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As realty cycle renews itself, buyers must be wary

by Garland M Baker on March 1, 2010

There is a much quoted phrase in Costa Rica between lawyers. Everything legal is not always right and everything right is not always legal. Many of the development projects of the last decade were put together by individuals with high hopes of raking in the dough selling to unsuspecting buyers. They skipped doing the correct due diligence on the properties they bought to sell. They bought only to flip.

Even well known Costa Rican developers built without all the paperwork and permissions required by law. They built fast to sell fast to the flocks of people coming to Costa Rica to buy property. There is one developer in so much trouble now in Guanacaste he is telling his buyers to move into the condominiums they bought and demand squatters rights because he cannot give them clear title.

Other developers promised everything and anything to prospective buyers. There is a well know adage when it comes to sales. A good salesperson needs a little larceny in their blood. Well, it appears that some sellers of real estate to foreigners in Costa Rica had a lot of larceny in their blood.

These events are not new. They have occurred over and over again in this country. One well known case is the development in Nosara. Back in the 70s, a promoter put a few ads in newspapers in the United States and all kinds of people found their way to this tropical paradise to buy land. However, one day, the promoter packed up his money and skipped town to leave all the buyers in a lurch.

Some of the original buyers had to “dig in” and make Nosara livable. It has taken many years, decades in fact, but they have done a great job making Nosara the dream it was meant to be. This is what usually happens, the promoters and developers skip town or go bankrupt and leave the buyers to fend for themselves.

Costa Rica is easy to sell. It is a beautiful country. Its land is very valuable and probably always will be. The country’s proximity to the United States makes it enticing. There have even been mumblings that Costa Rica is the happiest country in the world, based on a misinterpretation of a survey. This was a bit hard to believe considering all the problems Costa Rica currently is fighting like escalating crime, deteriorating infrastructure, and out of control consumer debt.

Regardless of the country’s problems, it remains a lure. Costa Rica has always been ripe for developers to take advantage of the unsuspecting. A classic example is beach property. Beach property in Costa Rica cannot be sold, but it is sold all the time to the naive.

Do some promoters and developers have a conscience? Do they believe in karma? Is there karma in business? Or are they just money grabbing people that do not give a darn about anyone else.

There is win-win in business. But there is also a lot of win-lose. Win-lose is where a businessperson to win must have another party that loses. One of the basic tenets of business is “caveat emptor,” let the buyer beware. Law supports this concept. Commercial and civil law clearly is geared to the realism that parties to a transaction must watch out for themselves.

People should look out for themselves. They should do their due diligence when doing any kind of investing especially when investing in real estate. More importantly, they should know who they are doing business with. Are they working with win-win or win-lose businesspeople.

In the legal world there is a saying that a contract is only as good as the parties to it. This means, some people will fight and nitpick over anything, and no matter how good a contract is, the transaction it represents ends up in a legal dispute. On the other hand, other people will always try to negotiate before going to court.

Currently, real estate sales are very slow. It is definitely a buyers’ market. However, there are few buyers with money and financial institutions are reluctant to lend money especially to foreigners. There are only a few banks in Costa Rica that do so. Those that do, ask for droves of paperwork going back years including medical histories of prospective borrowers.

The facts support the idea that today is a great time to buy real estate in Costa Rica because no one is buying. This is the other side of the pendulum. Just as it was not the time to buy when real estate was going crazy.

There are rumblings the new administration of the country — which is an extension of the last one — is going to promote foreign investment heavily as it did in the 70s, especially, in the area of offering foreign retirees added incentives to come here. This makes all the sense in the world given the fact the ruling class of the country is making heavy investments in medical care facilities. They know something the common person does not. They are banking on a huge retirement community base to use those medical services.

Prudent investors know the trick to investing. It is simple. One makes money when they buy not when they sell. This means a good investor buys something that is undervalued and knows what is paid is less than what it is really worth.

What happened in Costa Rica in the past decade was more of a cheaters market. Promoters and developers saw many people in Costa Rica that came here to look for property using kaleidoscopes for glasses. They took advantage of the situation, and some of them made a lot of money doing so. However, many others — the promoters and the developers — made mistakes too. They got too greedy and bought and borrowed too much and are now on the verge of going bankrupt. Some of them are in more trouble than the people they sold to.

Did they get what was coming to them? Logic suggests they just got caught up in the same frenzy as the buyers. Neither did their homework.

What will happen now is a rejuvenation of the market. This is what happens in growth tourism markets. The cycle will play itself out all over again.

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