Over the past few years, more and more of our clients have been asking for owner financing in order to make their dreams of purchasing a home in paradise a reality. Traditionally, in Costa Rica, the structure for purchasing property has been 95% cash with 5% financing, either through a bank or private investor/owner.
Bank financing is possible, but the process is long and tedious and the terms are often not so favorable with interest rates as high as 13%. However, recently owners of property in Costa Rica have seen that there are definite advantages to offering “owner financing” on their properties for sale. Poor returns on investments like CDs and savings accounts, coupled with the instability of the stock market, have made the potential to earn 6-10% per year to owners very attractive indeed.
BANK FINANCING - The world today is very different than it was just a few years ago. Generally speaking, unlike the United States and Europe, Costa Rica has not been affected much by the world economic downturn. The mortgage crisis that exists to our north does not exist here in Costa Rica. The main reason for this is that obtaining a loan in Costa Rica makes one act like a circus performer, as there are many hoops to jump through. Costa Rican banks haven’t made the same mistakes as banks in North America because banks here are very conservative when it comes to making loans and their terms are much harder for most to swallow. For example:
- 20% minimum down payment.
- 8.5-13% interest rate.
- Up to 3 points for origination fees.
- 1.5% in additional closing costs (based on loan amount).
- 10-20 year terms.
- Slow to close.
Here in Costa Rica, the banks will NEVER loan more than 80% of a home’s value and appraisals are very conservative. Interest rates vary widely, but the range is typically from 8.5% on the low end on up to 13% on the high end. Often, the lower interest rate is an introductory rate that is for the first 3 years, which adjusts to a higher amount in the 4th year. Origination fees can be as high as 3 points, and closing costs up to an additional 1.5% of the loan amount. Thinking about a 30 year mortgage? Forget about it! In Costa Rica your options are either 10 years or 20 years, with 20 years being the maximum. Time is of the essence to you to close? Well, not with banks in Costa Rica. Fast closings with banks do not exist. You can expect the process to take anywhere from 6 weeks to 3 months on average.
OWNER FINANCING - Since the beginning of 2010, we have sold several homes with owner financing and with negotiated terms that are win/win for both the buyer and seller. The good news about owner financing is that it is negotiable, whereas bank financing is not. When you find the right property and make an offer with an owner financing contingency, you will want to start with the terms that are best for you. Of course, one important factor to keep in mind is that you will not be able to negotiate on the price in the same way when dealing with owner financing because “cash is king”. In this modern world, cash really talks, but owner financing may give you the options you need to get the job done.
In our dealings with owner financing, some terms that we have been able to work out include:
- 30-50% down payments.
- 6-10% interest.
- 1.5% in additional closing costs (based on loan amount).
- 3-15 year terms.
- No upfront points or origination fees.
- No prepayment penalties.
- Fast closings.
One client who purchased a beautiful retirement home for himself and his wife, brought some interesting facts to our attention. First, there is a legal way that you can use your IRA to pay your mortgage payments on your new vacation or retirement home while avoiding a 30% penalty for breaking your IRA. An annuity that is owned by the IRA is set up, and the annuity gives a monthly distribution that, in turn, pays the mortgage. We did not help the client set this part of the deal up, but he recommended these sites to help facilitate this type of transaction:
In this particular deal, the buyer got exactly want he wanted, and his existing retirement investments are paying his mortgage. Talk about a great situation!
Now that these facts are on the table, there are a few other factors that you must think about.
Options: When looking for owner financing you limit your options. Your expectations cannot be the same as if you are a cash buyer because the number of homes available to you with owner financing is limited. Only about 1 in 10 properties offer owner financing. There are always compromises and having the option of owner financing is a big plus to many. If you find a property that meets 60-70% of your wants and needs, plus it offers owner financing, then you have found a great deal!
Negotiations: As with everything in life, there is compromise. In general, owners are very conservative when negotiating on price if they are offering financing. For example, on our most recent owner financing deal, the asking price was $355,000.00. After negotiations, the owner accepted $350,000.00 with favorable financing terms.
At the end of the day, owner financing can be an excellent situation for both the buyer and seller. For the buyer, it affords the opportunity of making the dream of owning a vacation or retirement home in Costa Rica a reality, with more favorable terms than a bank. In some cases it may allow a buyer to use existing IRAs and investments to pay their mortgage payments without penalty. For the seller, it widens the pool of buyers and can give a much better return on investment when compared to traditional instruments like CDs, savings accounts, or the volatile stock market. It is important that both parties keep an open mind and be flexible in working out these deals. If buyers are looking for 3-4% interest rates that are being offered “back home”, then forget about it because that is not going to happen in Costa Rica where people are not desperate. Likewise, if sellers are expecting a 12-15% return, well that is unrealistic in most cases. Ultimately, there is always a happy medium and our job is to strike that balance and make the deal work for both the buyers and sellers. Everyone has a dream and with our real estate knowledge and experience here at Pure Life Development, we can help make that dream a reality!
Costa Rica Realtors Chamber
Tours in Costa Rica
Pure Life Development of Atenas is a full service tour company. We feature full vacation packages and day trips for the family. Our tour director Nelson Conejo is very experienced and provides a personal service and attention to detail second to none in Costa Rica. Please write Nelson or give him a call to arrange your next Costa Rican vacation at (506)2446-0447 or
Retirement Living in Atenas
Interview with Pure Life Development co-founder and certified realtor Dennis Easters, about Costa Rica ranked by AARP as "one of the best places to retire abroad".