Due diligence for condo and pre-construction purchases

Carrying out due diligence on a condominium or gated community development is somewhat different than due diligence on a piece of property or a stand-alone home. In some respects, it’s easier: A lot of the due diligence issues mentioned in this chapter (utilities, property surveys, environmental impact, taxes, etc.) are already taken care of by the developer, who will probably present your lawyer with a thick sheaf of documents to review. On the other hand, there are additional angles you have to check out when you’re tying your financial investment to other people. It gets even more complicated when you consider that the majority of these kinds of projects are sold “pre-construction” – that is, before they’re done. To date, few decent beach-area condo projects in Costa Rica have been completed before they’re sold out. That is to say, if you want the good stuff in Costa Rica, you have to go out on a limb and buy it before it’s finished. The immediate advantage is that you also get a better price. The disadvantage is that you’re taking an obvious risk by committing to buying something that doesn’t exist.

It’s risky business and you’re not going to be able to cover yourself completely. Be sure to get an independent attorney (that is, an attorney not working for the developer or brokers selling the developer’s properties) to advise you, as well as have it independently appraised. Here are a few things to think about and look into as you consider the purchase of a condo or a gated community property.

Is the project successful?

You don’t want to find yourself living in a 30-lot development all by yourself. Those pool fees are pretty expensive when they’re not divided between neighbors, and a home in a half-empty gated community is a hard sell if you decide to move out. A project with lots of sales already on the books, then, is something to look for. Of course, finding this out can be difficult. Every developer will tell you he’s at least 75% sold out, so move fast. You can try asking how many of those units are sales options and how many have closed, and if the developer is being really transparent, ask to see copies of the sales contracts.

Is the project financially sound?

Again, finding this out is more of an art than a science, but it’s important if you’re to take an educated guess at whether your investment will be safe. Start by finding out how many other developments the company has done. A long and solid track record is a plus. If you’re investing at a very early stage in the development, ask about the project’s financial backing. Also, pre-construction sales that ask you to pay your refundable deposit or down payment straight to the developer should raise red flags. Escrow is the safest way to handle pre-construction sales and options, and developers who need your deposit for cash flow reasons must not be particularly well funded. Also, if those developments do happen to fail for whatever reason, your refundable deposit is gone, spent on concrete block and rebar.

Is the project legal?

It really is surprising the number of developments that go forward with sales even before they have all their permits lined up. Ask the developers for evidence that construction, lot subdivision, and environmental permitting has all been approved. Don’t take excuses. While it’s true that enforcement is spotty in Costa Rica, if it does happen it will close the project. Again, having an independent attorney will be important at this stage if you want reliable advice.

How big will the project be, really?

If, for whatever reason, the project ends up being either substantially larger or smaller than you were originally promised, you could have problems. For example, let’s say you purchase a condo in the first phase of a 150-unit development. The second phase is supposed to include the swimming pool and other recreational areas. But after you move in, the developer decides the swimming pool would be too expensive, or worse, the project doesn’t make it to the second phase at all. Either way, you end up with something different than what you originally paid for. Under a opposite scenario, the project could end up bigger or more dense than you had been led to believe. It’s disappointing to find that the developer changed the plans and now wants to cram another 50 units into the green space in front of your unit. The developer’s track record and financial solvency are probably your best insurance against this sort of thing, but talk to your attorney about adding specific language to the sales contract that protects you against these kinds of eventualities and establishes clear penalties.

What will the final product really look like?

Renders are a nice start, but after all, they’re intended to make the building look good, so they’re not really an accurate representation of the final product. If there are features of the render that you particularly like, don’t just assume they’ll end up in the final product: Ask. A lot of details fall by the wayside as developments progress. Likewise, when purchasing a pre-construction unit, take a close look at the list of furnishings. Just because the list says “luxury bathroom fixtures” and “high-quality, imported ceramic floor” doesn’t mean they will be. Drop by a hardware store to look at the brands and price-points offered on the list. A common trick developers use is to include something that sounds luxurious (imported German cabinets) at an absurdly low price point ($2,000). Then after you sign the option, you find out that, in reality, the product they include in the price of your unit is at the extreme low end, and you need to invest a few thousand dollars more to get a functioning product.

Will there be restrictions on what I can build?

Lots in a gated community also come with restrictions on what the buyers can do with them. Make sure to review those restrictions before you sign on the dotted line. You’ll want to make sure the rules aren’t too strict on what you build, but are strict enough so that your neighbors can’t build monstrosities.

Will there be restrictions on what I can do?

Condominium projects fall under a legal regime that requires them to have special rules that can only be changed by a unanimous vote of the condo association (that is, the owners). It behooves you, therefore, to take careful stock of the rules before buying. Get a translation if they’re in Spanish. As with building restrictions, you’ll want to make sure the condo association rules are both flexible enough for your purposes, and strict enough on your neighbors.

Due diligence is a complicated process, and there is often the temptation to cut corners – buy the place before someone else does, or take the seller at his or her word. But due diligence is extremely important when you’re dealing with large amounts of money, especially in countries like Costa Rica where court battles are so long, expensive, and unpredictable. No matter what anyone else says, follow your attorney’s lead and do your due diligence. You’ll be glad you did.