Small is beautiful, real estate buyers say, but cheap is better!

Long gone are the halcyon heydays where investors who had no intention of ever living in Costa Rica could come down, purchase properties, hold for a short while and flip them for a fast buck. But something new is now emerging; people are buying lower priced homes, paying with cash and planning to use the homes themselves while also earning vacation rental income.

For buyers who don’t have cash, the marketplace is evolving into something totally different as sellers are still looking to sell, while buyers are now seeking lower cost homes with low down payments in areas with high vacation rental appeal near the beach, lake or other high tourism area to justify the investment. Yet the financing in most cases is coming through private lenders because getting a bank loan today is much more difficult.

“That is the big issue; banks are being very conservative,” said Orlando López, regional director for Central America, Stewart Title Latin America. “The amount of loans granted for housing by the banks in Costa Rica (total figures, including Costa Ricans and foreigners) has dropped around 50 percent from 2008 to 2010. And the approval process usually takes a long time, with 90 days as a best case scenario and 180 days more probably the expected time.”

Even so, buyers today are looking for deals, and sellers are finding ways to facilitate those deals, notes Kenneth Schaafsma, owner/broker of Oceanside Realty in Jacó Beach.

“It is a buyer’s market, and we are seeing a lot of seller financing. If the seller is motivated enough and creative, they can sell. As an example: with 50 percent down and 50 percent seller financing over five years with a good interest rate, they can sell,” said Schaafsma, adding that conventional loans are still available, though more difficult to obtain. “Lenders are lending but with a lot more paperwork and a long time before final approval. So people are coming with cash, buying smaller properties and looking for private financing. The sweet spot seems to be around $250,000 or below, and the biggest draw is on the beach with beachfront condominiums still very popular.”

López agreed. “We are seeing, not only in Costa Rica but across the board in the entire region, Mexico, Central America and the Caribbean, a preference for lower-value properties, not exceeding $250K to $350K for houses and around $100k for lots. There is no appetite for high-end resort product. That is a tough sale right now.”

Deborah Gauthier, sales specialist and president of Resort Realty in Herradura/Jacó concurs, “For Los Sueños [Resort and Marina] and other luxury properties, the $400K to $500K entry level is the most sought after. Properties over the $1 million dollar mark are sitting for 18-plus months with few potential buyers. Pricing properties is difficult as only great deals are selling, reflecting prices of five years ago,” added Ms. Gauthier.

Potential buyer James Bates from central Florida, who has visited Costa Rica at least a half a dozen times over the past few years, said he feels like the time is finally right to buy as prices are down and sellers are willing to make a deal. “I am looking for a property that is in a secure location near the beach or lake that is both safe and affordable at under $150,000 that I can purchase now to enjoy as a vacation home today and later use for my retirement,” said Bates.

Ms. Gauthier credits lowered prices, along with seller or developer financing with a small but noticeable upturn in the market. “We are seeing a turn around, though slight. Up to $300K seems to be the most common price range for buyers.” And perhaps the best news of all, according to Ms. Gauthier: “Clients are actually purchasing now versus speculating about a further declining market. Also more Costa Ricans are looking in the central Pacific for vacation homes. They are looking for exceptional deals, as is everyone else.”

Costa Linda Condominiums near the beach in Jacó reports that more than 70 percent of its sales are now to Costa Rican buyers. And this trend toward more vacation unit

sales to Costa Ricans should continue, said Schaasfma, noting that the new San José-Caldera highway is a driving force behind a noticeable rise in Costa Rican buyers of central Pacific vacation properties. “The new highway is having an impact. There is a 3.5 million person market of Ticos now living within one hour of Jacó and the other beaches of the Central Pacific, and they can get financing easier than Gringos at this time,” said Schaafsma, speculating that the market will expand even more once the landslide problems with the new road are finally fixed for good.

Randy Berg of put it more bluntly, referring to North American buyers, “People are fearful, careful and unsure of their own futures, and therefore a house or real estate in Costa Rica is not in the forefront of their thoughts and minds. Buyers are few and far between. It takes far, far more work now than ever before to close a sale. Everyone wants a deal. No one is willing to pay full price unless it is a truly exceptional property, and even then it is rare.” Yet when a good deal is finally agreed upon between buyer and seller, lack of financing can still kill the deal. “Well over half of buyers before used sources of financing that simply are not available any longer; i.e. they tapped into their home equity or they borrowed from their banks. Those sources have dried up,” noted Berg.

Ironically, with such bad news in the world economy, the good news is that private investors are now willing to take the risks bankers have backed away from. “The lack of financing options available in the banking system, the bad situation in the stock market, the poor interest rate bonds and CDs are generating, these have all opened a space for private financing, which has become very popular recently, representing an alternative for borrowers and an opportunity for investors to place money at an attractive interest rate,” reported López. “Of course conditions are very tough, 2-3 years term, 12-15% interest rate, 5% origination fee, 50% LTV [loan to value].”

Yet Berg says short-term loans won’t work for most buyers. “People want financing, not just three year balloons, but longer-term,” remarked Berg, adding that in this down market he happened on a formula that seems to be working and working very well. And that is a small, yet ample two-bedroom home with pool and security, offered between $75K to $85K with 10-year financing and only a small down payment.

“We initially ran a few ads for these smaller casitas on one of our properties — with financing — and we sold them out within three weeks. After refining our offerings and properties, we ran additional ads targeting only the Costa Rican marketplace and with minimal marketing costs, we received well over 800 inquiries in less than a month. Next we targeted specific niches in the States and responses were the same — overwhelming!”

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