Owner Financing

[globalkid]

Planning on relocating to CR few years down the line. Had few questions hopefully some of you able to clarify them for me.

Here we go:

- 20% down payment for commercial properties such as hotel or b&b pretty standard here?
- Is owner financing are the norm or I have to bring loads of cash?
- Heard interest rate usually pretty high where is the rate coming from?


Hope to hear from you soon.

Thanks,
Rob

 

[Patrick]

Hi Rob,

Getting commercial financing from banks seems to be pretty tough to get.  This was the case a few years back, when I checked with a few banks about possible financing on a beach hotel.  It's probably easier for properties around San Josè.  I remember that the banks wanted about 40% down.

Regarding owner financing, it's highly variable and is whatever the buyer and seller agree to.  In general, most owners tend to want at least 50% down and finance for just two to five years at interest
rates of 8% to 10% (possibly up to 12%).  But it's getting tougher to find owners who are willing to provide financing on a commercial property.

On top of the normal risk that a buyer could default, there's the added risk on a commercial property that the buyer could run the business into the ground, default on the mortgage, and hand back a real mess to the seller.  So you just have to take it case by case.

I hope that helps.

Take care,

- Patrick
Costa Rican Real Esate Group

[Ivo]

Hi Rob,
I'm glad you're asking these questions as most people new to Costa Rica assume financing works the same here as anywhere else.

Bad experience has made the market careful about financing to foreigners. It's too easy to jump on a plane and disappear. You'll even find that guarantee deposits for things like internet access and cable TV is higher for foreigners than it is for locals.

Banks will not finance to anyone who doesn't have residency permit. They will only finance the purchase of a hotel or other commercial venture. Unless you have a local partner who does have a good credit record that can be shown for (could be a foreigner with residency). Banks will finance 70% of the appraisal to a foreign resident and 80% to a local at the moment between 7% and 8% plus a closing commission between 3 - 5% (one-time). The banks have had lots of bad experiences mainly with financing hotels, as many crooks have done honest investors many bad favors. I know of cases that the new owners time-shared their rooms for 4 years and then disappeared with the income, leaving the bank or mortgage holder with a totaly indebted venture. Also would they conveniently forget to do any maintenance to the hotel in this time, so the hotel was in shambles when they left it, together with huge debts to suppliers, taxes, social security etc.

The above is the same reason most owners will not give any owner financing, unless the contract is watertight. Most owners sell to go back where they come from though and don't want to leave their capital in Costa Rica without having any control. Very few (those that don't need the money to set up shop somewhere else), will agree on owner financing for 2 - 5 years, a short term, most at around 10% or higher interest. I've seen owner financing done between 30 - 50% with large balloon payments at the end of each year. Those balloon payments will take most of your income away, but that way they can be sure that the buyer will pay it off in time. Their two main worries are:
1. Get the hotel back in shambles
2. Tourism will go down and you won't be able to make the payments. By then the owner has settled somewhere else and has to come back and take over the hotel again.

A third option would be to find private financing. That's available for rates between 15 - 18%. In US dollars that is. We can help you there if you'd need it.

To be honest, in Costa Rica it is too hard to buy a business or property as a foreigner. Unless you have a way to get it financed somwhere else, you are doomed to bring loads of cash as you say.

The rates are set by the Central Bank of Costa Rica. It all has to do with devaluation of the colon and the inflation here. To give you an idea, the interest rates in colones are right now around 23%. I've been charged up to 48% a few years ago.

I hope Patrick's and my answers can guide you to a succesfull decision.

Ivo
Godutch Realty Escazú