“What?! My property has been on the market for 30 days and it hasn’t sold yet! It’s priced well at $600,000 as a one-bedroom one-bathroom house without any views, but new toilets. What’s wrong with you guys, why don’t you move my property! I paid $800,000 in 2006, and I won’t sell it for any less than that.”
These or similar words could be from my imaginary property owner friend who physically lives in Costa Rica, but in his mind is still well connected to the US. real estate market where you can get nervous when your property doesn’t move within the first 30 days.
In this article, I will give it a try to bring some transparency in the not so transparent Costa Rica real estate market compared to the US.
This article will be interesting to both property sellers and buyers in Costa Rica and it will cover the following:
- How different areas and factors influence the market demand
- What is likely the ideal price range to buy or sell properties
- The usual purchase period for foreigners compared to locals
- Why Costa Rica has traditionally more or less always leaned towards a buyer’s market and probably will continue to in the future
The imaginary dialogue reminds me of an experience a realtor from California had, complaining that one house she had for sale didn’t move within 30 days.
When I heard about this experience, I had to laugh a bit in silence, since this would be a conversation you would never have in Costa Rica, where it can take much longer than 30 days to move a property.
Why is that?
That’s a reasonable question to ask and I will try to find a logical explanation for you using my own experience and some collected market data, along with already existing data.
First, we have to answer the question of who is buying property in Costa Rica.
We have to make a distinction between the local Costa Rican buyers and international buyers from abroad and how they behave for the most part.
The Local Buyers
These are mainly Costa Ricans looking to buy a home or some land.
A negligible number of local buyers are also expats who like to buy another home besides the one they have or are in the process of selling their existing home to buy another one in a more preferable area. But, again, it’s negligible for this analysis.
Most local buyers need a bank loan to buy a new property and the loan amount is determined by the wage they are earning.
This is already a good hint to determine the ideal price range they will be looking at.
We just need to find out the average minimum wage and based on the minimum wage, what amount banks are willing to lend.
According to the Costa Rican Census the average income is distributed as follows:
- 21.9% earn 203,546 colones (~$335) per month
- 22% earn 461,317 colones (~$759) per month
- 20.8% earn 726,874 colones (~$1 195) per month
- 19% earn 1 130,684 colones (~ $1859) per month
- 16.3% earn 2 568,482 colones (~$ 4224) per month
Now, we will have to determine what amount banks are usually willing to loan based on monthly salary. Let’s use some data from Banhvi, a bank specialized in smaller housing loans.
Using their data, we can compare the above-mentioned income distributions with loans that can be attained according to the income for a repayment period of 30 years:
- A monthly income of 269,322 colones (~$443) gets you a loan of 10,294, 000 colones (~$16,930)
- A monthly income of 403,983 colones (~$664) gets you a loan of 15,441,000 colones (~$25,396)
- A monthly income of 673,305 colones ($ 1,107) gets you a loan of 25,735,000 colones (~$42,327)
- A monthly income of 1,077,288 colones (~$1,772) gets you a loan of 40,083,000 colones (~$65,926)
- A monthly income of more than 2,000,000 colones (~$3,289) gets you a loan of roughly $150,000 according to “El Financiero”
Then there is the waiting time until the loan approval, which takes about 22 days once the local buyer hands over all necessary documents to the bank.
This is not counting the time it takes to get all these documents, which I estimate to be another 30 days.
So, we can calculate about two months from the decision of the local buyer to buy a property until the property moves.
The above observations give us a decent point of reference from which we can logically conclude the market situation for local buyers, hence the ideal price range and the estimated time in which a property can move in such a price range.
You can see already that the first three salary groups (a total of 64.7%) won’t be able to buy much housing, but rather some lower priced building lots (steals) priced between $10,000 and $42,000 or some fixer uppers.
Only the last two groups (35.3%) have slightly better access to housing priced between $66,000 and $150,000. But even below $100,000, you barely get a high-quality home rather than a fixer-upper home.
From that, we can conclude that if you want to sell a property to the local market in a decent amount of time, it should be priced in this price range and should preferably be in the San José area, and in an ideal world, it will take at least two months to move it.
Why in the San José area?
Bear in mind that the incomes above are quite different in rural areas, where according to statistics, the average income is much lower than in the Central Valley.
So, should you be interested in including the local market in your potential buyer group, you can cast a wider net in San José or GAM (Gran Area Metropolitano).
Properties there can be rented not only to tourists for vacation rentals, but also to locals (professionals and students), since most people work in this area and most universities and private schools are located here.
And then again, they can not only be sold to local buyers, but also to foreign buyers, although the latter usually prefer areas closer to the beaches, which brings me to the next buyer group – the foreign buyers.
The main group of foreign buyers comes from the United States. This is due to the close geographical location and the high popularity of Costa Rica as a vacation destination for US tourists.
Here is a comparison using some recent tourist data from the Costa Rican Institute of Tourism (ICT).
In January 2019 alone, 126,170 US tourists came to Costa Rica compared to only 8,171 German tourists. So, a bit more than 15 times more tourists from the United States than from Germany arrived in Costa Rica in that month.
There arrived 39,573 tourists from Canada in the same month. So, that’s more than Germans, but still is far away from tourist numbers from the US.
Why am I giving you all the tourist data?
Well, the usual foreign buyer travels to Costa Rica to enjoy some nice vacations and during this time, some fall in love with the beauty of the country.
During the vacation or at latest towards the end, they already want to live in Costa Rica year-round or partially.
If there is interest in living in Costa Rica partially as snow birds, it might be important to these buyers to be able to rent the house to tourists during their absence.
Back in the US, they begin to look for properties on the internet and contact real estate agencies and for sale by owner properties.
They are rarely ready to buy within the next weeks, since they are still bound to the US due to several things, such as work or business, financial obligations or family.
This situation leads them to develop a plan on how they could omake a purchase possible.
So, they might think of selling their properties and/or vehicles in the US. They also think of how they could work remotely for the same company from Costa Rica or how theycould organize their business so that they could manage it from Costa Rica in the future.
After maybe one to three months, they get more clarity with regards to her exit from the US, and they travel to Costa Rica again after six to twelve months to take some property tours.
But they still aren’t ready to buy within a few weeks, since their exit is not completely set yet. They might put some money down on a property, but their liquidity is not yet enough to make the final purchase.
They might find a suitable property during their tour and are therefore under a bit of pressure to make her exit.
So, they start to sell their properties and vehicle(s), which can take another three to six months in the US.
As soon as these sales begin to manifest, they can start making offers on properties in Costa Rica. This offer making phase can take another one to two months.
After having sold their properties and vehicles in the US, they rent a property in Costa Rica close to the house they are going to buy.
By doing that, they can bridge the time until the final closing, and can run several errands (e.g. bank account, founding a corporation, etc.) in the meantime.
Then comes the closing and she can start the final moving process, and might bring some stuff from her old house in the US to Costa Rica.
To summarize the foreign buyer timeframes:
- 1-3 months until they get more clarity in terms of their US. exit
- 6-12 months until they take a property tour in Costa Rica
- 3-6 month until they sell properties and vehicles in the US.
- 1-2 months making offers
- 1-3 months between making offers, signing an option to purchase and final closing
In some way or form, this is usually the process for foreign buyers, and you might already see that between the desire to buy a property and finally buying one can take some time. Actually, it can take between 12 months and 26 months.
Why is this important? Well, it determines the timeframe in which a property targeting foreign buyers can be moved in Costa Rica.
Sure, as a seller, you might get lucky and put a property on the market exactly when a foreign buyer has already sold everything back home and wants to buy another property, but for some reason this deal fell through, and now she might need an alternative similar to the first choice, and your property happens to be the right alternative choice just at the right moment.
This can happen and in this case, the time between putting a property on the market and selling it can be quite short: between one and five months.
But as a seller, I wouldn’t bet on that.
It would also be a shorter time frame if the buyer didn’t have to sell properties and vehicles first because she already has enough liquidity at her disposal.
Then it would be between nine and twenty months. But still, compared to the speed of moving properties in the US, this is much slower.
As you can see, just by analyzing a bit the usual purchase process of a foreign buyer, you can conclude that under normal circumstances Costa Rica properties targeting foreign buyers move slower than when selling to domestic buyers, and slower overall than in the domestic US. real estate market.
Market Demand and Influencing Factors
In this section of my article, I will analyze the main areas of demand for housing and its external drivers, and why Costa Rica’s market traditionally leans towards being a buyer’s market.
From my own experience as a demand analysis, and what I hear from my local partners, there are basically two areas with a higher housing demand than average in Costa Rica.
The first can target both foreign buyers and local buyers and is the GAM (Gran Area Metropeltaneo), and then the beach areas mainly on the Pacific side.
The latter mainly attracts foreign buyers and fewer local buyers.
The local demand for the San José area is driven by the common factors, such as demographics (e.g. population), the local economy and jobs, interest rates and government policies.
Since there is also demand from foreign buyers in this region (not as high as for beach areas), another demand driver, such as tourism, needs to be considered too.
The second one is beach areas. The demand for beach properties is mainly driven by tourism and the usual drivers as mentioned before, except government policies can be mainly excluded and play a minor role at most.
Sure, government policies can always affect all real estate areas in some way or form.
So, should the government decide to increase property taxes to a rate of 50% because a Member of Parliament needs to buy his sixth luxury home and install several one-thousand dollar curtains, so he can enter the gourmet kitchen in a more relaxed way to eat some caviar with gold powder, and by doing so can ride his new Fusaichi Pegasus luxury horse faster afterwards, then of course, yes, property demand in beach areas would be affected negatively.
Another demand driver is based on the work of semi-government agencies and non-profit organizations, such as The Costa Rican Investment Promotion Agency (CINDE).
CINDE is a private, non-profit organization that provides investment services.
It has attracted more than 280 high-tech companies to Costa Rica so far, among other things: Procter and Gamble, ICU Medical, Baxter, Intel, St. Jude Medical and Western Union.
It was chosen by the international magazine “The European” as Latin America’s top “Investment Promotion Agency of the Year.”
The ICT (Instituto Costarricense de Turismo) is also working on making Costa Rica popular internationally, being present in different tourist fairs or arranging, for example, appearances of Costa Rica in different media channels or in movies.
The Travel and Leisure Magazine helped to increase the popularity of Costa Rica by voting Guanacaste as one of the 50 Best Places to Travel to in 2019.
It was selected because of the recent multi-million dollar Liberia airport expansion, as well as its luxury Peninsula Papagayo resort.
Why the Costa Rica Real Estate Market Will Always Lean Towards Being a Buyer’s Market
For many years now, the Costa Rica Real Estate Market has been, on average, a buyer’s market.
In areas where higher housing demand exists, (e.g. some tourist hotspots and areas of the GAM), this is less the case, but still, it’s somehow always leaning towards being a buyer’s market.
A buyer’s market means that the market supply exceeds the demand, giving property buyers an advantage over sellers in price negotiations.
The opposite happens when the demand exceeds the supply.
So, why do I think that the Costa Rica Real Estate market will likely never be a seller’s market?
Let’s first analyze some major reasons for a seller’s market:
1) When the average home buyer is unable to compete with flippers, cash buyers, and investors for distressed properties, and therefore needs to focus on non-distressed properties. The same number of buyers now compete for a smaller amount of non-distressed properties.
2) When banks don’t have much so called “shadow inventory.” This kind of inventory consists of homes that banks intend to foreclose. When this source gets low, again, buyers compete for fewer properties on the market.
3) When interest rates are low (this one is a biggie), which attracts more investors to buy investment properties, but also enables retail home buyers to buy rather than rent.
4) Population and job growth are another reason.
Let’s contrast the above reasons with the Costa Rica market.
1) Due to the lack of market transparency, there are not many local and international flippers and cash buyers for distressed properties in Costa Rica.
Simply because it’s difficult to run the numbers before an investment and determine the fair market value (as is possible in the US).
Still, it’s doable with enough experience and reliable cost estimates from local construction companies and enough knowledge of the rental market in question.
But you have to put in the work to compensate for the lack of market transparency. This makes these kind of investment strategies attractive for fewer investors.
Additionally, the pace in which such investments can be made is slower. This means that less average home buyers have to compete with local investors.
2) There is still enough “shadow inventory” in Costa Rican banks. It’s even promoted by television screens you can see when you line up in major banks.
And traditionally, I would say that it won’t dry up anytime soon.
No offense, and it definitely is not only a cultural problem in Costa Rica, but I have the impression that many people are not too good at financial math and get into debt easily.
This is especially the case in Costa Rica, where many “Ticos” tend to overspend, don’t think long-term much, and don’t do the math and end up having to sell their house as collateral or deciding to sell their house to cash-out and bring their finances in order (for a while) before the next large car has to be purchased (again financed), of course.
Another biggie which adds to this situation is the fact that the cost of living for the local Costa Rican is quite high compared to more developed countries. Just look at this overview of worldwide purchasing power and try to find Costa Rica. Exactly, it’s at rank 71 compared to the US (rank 2).
So here you have one reason why there are so many credit cards thrown at everyone and very often, grown-ups still live with their parents for a long period of time.
A major factor (worth it’s own article) for this weak purchasing power of someone earning a salary in Costa Rica is that import taxes are way too high.
These taxes cause a long chain of price increases. You almost pay the same amount in taxes for a vehicle than for the vehicle itself.
Groceries need to be transported by these imported vehicles and the companies transporting them need to include their costs in their prices to the grocery chains and other customers.
Then, many groceries are also imported and all this adds up and increases the final price the local “Tico” has to pay in the supermarkets. Again, this is a huge topic for its own article.
3) Well, interest rates are not low in Costa Rica. If you want a mortgage in the local currency, Colones, you pay around 10% and if you need a mortgage in USD, you pay an interest rate of around 8%.
With luck, you can negotiate the price of an investment property down enough to achieve an annual ROI of 10% or 11% (possible also with some vacation rentals).
This is not easy, but doable for a few deals.
But you can already see that there is not much wiggle room for a local real estate investors market to motivate a large number of investors to buy properties financed by banks and increasing the demand.
Sure, someone with cash can still have an attractive cashflow with these ROIs and, also, foreign investors with cash or other sources of financing at better terms can make nice investments.
But due to the interest situation, the local investor demand is not strong enough to switch the market to a seller’s market.
4) There is still population growth in Costa Rica but it’s slowed down.
If you check the charts, it has a slight downwards trend. At the same time, there is not really much job growth.
The job market is stagnating at best and in 2018, there was an even stronger rise in unemployment rates.
So, concluding, as long as at least two of the biggies (numbers 2 and 3) of the above factors are not changed drastically, you can expect that the buyer’s market in Costa Rica will remain in the future.
Ending this rather long article, I thank you having stayed until the end and hope that I could bring some more transparency into the real estate market in Costa Rica for you. Let me know what you think.
And should you happen to be lucky enough not to have to finance your future house through a local Costa Rican bank, don’t forget to take a look at our listings.
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