Buying pre-construction

The heat of Costa Rica’s real estate market (especially beachfront condo developments) in the last few years has meant that pre-construction sales have become commonplace. Builders sell a certain number of units at introductory prices to build buzz and, occasionally, raise funds to finish the project.

Pre-construction sales are still a good way to go if you’re looking for a quick return on your investment or aren’t in a hurry to use your new digs. It usually takes over a year for the project to be completed, but in return for a little extra risk, a pre-construction buy will give you a substantially better return. Generally you put down a deposit, and as the construction reaches various stages, you put down more money. On completion of the project, you pay the balance.

The payoff is bigger than in a regular property deal because your risk is higher: You’re buying something that doesn’t exist yet. There’s no guarantee that the development you’re buying into will get developed, nor can you be sure that the developer will be able to sell the remaining units, which would bode poorly for the value of your property.

You can lower these risks substantially in two ways. First, only buy into developments that have all their permits lined up. Permitting in Costa Rica is a famously arduous process, and developments that are “almost” there or “in the final stages” could still be months or years away from getting the green light from the half a dozen government bodies supervising them. Have the developer send you copies of the completed permits and ask your lawyer to review them for authenticity as part of the due diligence process.

The second key to pre-construction investment is to make sure that the deposits you’re putting down go into a third-party escrow account, not the developer’s pocket. Do not invest in a pre-construction project that plans to use your funds to build. That’s an extremely risky business model, and you want to stay far away from anyone operating like that. With your money in untouchable escrow, it will be refunded to you if the project hits a snag.

Finally, while pre-construction was a good way to go several years ago, when beach-front condos were flying off the shelf and property values were soaring, the market today is cooler. Buyers can afford to wait, at least to the point that the building is visibly on its way up and the developer has proved his or her ability to weather the world’s current financial storm.