A Gringo and His Money are Soon Parted in Costa Rican Real Estate

Gringos are often attracted to Costa Rica for its beauty and its claim to be the happiest nation on Earth. Some decide to buy real estate, but the result is not always happy.

My first awareness of the risks in investing in Costa Rican real estate came in 2004 from an old friend who decided to retire, sell his travel agency, and invest the proceeds in a cliffside restaurant/home in Costa Rica.  Being a Venezuelan national, he was fluent in Spanish and could competently read any document presented to him in Spanish. He hired an attorney to advise him on the purchase. After delivering his life savings to the closing of the sale, he then went to visit his property, only to find out that the seller did not have title to the property and that his own attorney conspired against him. 

He returned to the U.S., broke and reduced to sleeping on friends’ couches.

I first started appraising in Costa Rica in 2010, and I started hearing stories of foreigners cheated in real estate deals.  The best known story at that time was the experience of Sheldon Hazeltine, who created a YouTube video titled “Costa Rica land fraud”.  Hazeltine and his partners bought a coastal parcel near Los Sueños with the intention to develop it.  While he was outside Costa Rica, a nearby wealthy landowner organized squatters to occupy the land and then declare squatters’ rights.  In Costa Rica, a squatter can acquire a right to possession (not ownership) after just one year of occupation, unless it is an agrarian parcel, in which case, the Institute for Agrarian Development can expropriate the land and transfer ownership to squatters who are farming the land. Otherwise, after 10 years of occupation, the squatter can then obtain titled ownership, anyway.

After some time being occupied by squatters, though, a billboard was erected on the property advertising the development of a hotel on the site by the wealthy landowner.  He basically paid the squatters to take the land and enable him to obtain ownership through their squatters’ rights. The squatters were paid off to leave. Hazeltine had been trying to get back his land for almost 20 years.

This YouTube video is no longer available due to a defamation lawsuit against Hazeltine.  He accused a thief of being a thief.

I was told of squatters who have taken over properties previously belonging to Tropical American Tree Farms, a failed teak farm venture. A young attorney organized squatters to occupy the former teak farms, charging them for the privilege. They cut down the trees and planted crops. It is possible, now that the teak farms have been vacated for so long, that the squatters may have obtained title to the lands per agrarian law.

There is a logic behind these squatters’ rights laws that is antagonistic to absentee landlords living in other nations.  Possession is nine-tenths of the law; there is little sympathy for supposedly rich gringos that own land but do nothing with it when there are so many landless campesinos in Costa Rica who just want to earn a basic living.

But the problem of expropriation of land from foreigners gets worse.  There has been a proliferation of property theft gangs which use public notaries to record transfer deeds in their favor without the owner of the land knowing about it.  Any deed transfer by a notary public is accepted as true until a judicial proceeding establishes otherwise, and such litigation typically takes 5 to 7 years.

Property theft through fraudulent title transfer has become such a problem in Costa Rica that a legislative bill was introduced last August to quicken the pace of justice for defrauded landowners.  

Legislative bill number 19.968, the Law for the Cancellation of Irregular Entries in the Property Registrar (Ley De Cancelación De Asientos Irregulares En El Registro Inmobiliario Del Registro Nacional), would create an administrative mechanism to cancel fraudulent property documents that have entered into the Property recording system.   By bypassing the courts, the time frame to revert a fraudulent transfer would be significantly reduced.

If a foreigner wants to be an absentee landlord in Costa Rica, nevertheless, the risks are high.  The best way of having a defensible ownership is to buy within a gated community.  Otherwise, one must live in Costa Rica full time or else hire security, and there may be little to prevent your security guards from transferring the ownership into their names.

 

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Appraisal of an Industrial Property in San Jose, Costa Rica

Urban real estate appraising sometimes yields pleasant surprises, as the shortage of land in growing or geographically constricted cities can create situations in which a property’s land value can exceed its value as currently improved. I appraised a similar situation in San Francisco, California immediately before flying to San Jose, Costa Rica to appraise the property of a bankrupt boatbuilding company.

I stayed at the charming Hotel de Bergerac in the Los Yoses barrio of San Jose while making a two-kilometer walk to and from the subject property, located in the rapidly urbanizing suburb of San Pedro in the canton of Montes de Oca. Vacant lots were few to be found, and new, upscale retail stores were often built next to dilapidated, corrugated steel structures, as often occurs in Latin American cities concurrently experiencing prosperity and land shortages. Moreover, much of San Pedro had been upzoned, permitting building heights of up to 7 stories and site coverage of up to 85%.

Montes de Oca has a particular attribute contributing to its growth. It is also known as Costa Rica’s “Cradle of Higher Education”, including the Universidad de Costa Rica, Universidad Latina and Universidad Fidelitas, all located in or near San Pedro.

Arriving at the subject property, I was initially disappointed to see the physical deterioration of the various structures, most of which were aging metal buildings with rusting steel roofs. This is one of the common letdowns of foreign appraising – traveling many hours and thousands of miles to find a property that is far less than as described. It makes me anxious that someone is going to be angry with my report. The remaining physical life of these particular buildings was rather limited, although San Jose’s 96% industrial occupancy rate does prolong the usage of older buildings.

What was encouraging to see, though, were two neighboring industrial sites that had already been redeveloped with attractive new multifamily housing. San Pedro has a housing shortage and has been encouraging multifamily development.

In one of my posts last year, http://www.internationalappraiser.com/2012/07/appraisals-of-view-land-in-costa-rica.html, I described my lunch with a Costa Rican appraiser in which I asked what Costa Rican appraisers use for comparable land sales. He said that because of the lack of publicly available land sales data, the San Jose provincial government has created a map system for appraisers known as La Mapa de Valores de Terrenos, which sets a baseline value per district, which is then adjusted by appraisers for site factors such as size, zoning, commercial street frontage and terrain. The base rate for this section of San Pedro is 180,000 colones per square meter, equivalent to $358 per square meter (or $33.25 psf) at today’s exchange rate. These land values are comparable to CBD land values in many U.S. cities.

When the comparable improved property sales and listings and land sales and listings were compared, it became clear that the subject property was no longer improved at its “highest and best use”. The land value of the site, even adjusted for demolition and remediation costs, still exceeded the “value in use” of the current improvements, and there seems to be enough collateral value to support the requested loan, which, ironically, is going to be used to restart boat production.

More later, when the loan is funded.

The International Appraiser is Threatened with a Libel Lawsuit from the UK, a “Land Called Sue”

Her Majesty's Libel Judge

Ironically, the legal threat has nothing to do with anything I said, but what one of my readers commented on in the open forum that follows each blog post. On my “Costa Rican Teak Farms for Gringo Investors” post from August 2011, http://www.internationalappraiser.com/2011/08/costa-rican-teak-farms-for-gringo.html , a commenter named Dave Anderson stated:

Dave Anderson said...
Just to let everyone know Living Investments uk are now under investigation for fraud. Anyone affected by this should contact Actionfraud on 0300 1232040. Thanks for your advice especially explaining conversion bft to cu.m which allowed me to challenge their projections and realise their scam. January 24, 2013 at 2:19 AM

On Monday morning, June 17th, almost 5 months after this comment was recorded on my blog, I received an e-mail from Steve James of Living Investments UK with a request to remove Mr. Anderson’s remark, which he deemed to be false. My response was as follows:

"Mr. James,

You're welcome to publish a rebuttal to his comment. I do little to censor the commenters."

Most of the commenters on my blog do so to promote their own web sites or products, any way; my favorite one is the cat furniture guy. What does the cat furniture guy expect to happen when my readers click on his link? “Honey, forget buying the Costa Rican beach property. Let’s upgrade Fluffy’s scratching post instead!”

Here is the response from Mr. James that I woke up to on Tuesday morning:

"Hi
Your response is disappointing. The statement written is a lie and you are implying by refusing to take down the offending statement that you agree with the lie. The libel laws in the UK are quite easy to interpret, you can publish comments on the basis that to the best of your knowledge they are true; however once it has been brought to your attention that the statements are not true then by continuing to run the offending article you lose that particular defence. In short in court you will have to prove that we are under investigation for fraud (we are not and never have been) and if you cannot do this then you will (if you lose) have to pay substantial damages; as we will prove that your actions have damaged our business and you may have to make good the profits that we have lost in the process.
...…............ I would rather not go to court as the costs for both sides will be in excess of £ 100,000 and even if we win we will only recover 70% of that from yourself so it will cost us at least £ 30,000 and a lot of time to prove this.
…...............I have already spent considerable time on this matter but I have done so, to try and save us both a lot of money and time (especially the time) some companies would just sue you today as you have responded once you were made aware of the falseness of the claims and have continued to “republish” the offending comments. I have taken a different approach to try and explain things fully however once I start the legal process we will go all the way as we don’t settle. To start the ball rolling costs £ 20,000 but the time element is massive so paying the costs will not be enough for us, we would want substantial compensation for loss of business (we can prove this).

The decision is of course entirely yours, I await your response but if I hear nothing by tomorrow (19th June 2013) I will place the entire matter in the hands of our lawyers.

Regards
Stephen James"

I once again invited Mr. James to tell his side of the story on my blog. But would you want to do business with a guy like this?

So it took 5 months for this man to find a 3rd party comment on my blog, but he then claims proven loss of business. As I checked my site traffic statistics (maintained by Google) I found only 72 page views in the UK in the last month, and that covers an entire blog with 89 posts; most UK readers were probably looking at my recent post featuring Fawlty Towers.



In my part of the world, such a defamation lawsuit is called “pulling a Streisand”, a counterproductive legal strategy in which most of the damage to the plaintiff’s reputation comes from the plaintiff’s own publicizing of the alleged defamation or similar act. Barbra Streisand once sued a coastal photographer for invasion of privacy when he accidentally photographed her house on the Malibu shore. When she filed the complaint, many media outlets republished the photo and it was ultimately determined that she was the most responsible for the loss of privacy that she was suing about. Suing gets publicity.

My first reaction to Mr. James's e-mail was how does he know that he is not being investigated? In my training as a Certified Fraud Examiner, I was never told that I should first inform the fraudster that he is being investigated. I have no way of knowing if Living Investments UK, a company I never heard of and never criticized, is being investigated for fraud. Nor have I ever claimed such.

An Internet search of Living Investments, though, makes me uncomfortable about this company, such as their claim on YouTube that they can turn a ￡5,000 teak tree investment into a ￡32,087 investment in 15 years, suggesting a return on investment of over 13% per year, and that investors start getting returns as early as 4 years for a 4-year-old tree (sold for what -- pulpwood?).  If the returns are this good, why are they selling? I would load up as much as possible with financing from my private lender clients and keep the secret to myself.

I also found the following comments at qfak.com:

"I keep getting calls someone at Living Investments UK in Dec 14 at 5:55
They apparently have a teak plantation in Costa Rica and they asked me to invest ￡25,000. I personally think it is a scam, but im not sure. Has anyone else had any experience with them. I dont like how persistent they are. They were definately using boiler room tactics."

Answer _ Page 1
"Smithmeister, I think I remember you, I started with you for the training week thing. I stayed a little bit longer than you, I have a less sensitive bull**-o-meter and I stayed for 8 days. It is the most rediculous company I have had the pleasure of working for. They have a virtual office at 14 Grenville street, but it is simply a decoy for all their letters to go there. They actually operate from 6-8 st. John Street EC1 in Farringdon.
No They are not regulated by the FSA and companies like this make me sick because they don't know the impact they have on peoples lives. They don't deal with any fund managers or pension managers. They get all the prospects from an investors list with mainly elderly pensioners and harrass them for money. Its not even a limited company, its sole propreitor with some guy who no one knows. If someone calls from LIUK, Tell them to stick the phone up their arses"

And the following is a recent job advertisement for Living Investments UK:

• Company Living Investments UK
• Job location London (United Kingdom)
• Contract type Permanent
• Closes on April 19, 2013

Basic Comm 55K-85,000 City based private client brokerage is interviewing for the above positions for an immediate start. We are looking for individuals who are proven in introducing investments to private clients and IFA’s. If you have an extensive and highly successful experience of dealing with building client portfolio’s within a broker style environment we will be interested in hearing from you. You need to be driven and money motivated and with a strong professional work ethic and furthermore you need to be articulate and able to think on your feet. Our top earner earns over 130,000 p.a.

They have the appearance of being a telemarketing boiler room operation. Is this legal in the UK? Probably. Did I say this was a fraud? No. Would I want these "money motivated" brokers selling Costa Rican trees over the telephone to my parents? Never.

I have also noticed that a disproportionate number of investors scammed in Florida and Latin American real estate developments (based on my observation of the sales contracts) are British.  Could it be that British libel laws prevented British subjects from learning the truth about dodgy real estate projects?  There's good news at least; the UK libel laws are already being changed.

Ronan McMahon’s "Real Estate Trend Alert" is Put to the Test in Costa Rica

I’ve been a reader of International Living for a few years now (I only subscribed for one year, but since they have my credit card number, they keep on renewing without my permission), and IL is just one spoke in a real estate advertising and publishing empire that includes such affiliates as Pathfinder International and Real Estate Trend Alert. Many of the IL articles are written by or about ecstatically happy expatriates who escaped dreary lives in Rochester, West Virginia or Minneapolis (December 2012 issue) to find low-cost, gringo-loving paradises without mosquitoes, muggers or muddy roads. A typical testimonial might sound like this: "Every morning we eat fresh tropical fruits on our patio while Juan Valdez roasts our coffee.  Unicorns come to us from out of the jungle -- and we can actually pet them!"

Nothing bad ever happens in Latin America in International Living. Crime? Never heard of it. Try reading expat forums to learn the downsides of living in Latin America.

A subscription to IL gets one signed up for complimentary Pathfinder Alerts, an on-line newsletter featuring foreign real estate deals. A recent e-mail from publisher Margaret Summerfield to a “select group of readers” presented a “For Your Eyes Only” audiovisual presentation from “an international businessman” with a “shockingly powerful wealth-building secret” which we, the "select readers" on their spam list, are urged to keep secret. "Secrets of the wealthy" is getting to be one of the most tired lines of the investment scam business, and this script has all the other standard vernacular of phony get-rich-quick schemes, including the requisite “what would you do with that kind of extra money!” and “You need to be serious about making money – fast!” -- except for the slight Irish accent.

The "international businessman" turns out to be Ronan McMahon, her business partner, promoting a premium IL product, Real Estate Trend Alert, featuring his alleged prowess in spotting amazing real estate deals and sharing “insider information” from his “millionaire friends”, a service normally priced at $999 per year, but temporarily reduced to $499 per year if one “acts now”. The price can even be broken down into quarterly payments of $124.75, and there is a 30-day money-back guarantee if not delighted with his service. I found myself intrigued when he said that his most recent finds are in Costa Rica, a country where I also appraise real estate. 

This presentation has many of the typical features of the Sleazy Investment Promoter's Playbook, such as:

1. Playing on our dreams.  “What would you do with all that extra money?” is a standard investment promoter’s psychological ploy that takes the listener out of the realm of reason and prudence and into the realm of dreams.  
2. Exaggerated claims of investment expertise.  Mr. McMahon’s own resume shows that he was not employed in the real estate industry prior to being hired as Pathfinder/International Living’s “real estate expert’. If he is indeed a successful real estate investor, he should give us evidence.  As for RETA's claims of profits made my its members, they use the dishonest technique of calculating profit by taking the lowest original purchase price in the development and then comparing it to the highest current listing price in the development, misleading readers into thinking that Ronan McMahon provided 100+% profits for his readers. Aren't there any resales to calculate actual profit?
3. Claims of “insider secrets” and “millionaire friends” and heavy use of investment promoter buzzwords, such as “confidential” and “insider”. This "fake exclusivity" is how many so-called real estate and advice gurus sell their expensive seminars and publications.  Truly successful investors have no need to sell seminars and publications. Most of today’s real estate and investment gurus, even Rich Dad himself, make their money from marketing books and seminars and not from investment.
4. Calling us “select”.  This is also a "fake exclusivity" trick. Twenty years ago I often received mass-mailed letters addressed to “Select Area Single” from Great Expectations, an overpriced and scammy dating service.  They didn’t even know my name or marital status.  Likewise, the only thing International Living/Pathfinder knows about me is that I was a sucker who gave them my credit card number.  For that I should be labeled "naïve" rather than "select", unless I've been selected for being stupid.
5. Special discounts if you “act now”, thus engendering a sense of urgency.

Despite suspecting a hoax, it is to protect and inform all of you, my “select readers”, that I acted as a guinea pig in subscribing to his Real Estate Trend Alert service, authorizing a payment of $124.75 on my credit card and relying on a 30-day money-back guarantee. Little did I know that the scam had already begun.

Although I chose the $124.75 (3-month) option, their server automatically upgraded my request to the full $499 subscription. An hour later, my credit card company contacted me about this mysterious $499 charge. I contacted IL and asked for this charge to be corrected.  Four days later I requested a full refund, but only received a credit for $124.75, leaving me with a balance of $374.25.  I have since asked for and received a full refund on March 7, three weeks later, after several dealings with their flaky customer service department (with excuses such as "our computer is programmed to give only one refund, and we can't get it to refund the remainder"). Remember that Pathfinder is an Irish company and might not play by (or even know) the same rules as American companies.

Two days after ordering, I started receiving the daily Real Estate Trend Alerts, which turned out to be recycled (and free) Pathfinder Alerts and International Living classified ads. Nothing secret or "insider" about these, thus contradicting his claim that his selections “truly are insider investments, not available to the public.” Some of these properties are getting shopworn after being repeatedly advertised in these publications for two years or more. And if Mr. McMahon is such a real estate investment genius, why are most of his recommendations his own advertisers? When McMahon uses the word "insider", it really means "advertiser".

Case in point is the last “Alert” I received the morning before I called to cancel my subscription. The title was “Last 2 Lots at this Low Price (Great Views)”. The project was “The Preserve at Lake Arenal”, a Costa Rican project I’m already familiar with as the result of a free Pathfinder Alert. This morning’s alert told of two remaining half-acre lots available to RETA subscribers at the low price of $25,000 each, with 10% cash down and interest-free monthly payments of $187.50 per month for 10 years. McMahon tells us “Arenal is facing an inventory crunch. Land prices have risen,” when the opposite is happening. It always amuses me when I'm told that Costa Rica is running out of land.

I had already recently communicated with owner Greg Coxon, who basically offered the same deal to me: “Our lowest price lots start at 25k.” and “Were [sic] offering no interest financing on short term loans,” thus contradicting McMahon’s promise of “off-market deals” and “massive discounts like 50%.” Moreover, the views from these lots are jungle views, not lake views, which makes a difference at Lake Arenal, also known as the "Lake Tahoe of Costa Rica".

A closer look at the sales history of The Preserve might make a buyer cautious. Having been marketed for over 2 years now (as determined from the date of the Facebook page), only 22 out of 57 lots have been sold. The pace of sales has slowed in the last year, with only 6 sales last year and one lot unsold (probably a payment default). http://mypreserveatlakearenal.com/html/lots_for_sale.html Only a model home and a clubhouse have been built. Described as a gated community, the fencing around the gate can easily be stepped over on foot. The lots are not yet graded, and this subdivision is “eco-friendly”, the euphemism for having no public water or sewers. The sewage treatment plant has not yet been built, but there is well water. In other words, this subdivision is still in mostly raw form 2 years later, and the longer development is delayed, the harder it is to sell the remaining lots as prospective buyers become skeptical about the project’s viability. I’ve also never seen slowing lot sales speed up again, as confidence wanes when sales slow down.  Subdivisions are my valuation specialty.

The viability of The Preserve also needs to be judged in the context of its milieu. It is adjacent to another struggling community known as Turtle Cove Lake and Yacht Club. Turtle Cove has a marina, boat storage, and 5 custom homes built so far (two of which are for sale). After 5 years of marketing, only 22 out of 47 lots have been sold, and now their developer is holding a fire sale, with discounts of up to 34%. This spells trouble for the neighborhood. Financing is 20% down and 5% interest. The current price list and site plan can be found via this link: http://turtlecovelakeclub.com/arenal-real-estate.html .

When lots get discounted like this, the stage is set for negative lot absorption -- many lots will become “unsold” as buyers who already put 20% down realize that all of their equity is gone and they are now “underwater” on their purchase loans, owing more than the lot is worth. Buyers like this are often litigious, too, but lucky for the developers, they will get nowhere in Costa Rican courts, and neither would you. Vacant lots in distressed subdivisions are among the worst real estate investments that can be made, because the investor could lose his entire investment. Why does Pathfinder and RETA promote them so much? And don't get me started on "Pre-construction pricing" on unbuilt condos.

In summary, this shopworn property is not a suitable investment to be offering to subscribers, is more likely to lose money than make subscribers rich, and Real Estate Trend Alert is no more than a marketing gimmick that repackages paid advertisements into recommendations from a fake expert (a young man who came to IL from the dot.com industry) while collecting hefty fees from gullible subscribers.

PS: April 28, 2013, ten weeks later --

Pathfinder Alert has become increasingly desperate to market these shopworn Lake Arenal properties, with almost daily alerts.  Today's alert reads: 

"Once word gets out about this place, and it becomes trendy or hip, it could explode. There's no reason for its low property prices, other than the fact that nobody knows about it....

A lake-view lot for $17,500 - and it's open to offers."

What?  Could Ronan's insider deal at $25,000 ten weeks ago have actually been marked down 30% since then? And still be open to offers? 

PPS: February, 2014, one year later: The Preserve at Lake Arenal now has 36 lots for sale vs. 35 lots one year ago, indicating a net loss of one sale during the past year, and they are still offering "pre-construction" pricing! I seriously doubt if this project will get built.

Nevertheless, I just received this "Pathfinder Alert" from Margaret Summerfield:

"How to make $1.1 million in Costa Rica

Last week, Ronan McMahon told RETA members how they could have made massive profits from a land purchase in Arenal, Costa Rica. If you’re looking for access to “insider deals”, RETA could be your most valuable membership. Join Real Estate Trend Alert to be briefed the next time an opportunity like this crosses Ronan’s desk."

This phantom $1.1 million profit would have supposedly come from subdividing a large residential estate that sold at half its original listing price, but what hasn't been mentioned is that permits are needed to subdivide the land and Costa Rica's rules for approving subdivisions are just as onerous as California's; approvals take years, not months.  Then you have to find buyers for the lots, and buyers have been scarce at Arenal over the last 2 years.  If someone made $1.1 million on this deal, I would like to receive proof.

The style of communication of Pathfinder also presents some concerns. I'm talking about the frequent underlining, highlighting, bolding and exclamation marks!!  Where have I seen this before?  Just about every piece of spam I get, such as ads for miracle weight loss or genital enlargement pills. It's just so transparently sleazy.

11/20/17: I have published an updated article on Ronan McMahon:
http://www.internationalappraiser.com/2017/11/five-years-later-reassessment-of-real.html .

Central American Real Estate Horror Stories

I received another such phone call today. Today the offending country was Panama, but sometimes it is Costa Rica. I asked, “Did you get legal representation before you purchased the land?” The answer was “I didn’t know how to find an attorney down there, so I just went with the one recommended by the seller..” I asked, “Did you get title insurance?” The answer was “No. The title company thought it was a scam.” I’m short on time today, so let me just present 3 “musts” for investing in foreign real estate:

1. Get title insurance. It has become available in many countries where it did not exist before. If the title insurer won’t insure, that is Red Flag no. 1.

Get to know this "scent" before investing in Latin American real estate














2. Get independent legal representation. This means never use an attorney recommended by the seller. That is Red Flag no. 2.

3. Keep your property secure from squatters. If you do not plan to occupy your property, make sure that someone is there to keep the squatters off. Whether it is Latin America or Africa, once they’re living there, you will have a hard time removing them. Recall my previous post linking to a YouTube video of a desperate British investor who has fought for 14 years to remove squatters from his property in Costa Rica. My advice: If you’re just buying a vacation home, buy in a gated community.

Appraisals of "View Land" in Costa Rica

Much of my work involves flying to faraway places and then being driven in a 4-wheel drive vehicle into the countryside, up winding dirt roads, to a parcel of land with sweeping vistas featuring bodies of water, and then being told “Just look at this view. It’s priceless.”

I often encounter misconceptions of what constitutes the value of a “view parcel”. There is no argument that a finished lot with a view commands a premium over lots with no views. I emphasize the word “finished”, as “raw” mountainside or mountaintop land with views is usually priced and valued less than flat land at lower elevations.

Why? Because of the extra costs to develop land in rugged terrain or higher elevations.

Let’s indulge in a reductio ad absurdum to make my point.

The top of Mount Everest offers spectacular views, but I offered to sell you a lot up there, you would say “How ridiculous! How could I get my Range Rover up there? How and when could I get utilities connected? Where would I buy groceries?” I would attract no buyers, despite the magnificent view.

Suppose that I had already graded the lot and just completed a 4-lane road to the top of Mount Everest, installed all utilities, including digital cable, and even supplied extra amenities such as a golf course, supermarket, and gourmet restaurant? Now that might be something somebody is willing to pay a lot of money for, and the value would be enhanced by the unequaled views from the top of the world.

The extra costs of land development at such a high altitude would probably not be compensated for by the view premium for the finished lot, so this hypothetical unfinished lot on top of Mount Everest would be comparatively worthless.

View Land for Rich Gringos
Developers all over the world have spent the last few years acquiring “view land” for subdivision and sale to rich foreigners, whether they are North Americans, Europeans or Australians. Costa Rica is crowded with numerous proposed “5-star developments” as developers compete to attract rich gringos. Most of the developers are foreigners, too. Many of the projects have impressive artists’ renderings and obligatory photos of female backsides in infinity pools, beautiful women getting massages, Caucasian families frolicking on the beach, and exotic fauna and flora.

 

The result in Costa Rica, as I’ve also seen in Mexico, Fiji, the Dominican Republic, Brazil, Canada, and Barbados, is a surplus of unstarted or unfinished (see previous post on Barbados) 5-star projects and declining values for raw land.

Such was the case with two land parcels I recently appraised in different parts of Costa Rica. The dome-shaped parcel below looks very difficult to develop because of steep slopes, but there are views at the top of the scenic Orosi Valley. Also limiting value was the lack of approved entitlements and a well report indicating a water flow rate (10.8 liters per second) which can only support about 16 households.

The Orosi Valley


The other subdivision had distant ocean views and was farther along in the entitlement process, still not having local approval, and the “will serve” letter from the municipal water utility read more like “we might serve in the distant future”, as was their commitment to waste collection. This project had pre-sold 9 out of 94 lots in the last 20 months, at prices ranging from $100,000 to $270,000, but pre-sales stopped in 2011, and once pre-selling stops, it is very difficult to get it going again, as foreign buyers fear that the project won’t get completed and they may lose their deposits. When existing buyers see land prices falling, moreover, they may be willing to forfeit their $5000 deposits.

The foreign subdivision projects I actually see succeeding, on the other hand, are the ones aimed at the local nation's burgeoning professional class, offering lots and residences at lower prices within reach of the upper middle class and within commuting distance of major employment centers.  In the Dominican Republic, for instance, when a new highway improved accessibility to the beach towns east of Santo Domingo, such as Juan Dolio, Grupo Metro made a lot of money building condos and villas for sale to professionals working in Santo Domingo.  Similarly, I've seen the Palm Springs community north of Natal,  Brazil, achieve enviable pre-sales as new roads and a bridge to downtown Natal are enabling Palm Springs to become an oceanside bedroom community for Natal commuters, with lot prices starting at $30,000, certainly within reach of the middle class.

One stigma that is currently complicating lot sales in Costa Rica to foreign buyers are some spectacular development project failures, such as Hacienda Matapalo and Wyndham Jade, which are alleged to have been fraudulent schemes all along. There have been development scams, teak farm scams (see my post entitled “Costa Rican teak farms for gringo investors), and squatter scams (see my post entitled “Latin American land grabs from absentee owners”) going on in Costa Rica, many of which are being perpetrated by foreigners, too, such as Americans, Canadians, British and Dutch. That does not mean that local developers are any more trustworthy, and the inherent problem spoiling confidence in the real estate market in Costa Rica is its slow, ineffectual justice system.

Meeting a Costa Rican appraiser

In this valuation assignment, the developer asked me to meet “the independent appraiser” to discuss his recent valuation of the two properties together for a combined value of $12.4 million. Finding the “independent appraiser” sitting across from me at the lunch table made me doubt his independence, and his valuation reports were addressed to the developer.

The developer invited me to ask the appraiser questions. My first question was “¿Qué es lo que utiliza para las ventas comparables?” (What did you use for comparable sales?) His answer was quite unexpected but interesting. There is some institution, perhaps governmental, which has mapped out real estate values, and a Costa Rican appraiser consults the map and then makes adjustments much as any appraiser would. This is not the same thing as researching comparable sales, though, although the map is probably based on previous sales; I just don’t know how long ago they occurred.

Incidentally, all professional appraisers in Costa Rica, as in Mexico, are either architects or engineers, and are expected to have a more rigorous education in quantitative methods than in the U.S., where one can major in Psychology or Religion and still meet the academic standards needed to get certified or designated.

I am not an architect or an engineer, but as an appraiser I am a traditionalist. I like to use recent comps and listings (if the listing prices are below previous closed sales prices, and there is no shortage of failed subdivisions for sale in Costa Rica). Unfortunately, my estimate of value came in lower.

Latin American Land Grabs from Absentee Owners

Squatter housing in Mexico

When performing market research in Latin America, I heavily consult broker web sites, some of which require me to identify myself and provide contact information.

As a result, I find my e-mail inbox filled each day with “Retire in Paradise” promotions, written with the same tired old marketing vernacular, frequent underlining, bolding and exclamation marks!!!, used to also peddle miracle weight loss or genital enlargement pills.

Included are elated testimonials from retirees living like kings on $800 per month, describing cheap, delicious local food, friendly locals and $10 visits to U.S.-trained doctors. There are no traffic jams, but one still has to drive slowly in order to avoid hitting one of the many unicorns jumping over rainbows. Then there is the exhortation to buy now, before prices go up, because Latin America is running out of land, and the Baby Boomers just started hitting age 65 last year.

So you make up your mind to buy a foreign property now for when you retire in 5 years. You go down there, find some run-down property or vacant land advertised at a bargain price, hire a local attorney to verify clear title, pay the money and then leave. Everything is OK, right?

What sometimes happens is that the absentee owner arrives five years later to find squatters living on the property. When you call the police to have the squatters removed from the property you rightfully own, you find out that squatters often have occupancy rights under various “adverse possession” or "prescriptive easement" laws meant to protect landless campesinos from homelessness and starvation.

Even the United States has adverse possession and prescriptive easement laws, which recently became problematic in several states, such as Colorado, Florida and Texas, where squatters have seized unoccupied homes and transfered title to themselves, including a case in which the owner was absent only because he was being treated for cancer in Houston, 250 miles away. "Adverse possession" is different than "prescriptive easement" in that it extinguishes title for the former owner,
and in most U.S. cases, the title has been transferred illegally, as the minimum period of occupancy required in any state is 7 years. That's somewhat irrelevant, though, in removing squatters, as even American state laws protect squatters' rights until the matter has been adjudicated.

This squatter problem may be a somewhat recent problem in Latin America, which was largely ruled by heartless fascist dictatorships 50 years ago, but has recently been experiencing a democratic renaissance. Democracies give poor people a voice, effecting legislation sympathetic to their interests, including adverse possession laws.

If taken to a court of law, who would be the more sympathetic party in front of a jury or a judge -- the barefoot campesino who just wants a place to raise his chickens? -- or the rich gringo who didn’t even live on the property, letting the space just go wasted?

On the other hand, adverse possession can sometimes be a scam organized by a wealthy land grabber. Consider the case of Sheldon Haseltine, an absentee UK investor with prime land next to Costa Rica’s finest marina. He found squatters on his land in 1998 and tried to have them legally removed. He later found a billboard advertising a Wyndham hotel to be built on his site. He found out that the campesinos had been paid to occupy his site by another wealthy landowner and even found a copy of the cancelled check to the campesinos, in the amount of 100 million colones (about $200,000). His litigation has now lasted 14 years.

How could adverse possession be avoided?

1. Buy in an already-gated community (not accepting the promise that it will be gated some day).
2. Try to get some type of title insurance to protect against adverse possession (not sure if this exists). Title insurers, please comment.
3. Buy only when ready to move in.
4. Do not necessarily believe that prices will be increasing in the near future. In most countries I visit, property prices have been decreasing. There may still be opportunities available at the time when you are ready to occupy or develop your foreign property.

Related articles

• Curuguaty and the Paraguay Coup

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• Squatters lied to stay on land, says tycoon

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• Adverse Possession Law in Texas

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• Squatter legally moves into Boca mansion
• Charges reduced or dropped in several adverse possession cases

Appraisal in Costa Rica

The property consisted of three parcels of raw land totaling 92 acres adjacent to a remote beach in Guanacaste, a northwestern province of Costa Rica. The owner wished to finance construction of a 5-star hotel, tourist hospital and wellness center. The owner had signed a management agreement one year ago with Barcelo Hotels, a Spanish-owned luxury hotel group with many existing hotels in Mexico and the Dominican Republic. There were Costa Rican appraisals estimating the combined property to be worth about $26 million “as is”.

Although written in Spanish, the Costa Rican appraisals seemed to contain too much hyperbole to be considered objective. For instance, what were described as 360 degree panoramic views were largely obscured by hills and protected mangroves. The appraisers also assumed that 25 kilometers of unpaved road leading to the project would soon be paved and they valued “protected” (unbuildable) land at 80% of the value of buildable land. (Twenty percent would be a more reasonable number, since nature preserves do add some incremental value to adjacent development land.)

The owners claimed to have full entitlements to build the project, but the submitted documents only indicated approval to build 12 seven-story condominium towers on one of the three parcels, and these approvals were from 2007. The owner had decided to turn the condo towers into hotel rooms, without creating architectural drawings or plans, and there was no documentation that a development plan for a hospital and wellness center was even under consideration by local authorities. There were no drawings, plans or specifications for the revised development plan, other than a generalizd aerial view of the proposed project. The only site work had been to drill two authorized wells.

There were factors that caused great doubts about feasibility, the first of which was the lack of paved road access. The closest paved roads were in Santa Cruz, 25 km away, and the 6-month rainy season and rugged topography of this region can make road travel difficult, as roads are occasionally flooded during the rainy season. Four wheel drive vehicles are needed for half of the year. This is not a good setting for a 5-star hotel, but for a hospital, the setting was particularly doubtful. Successful tourist hospitals are typically located near airports, indicating that accessibility is a strong selection criterion of a hospital. The notable tourist hospitals in Costa Rica are CIMA, Clinica Biblica and La Catolica, located in the capital of San Jose, and the first two are already developing similar facilities near the Daniel Oduber airport in Guanacaste, with La Catolica also considering a branch there.

The idea for this project is that the hospitals would specialize in cosmetic procedures and that patients had the choice of convalescing in a time-share wellness center or else in a room in a 5-star hotel. Get a face-lift, for instance, and spend a month recuperating while gazing at the ocean. Still, the concept of a hospital so far removed from paved roads seemed to be far-fetched. Imagine being sore from a tummy-tuck operation and then having to return to the airport over bumpy, gullied roads.

The other factors that made me believe that this was not a serious project were:

1. The property is listed for sale for $8,500,000, entitlements included.

2. The property was previously listed for sale in 2008 for $5,500,000 and marked sold.

3. The construction cost estimates were quite incomplete, as were designs, drawings, plans, and specifications.

4. The lack of housing in the area for hospital or hotel support staff.

Considering that the owner had originally conceived of condo towers and townhouses on his property, the change to hotel and hospital seemed like an afterthought. This was a parcel of land in search of a profitable use, not a hospital enterprise in search of an ideal location.

As in Mexico, comparable sales are hard to come by in Costa Rica. There is no rule that the sales price recorded has to be accurate, and there are other circumstances that induce sellers to record false prices. I turned to listings of entitled land and unentitled land to set a ceiling of value for the property, and there are getting to be more fully entitled projects put on the market today just as in U.S. beach communities, too. I found entitled projects priced as low as $20,000 per developable unit, and unentitled ocean-adjacent land in Guanacaste priced as low as $10,000 per acre. I valued the hotel parcel as entitled land and the other two parcels, with no proven entitlements, as unentitled land.

Unfortunately, when looking at lending opportunities in Latin America, I see too many deals like this one, with the property listed for sale at a fraction of the value estimated by local appraisers, with the owner meanwhile spinning a fanciful story of a world-class development project. Lender beware!

My observations about international real estate deals are essentially this:

The least desirable properties must travel the furthest to find buyers or lenders. Good real estate opportunities tend to get picked off by local investors and lenders.