while Ticos keep raising theirs.

2. There is a "Tico Price" and a "Foreigner Price". Many Tico "commissionistas" (part time real estate agents) such a taxi drivers, adventure tour operators, etc, will claim that they can get you the "Tico price" for a piece of land. In our experience, you are probably more likely to pay MORE through a commissionista than working with an established company, because many of the part-timers will pad the price told to them by the owner, to try to make extra for themselves. As far as I know, none of the established companies in Montezuma engage in "overpricing" like this. Overpricing is illegal in the U.S. and Europe, but legal here in Costa Rica's unregulated real estate market. Sometimes we hear about people getting a sweet deal from a Tico landowner, but in this case, it's usually a person who spends a good amount of time here and befriends one of the locals and his family. If a landowner likes you and wants you as a neighbor, then you might get a great deal.

3. Everything is for sale. Because there are a lot of realtor's signs around, people sometimes comment that "everything seems to be for sale". While it may appear to be that way, you should realize that this market is not like that in an established market like in the U.S. or Canada. In those countries, there's a fairly fixed number of properties that are continually changing owners approximately every five years. Here, many of the properties were recently subdivided by larger farms just a few years ago, and have only had one or two owners. What we are seeing is that gradually, the best lots are being purchased, built upon, and then are not going back on the market. The average quality of the lots available is steadily decreasing, because people are holding onto the best ones, hoping to eventually move to Costa Rica or retire later. Many of the foreigners who first purchased here have subdivided and are now selling lots to make a profit and pay their bills. So it might appear that everyone is trying to sell at once, but in fact there are far more people moving here than there are leaving, and most of the lots have never been owned previously, except as part of a large cattle pasture.

4. Everything is overpriced. For the last 20 years, prices have steadily risen around 20-30% per year, until recently when the real estate bubble burst in the U.S. Since then, the number of buyers has decreased, but prices have not been dropping, which seems to violate the law of supply and demand, but it makes sense for several reasons. First, most people buying here are not speculators, but people who hope to move here or build a vacation home someday. So these properties are their dreams, and people don't sell their dreams cheaply. Second, with 20+ million baby-boomers retiring in the next decades, everyone expects many of them to seek out safe, beautiful beaches to retire to, and Costa Rica is their #1 pick. So few people want to sell cheaply now when people believe that prices will start to go up again as markets recover. If you look through the listings, you'll see that there are few, if any, true "fire sales". So while there are many properties that are overpriced, especially those owned by Ticos, there are still many properties that I expect to go up in value over a reasonable period of time. My advice is that you should have a five-year outlook when purchasing here.

Real Estate Problems:

1. Access/Servidumbre Issues: Many properties don't border a public road, but are accessed through an easement (servidumbre in Spanish) road. I have found that many properties show an access on the plot map (plano), but no legal access has been recorded on the title of the properties themselves. Many lawyers won't notice this problem, and then you'll find you don't have a legal access. In Costa Rica, every property is guaranteed access, but, if it's not legal, you may have to go to court to open a road if someone decides to put a gate on their road and not give you a key. It could be difficult to re-sell a property like this. It could also be difficult to subdivide a property like this as well, since your new lots would also have no legal access. The most dangerous cases of this occur when a property borders a public road, but the building site is unreachable through the property, because there's a deep chasm in between the road and your building site. In this case, you will have no legal right to access your building site, and your property will be virtually worthless because you'd have to build a million-dollar bridge to use your property! If you have a servidumbre shown on your plano, make sure you see with your own eyes that your legal access in inscribed in the Registro Nacional, giving you the right to access your building site.

2. Bad Lawyers: Many (or most) lawyers will want to find a way to make your deal go through, because they don't make money if they find a problem with the property you want to buy. I can't stress the importance of this enough. I usually work with LLMR&T, a large firm in San Jose who has many clients in the Montezuma/Malpais area and frequently come to the region. In my experience, their lawyers always do the right thing, and many of our deals have fallen through because they found problems with the property that their client wanted to buy.

3. Lack of Water: Although a huge amount of rain falls on this part of Costa Rica every year, the government hasn't done enough to build the infrastructure to capture it and provide water to the people who live here. Growth has been fast, and infrastructure has not kept pace. In many areas, you cannot get a public water hook-up at all. You may be able to drill or hand-dig your own well, but permitting has become more difficult, more expensive, and takes 1-2 years, especially if you're within 1000 meters of the ocean. If your property already has a well, it may dry up during dry season, or, the refresh rate may not be fast enough to keep pace with a pump, making it difficult to use the well. If you can't prove to the municipality that you have a legal source of water, they will no longer give you a building permit. Your ownly option in this case is to declare to the Municipality that you will provide your own water by truck, and get the signature from a legal well owner committing to supply you with water. That will get you a building permit. Then, you can do rainwater harvesting, which costs around $20,000 to $40,000 for a single house, or you can buy water from water trucks. This solution works for a single house, but for a hotel it's usually unaffordable because tourists tend to really waste water.

4. Informacion Posesoria: This is a type of land that is not titled, although it may have a plano that the owner will show you. Usually on this plano will be written "Para Informacion Posesoria". To title this land takes at least three years. You should get the signatures of all your neighbors, agreeing that your fence is in the correct place. If just one of them disagrees, you have a problem. Even if everyone agrees, there's a three-year waiting period during which time someone could come out of nowhere and claim they own part or all of the land. I don't recommend this type of land except in special circumstances, such as when the same person has owned it for 20+ years, and it has no neighbors other than public roads.

5. IDA Land: Another type of problematic land, which isn't titled, is IDA land. This is land that was assigned to the current owner by the government, with a 15 or 20 years waiting period before it can be titled. Many lawyers will sell you this type of land, devising all kinds of tricky contracts to give you ownership. All such contracts have already been ruled illegal by the government, and so if you sign one, it's no better than a hand-shake deal with the current owner. He or she will have no legal obligation when (and IF) the property ever gets its title liberated from IDA. In addition IDA was recently found to be so corrupt that the entire titling division of IDA has been suspended. So most IDA land is now in perpetual limbo. If you do make the mistake of buying IDA land, then your best hope is to move onto the piece of land and take ownership by possessing it. Possession rights in Costa Rica are very strong, and you can probably live there. You may not be able to get a building permit or sell it, but if it has a small house you can live there and wait it out, hoping for a miracle.

6. Ownership through shares of a corporation: Many people here try to circumvent the laws concerning minimum lot size, by subdividing a property via a corporation. They will have plot maps drawn up of their new lots by a Malpais or Montezuma topographer, but they will not be registered (because they are illegal) and then they will form a corporation with detailed bylaws and a private agreement between the new lot owners to respect the boundaries, etc. So instead of buying a property, you're buying shares of a corporation, and you will become partners with a bunch of people you don't know. I highly discourage this type of purchase. Costa Rica already has a legal way to make this work, by incribing a property under condominium law. Buying a share of a corporation can open up a whole can of worms that is too lengthy to describe here. Good lawyers will rarely recommend this type of purchase.

7. Buying the wrong lot: I've talked to two people in the area that did this. What happens is that a person is shown a lot by the seller, or a crooked/inexperienced realtor, and they end up buying a lot next to the one they were shown. In both cases, the lot actually purchased had no building site and was all steep slope, worth a fraction of what they paid. In both cases, the lot they purchased had the same, or nearly the same shape as the one they were shown, so that even with the plano in hand, it appeared that what they were buying matched to the paperwork. When purchasing a property, if you can't be 100% sure that the shape you see of the property matches to the plano, and the location as well, based on obvious landmarks like roads and corners, then you can make your offer contingent upon a topographer certifying that the property matches to what you were shown.

8. Wrong Fence Locations or Bad Topography: Twice I've seen somone buy a property, then discover afterwards that the building site they were shown isn't on the property. In one case, the actual house they were buying was over the property line! This usually happens because someone buys a property without a fence clearly marking the property's limits. I would say that more often than not, if you buy a property and then have a topographer come to measure the limits, at least one of the fences or posts is in the wrong place, especially when the plano (plot map) was made more than 4-5 years ago. Many of the local topographers apparently are fairly careless in their measurements. If you buy a property with a fence marking the boundaries, then you have purchased what's within that fence, not what the plano says. If you buy a property without a fence, then you don't really know what you're buying. Your plot map may overlap your neighbor's. So it's a good idea to make an offer contingent upon a topographer certifying that what you're buying is what you think you're buying, especially when important features, such as an ocean view building site, are close to the property line.

Now that you're thoroughly scared about all the possibilities that can go wrong, you can probably see why it's so important to have a knowledgable and experienced realtor and lawyer who are working to protect you. Your lawyer will probably never see your property, so will be unable to protect you from many of the problems above, because these problems will not appear in the paperwork that passes through their hands. So it's essential to be aware of all these potential pitfalls, ask lots of questions, and make sure that your realtor is aware of these problems and has the integrity to help try to uncover them. There are no laws requiring disclosure of a property's problems, so it's up to you to make sure you protect yourself and are allied with people working for your behalf. Once you finalize your purchase, you will have little legal recourse against the seller, your lawyer, or your realtor, all of whom are making money from the sale and may not want to find a problem that could jeopardize it.

Geoff McCabe
Tropisphere Real Estate
(011 506) 8844-4726

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