Investing in pre-construction developments appeals to many investors because it provides an avenue to maximize returns; however, not all pre-construction opportunities are equal.

As Costa Rica continues to develop, there are a variety of enticing pre-construction investment opportunities available to buyers.

This article takes a look into some of the key factors to know before investing in a pre-construction property in Costa Rica.

1. The first consideration to make is the location of the project. Is it in an area that will best serve your investment goals and desired lifestyle? To address this, it is important to analyze the expected growth of the area and surrounding communities.

   Are you anticipating future growth or do you want a more secluded atmosphere? To have a better understanding of how pre-construction projects will impact the surrounding area, it is important to understand the type of clients that will be attracted to the development and community once completed.


2. Secondly you should consider what your specific investment goals are. If you are looking for a property that will have great cash flow potential, your criteria may vary from someone who wants a second home to use a few months out of the year with no interest in rentals. Either way, knowing what your specific goals are before making serious considerations will provide you with direction that will allow your local Realtor to do their job to the best of their ability. It is also important to consider your exit strategies.

   Is this a property that you will want to hold for 15 to 20 years, or would you like to use it for 3 to 5 years and use the property as a platform to move on to your next investment? In any case, uniqueness will increase a property’s demand and marketability.

   There are a handful of developments in Costa Rica that offer ‘pre-construction’ or ‘raw-land’ prices to clients, but if you are buying a piece of property that is a dime a dozen, I assure you that you will have difficulty reselling your property. Great product has limited competition, so if you buy the best you will ensure the success of your investment.

   

   Another important factor is to see how your investment goals fit the market you are interested in. Analyze the market’s specific needs; is demand high for single family homes, condos, or luxury hotel accommodation? Envisioning the opportunity that lies within each area will help you make the most successful decisions regarding your investment.

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3. What is the builder’s reputation?There is a tremendous difference between saying “This is what we plan to do” and “This is what we have done”. If the developer does not have experience in Costa Rica, be cautious. Most builders learn from one project to the next, so it is ideal to put yourself in a position where your investment is not in the beginning of their learning curve.

   If the builder has worked in the area, be sure that you visit some of their previous projects and have a firm understanding of their construction process and the quality of their finished product. If a developer tries to discourage you from speaking with local Realtors, take caution. Be inquisitive and ask the developer to explain the quality of their construction to you so that you understand why they plan to use the construction methods and materials that will be used.

4. What are the developer’s plans for the specific project? This point ties back into your personal investment goals. It is important to look at the total number of units proposed in the project. Will your unit be unique and in high demand relative to the others in the project? What will make the project unique?

   

   Some of the pre-construction opportunities in Costa Rica are in large scale projects that will be a 10 to 15 year build out, while others will be completed within 18 to 24 months. Do you want to be in a community that will have on going construction, or do you want to be in a location that will be completed and have all of the units delivered simultaneously?

5. Is the project fully permitted for construction? The permitting process can be time consuming, and it is best that the developer is not waiting for the final go ahead while controlling your investment capital. Over the last few years in Costa Rica, I have seen several projects go to pre-construction sales before having all of their final permits in place, only to find out that there is one permit, which they will not be grated, that compromises the whole project.

   To eliminate this potential hold up, the only pre-construction projects worth considering are developments that have all of the pertinent permits in place today. If you hear soon or next week, don’t waste your time or money. It is best to either wait until all permits are cleared or consider another project.

6. Is the property held in concession or is it fully titled? In Costa Rica, roughly 90% of the coastal property within 150 meters of the high tide mark is held by government concessions, so it is important to make sure that you are dealing with property that is fully titled.

   

   If necessary, seek legal council to fully understand how the property will be legally held before making a decision. Concession land is a lease from the government that gives renewable rights to the property, whereas titled property is fee simple. There are also properties in Costa Rica that are titled, but are not independently segregated and function as a co-op ownership although they are titled.

7. How will the deposit funds be managed? Once you decide to purchase a pre-construction property, where or how will your deposit be held? Unfortunately, I have heard of several situations where buyers placed ‘deposits’ on pre-construction properties, and because the deposit was not held in a third party escrow account, the funds were not used for construction of the contracted unit.

   Be extremely clear as to how the funds will be held, when the funds will be released, and under what conditions the funds will be released. Discuss all of these aspects with both your attorney and your Realtor. If the developer/builder insists that you use their accounts to hold your funds, be cautious. It is also important to have a clause in the contract that will force the developer to perform with in a reasonable time period, so that failure to do so will require the return of any funds received as a deposit, this is discussed in further detail under contract structure.

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   Be extremely clear as to how the funds will be held, when the funds will be released, and under what conditions the funds will be released. Discuss all of these aspects with both your attorney and your Realtor. If the developer/builder insists that you use their accounts to hold your funds, be cautious. It is also important to have a clause in the contract that will force the developer to perform with in a reasonable time period, so that failure to do so will require the return of any funds received as a deposit, this is discussed in further detail under contract structure.

8. If purchasing a home site in a pre-development sale, is there a hold back payment to be held in escrow? Hold backs are useful tools when purchasing home sites in communities and are not necessary with condos. Hold backs are to be released once the developer has delivered on all of their contractual obligations such as infrastructure, water and electricity. A hold back acts as motivation for the developer to complete their commitment to you, the investor, but also protects the investors in the event that the developer defaults.

   In the event that a developer defaults, a properly structured hold back will allow the home owners to complete the work that remains to be done. In example, if the estimated cost of infrastructure is $2.5 million for a gated community, the total amount of funds held until delivery should be divided by all of the properties in the community to ensure that $2.5 million will be available to the homeowners if necessary. If a hold back is not in place or not sufficient, there is a chance that additional assessments will be necessary to complete what should have been finished in the first place.



9. Is construction financing in place or is the developer relying on sales to complete the project? In uncertain economic times, cash is an even stronger position that it has been in the past, so it is important to use it wisely, especially when leveraging your assets by investing in pre-construction properties.

   If the developer is going to rely on sales revenue to complete the project, then your investment is exposed regardless of whether you honor your payment schedule or not. However, if the developer has sufficient funds to complete the build out, then your investment is protected and you can be confident that construction will progress as planned.

10. Does the structure of the contract protect your investment? Does the structure of the contract protect your investment? It is important that developers be accountable, as such be very clear that if pre-established deadlines are not met, then you are protected. Contracts will designate when payments are due if dealing with progression payments, so be sure that the developer is fulfilling the necessary progress before releasing funds.

    Depending on the nature of the project, contracts will vary, but should outline the repercussions should either party be in breach of contract. An arbitration clause will allow for conflict resolution should there be a disagreement between you and the developer as to what constitutes either party’s contractual obligations.

Although pre-construction opportunities are higher risk due to their nature, much of the risk can be managed by understanding the situation to ensure that you invest wisely and maximize your returns. Ultimately, you are investing in your lifestyle, so choose wisely to make sure it is a property you will enjoy!

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For more information about condos, homes and land for sale in the beach town of Jaco and surrounding areas please contact our Recommended Realtors in Jaco Shawn Fletcher and his wife Hannah Fletcher
using the simple form below:

Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.