Housing market changing

From the print edition

People from all over the world want to buy property in Costa Rica. 

North Americans, who come for a visit and fall in love with the country, and South Americans trying to protect their fortunes from questionable government policies in their own countries are the most common  foreign real estate investors. 

To these groups we can now add a newly empowered and ambitious class of young Tico professionals, and emerging European and Russian investors. Together, these groups form a changing demand for Costa Rica’s real estate market.

The supply side also combines the old and the new. Costa Rican construction has always been solid: The country is seismically active, and for decades has had a construction code reflecting this. But architecture and finishes, which used to lag, are now world-class. Over the years, foreign real estate developers have seen opportunity in Costa Rica, and Ticos have learned from them. 

Despite all the interest, real estate remains tricky in Costa Rica; scams abound, both for Ticos and expats, although foreigners are much more vulnerable. Things taken for granted in other countries, such as title insurance or water supply and rights, can bite those who didn’t do their homework. 

Lawyers, essential to any purchase or sale, come in all shades of honesty and competence. And Costa Rica has its peculiarities, such as a court system biased towards squatters’ rights, allowing homeless people to simply move onto and establish claims to lands belonging to others. 

Finally, rush-hour traffic is now a big consideration in the Central Valley: A 20-minute drive from Alajuela or Heredia to San José between 10 a.m.-3 p.m. can turn into an hour and a half of bumper-to-bumper hell around peak commuting times of 7:30 a.m. and 5:30 p.m.

So how is the market? For expats, it’s most easily understood through the experience of well-established real estate professionals. Les Nunez and Mercedes Castro of First Realty Costa Rica have been in business for more than 15 years, and combine local and international perspectives. They point out that the real estate market in Costa Rica has two basic, and quite different, divisions.

The first market is driven by local supply and demand in the Central Valley provinces of San José, Alajuela, Heredia and Cartago. “Local” here does not mean Tico only; expats are a big part of this market. Real estate prices in these provinces have increased steadily, but not explosively, for 20 years. 

This market slowed a little with the 2008-2010 economic downturn, but has resumed its steady upward trend. Prices for single-family homes in traditional neighborhoods, generally with three or four bedrooms, vary widely. Depending on both quality and neighborhood security, they can range from $100,000-$600,000. 

But this traditional housing is rapidly losing its appeal due to security worries. The modern preference is for houses and condos up to international standards in gated communities. These generally start at $200,000, for smaller areas of about 160 square meters (1,700 square feet), with two or three bedrooms. 

A new trend is shrinking condo areas to drop prices, making up for reduced size with first-class finishes, security and shared amenities that may include swimming pools. One-bedroom units can be as small as 60 square meters (650 square feet). Prices for this new concept, increasingly popular with single or married young professionals, start in the $80,000 range. 

On the high end, apartment tower projects overlooking La Sabana, the equivalent of San Jose’s Central Park on the western edge of the capital, near the National Stadium, are on architects’ drawing boards. These will have prices ranging from $400,000-$1.5 million. 

The second important real estate market is the northern and mid-Pacific coast, and to a lesser extent, Guanacaste province in northwestern Costa Rica. This market saw a vacation-home boom that was a part of the United States housing bubble. Sophisticated sales teams marketing directly to investors in the U.S. and Canada drove sales of coastal homes within sight of the beach. Property and home prices tripled from 2003-2008, and then collapsed along with the U.S. real estate bust in 2008-2009. 

Today, coastal houses and condos that sold for $200,000-$300,000 can be bought for $80,000-$125,000. 

The U.S.-based bubble also affected non-coastal areas of Guanacaste. Significant construction activity generated demand for local housing around the provincial capital of Liberia. Though the price run-up and later collapse for inland Guanacaste real estate was much smaller, home and condo prices there are still well below the 2008 peak. 

Further international perspective on real estate in Costa Rica comes from Thomas Franceschi and Elizabeth Sargent, a Tico-Gringa couple who own a rental house, condos and apartments in the U.S. in South Beach, Miami and Coral Gables in Florida and Aspen, Colorado.

In Costa Rica, the couple built a six-bedroom home that won architectural and interior design awards in Faro Escondido, an elite Pacific beach real estate development. They have made haste slowly, learning the Costa Rican real estate ropes with their own house before starting their first for-sale development – a seven-story, 31-unit condo building on a hill, one kilometer from Flamingo Beach in Guanacaste. 

Water was the big problem for their project. In the provinces, frequently struggling municipal water works have trouble delivering dependable water. Now that the Costa Rican Water and Sewer Institute has taken over in the Flamingo area, they are ready to go ahead. 

Sargent is impressed by the resiliency of the Costa Rican Central Valley real estate market: It sailed through only a modest 2010 downturn, which she describes as “only a blip.” Sargent considers Costa Rican real estate prices surprisingly high: Condos in Santa Ana, southwest of the capital, are in the same price range ($125,000 with two bedrooms) as her units in South Beach, and much more expensive than units in inland Miami.

One-room condos in the $90,000 range, common in Miami, are only starting to become available here. 

But she says these market gaps are part of what makes Costa Rica a great place for real estate development, along with the quality of construction professionals. Sargent considers Costa Rican architects, engineers and  building companies up to the highest international standards.

Economics and Prices

 Costa Rica has free exchange between its currency, the colón, and the U.S. dollar. Contracts can be made in either currency, and payment must be honored in the contracted currency. Up to 2007, the colón devalued steadily against the dollar, an average of 11 percent a year for 27 years. This made the dollar the currency of choice for high-value fixed assets like real estate. 

In 2007, the Costa Rican Central Bank stopped its devaluation policy and floated the colón. Since then, Costa Rica has had so much success with exports and in attracting foreign direct investment, that the problem now is possible revaluation of the colón. There is a ₡10 spread between buy and sell rates for the dollar, and the Central Bank has set a base rate at which it will buy dollars to keep their price from falling further. This base rate is currently ₡500 per dollar. Because of the buy-sell spread, the rate can fall up to ₡10 below the Central Bank’s support rate, so that the exchange rate has settled into the low {490s.

The chart on Page 4 is a sampling of 10 condo projects in San José, Heredia and Alajuela. Nunez, of First Realty Costa Rica, who provided the information, points out that there are two beachfront condo projects that he knows of in Sarasota, Florida, that are selling for $81 a square foot – considerably less expensive than all of these Costa Rican condos, despite their locations on the beach. 

On or near the beach in Costa Rica, developments are starting up again, now aimed principally at Costa Rican buyers with bank financing available. A typical new project is Residencial Malaga, near Playa Herradura in the northern Pacific region, featuring 180 square-meter (1,900 square-feet) lots with two to three bedroom homes, for $80,000-$92,000. 

Condos are now setting the pace for house pricing in Costa Rica, but Sargent points out that for existing homes – as opposed to developments that must sell – prices are all over the place. Many so-called sellers really just want to test the market to price their homes and are not willing to take a market price if it is too far below their expectations. 

The Future 

After a boom-bust bubble cycle in the Pacific coast area, real estate property appreciation there and in the Central Valley is once again positive. Even so, Nunez believes real estate development is being held back by lack of credit. Although most banks, public and private, have fairly aggressive mortgage loan departments, high credit standards (down payments in the 15-20 percent range) limit the number of qualifying applicants. Still, as two-earner families become common among young professionals, developers are gearing up with many new projects, as the table shows.

Moving forward in Costa Rican real estate, there are two wild cards. The first is foreign investment, as Costa Rica continues to gain recognition as not only a great place to live, but also a good place to invest as advanced economies go into crisis (see Editorial, Page 11). 

The second wild card is the untapped potential of Costa Rica’s Caribbean coast. Property values there are half of Pacific coast prices, and mega-projects going forward (a new billion-dollar petroleum refinery and a new billion-dollar container port) should revolutionize the area. Nunez points out “smart Costa Rican real estate money should be looking east.”

Buying Property

In Costa Rica, foreigners have the same rights as Ticos for buying and owning property. If an expat who buys real estate does his or her homework and does not skimp on professional help, the process should be straightforward. Here are some points to keep in mind:

• It’s best to hire a real estate broker to locate the property you want.

• There is an exclusion zone for beach property, 200 meters from mean-high-tide.

• Costa Rica has a National Registry where all owned real estate is registered. There are still a few unregistered properties in Costa Rica. These should be avoided, as establishing ownership for purchase is uncertain. For registered properties, all ownership information, liens, and annotations concerning a property should show in the National Registry, provided the interested party (for example, a bank with a mortgage loan) took the initiative to register his document. National Registry information is in the public domain and can be legally reviewed by anybody, but its use requires specialized knowledge, so it is best to hire a lawyer for this. 

• Once you decide on a property, a real estate lawyer to do a registry study and represent you for the legal paperwork is a necessity. A good real estate lawyer will go beyond a registry study to full due diligence, especially important if the property is in the name of a corporation.

• A purchase option, which functions as an earnest money deposit, is the first step towards the actual purchase. This can be for a period of one to three months. If the purchase goes through, the deposit is applied to the purchase price. What happens if the deal fails is a matter to be negotiated. In the past, purchase options were nonrefundable, but that is changing, and a U.S. escrow-like concept is making headway. The terms of the option deposit should be the first thing your lawyer negotiates for you. 

• It is possible to purchase properties either personally or through a Costa Rican corporation, with the most common type being a sociedad anónima, or S.A. S.A.s are the preferred way to go, because it then becomes possible to sell the property by selling the S.A., avoiding transfer taxes. The chartering of the S.A. and the purchase of the property and its transfer into the new S.A. can all be done in one legal closing transaction.

• Closing costs for real estate purchases involve taxes of 1 percent of the purchase price for stamp taxes and 1.5 percent in transfer taxes. Notary fees, for the lawyer, have a base rate of 1.25 percent, but are negotiable, especially for expensive properties.

• A new concept gaining force in Costa Rican real estate is title guarantee. This is an insurance against mistakes at the National Registry that could put ownership of a property in doubt. Stewart Title Guarantee Company issues title insurance in Costa Rica. The fee is 0.5 percent of the property value.