Article

Season of the spec home: Building in hopes of selling is booming

A spec home on the southern Pacific coast.

“Making money in The Zone is easy,” a friend of mine said, using the local vernacular for the Southern Zone coastline that includes Dominical, Uvita and Ojochal.

I wouldn’t make such a statement without a few qualifiers. This was a local resident, a retired, middle-aged businesswoman from the States with whom I have consulted about various investment strategies over the years, such as using IRA funds to buy land in Costa Rica. She and her husband are enjoying the ease with which their efforts in building spec homes have yielded healthy returns.

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She paused and thought a moment. “Well, I should say that it is easy if you come here with some money set aside to work with.” OK, now you can quote me as wholeheartedly agreeing.

We are in the season of the spec home.

A spec home on the southern Pacific coast.

The exterior of a spec home. (Courtesy of Ben Vaughn)

What is a spec home?

A spec home is a house built in the speculative hope of finding a buyer. It’s a house built on the speculation that the cost of acquiring land and building on it will be significantly lower than the value of the finished home, enabling the builder to bank a nice profit.

I used to wonder, in years past, at how few spec homes were built in The Zone. This may have had to do with the relative newness of the real estate market here.

Historically, the majority of prospective buyers who entered real estate offices here were looking for an existing house. In the past, the inventory of existing houses was low, and most of our properties were undeveloped – raw land and lots. A lot of people wanting to buy a house ended up buying a lot and building the house themselves.

But as we emerged from the financial crisis of 2008 and following, the economy strengthened, and with the passage of time the real estate market matured. Today most prospective buyers are still looking for finished homes, but nowadays real estate professionals have plenty to show them.

Spec home plunge pool. (Courtesy of Ben Vaughn)

Spec home plunge pool. (Courtesy of Ben Vaughn)

Favorable conditions for spec homes

Raw land prices are low. Generally speaking, prices are still at, or near, recession levels. The truly optimal properties are finally seeing some increase in values. But the primary demand on the inventory is for finished homes.

There are still some lots on the market that have been there for an inexplicably long time. Speculators are now starting to eye these languishing lots as a piece of the spec home formula that is now working quite nicely.

I would define “the spec home formula” as follows: Low raw land prices + high demand for finished homes = good investment strategy.

Let’s say you pay $100,000 for a 2-acre, ocean-view lot that’s 7 minutes from the grocery store, with water and electric.

You work with your architect to design the house — but remember, you’re building this dream home for somebody else. Design for the market. Build a product you can sell.

Talk to the real estate agent who sells you the lot: What kind of houses are selling here? Are they modern, Mediterranean, contemporary, Spanish? What are the most promising trends in the market today?

Spec home interior. (Courtesy of Ben Vaughn)

Spec home interior. (Courtesy of Ben Vaughn)

What does it cost to build a house in Costa Rica?

I’m not sure about other parts of this country, and even here in The Zone you’ll get different answers to this question. I tell my clients to consider $100 per square foot the middle of the road ($100,000 for 1,000 square feet). You can move this number up or down.

A swimming pool would be a good idea, starting at around $15,000. If you can spare $30,000, you could add a natural stone burbling waterfall, an infinity edge and a swim-up bar. Your objective is not to build as cheaply as possible but to build something irresistible.

If you build it, they will come, especially if you build it well.

A spec home under construction. (Courtesy of Ben Vaughn)

A spec home under construction. (Courtesy of Ben Vaughn)

Let’s say you build a 3-bedroom, 2½-bath, 1,600-square-foot house. You’ve now got $260,000 into the land and the construction. With the pool and landscaping, you’re at that nice round $300,000 figure. Let’s say that the whole process, from getting permits to putting the house on the market, takes around eight months (some here in The Zone are getting it down to five).

You put your house on the market for $429,000. You accept an offer of $390,000. Your costs for selling the property are 11% (más o menos).

Costs to sell

  • 8% commission = $31,000
  • 2% transaction fees = $7,800
  • 1%ish Costa Rica seller’s tax = $3,900
  • Total expenses: $42,700
  • 390,000 – $42,700 = $347,300
  • Profit: $47,300

If all goes to plan, you’ve just made close to $50,000.

A spec home under construction. (Courtesy of Ben Vaughn)

A spec home under construction. (Courtesy of Ben Vaughn)

Costs explained

Commission: 8% is the usual commission charged by all real estate agencies in The Zone. It is lower in some other parts of Costa Rica.
Transaction fees: These include the attorney’s fees, taxes, registry fees and such. This is usually around 4% and is split equally buyer and seller (hence the 2% figure above).
Costa Rica seller’s tax: This one is a bit strange. This is calculated as 13% of the amount of commission paid. So take the $31,000 commission x 13% = $4,030. (You can see why I use the “ish” on the 1%. It’s a little more in this case, but still a good rough guide.)

Time frame: Figure eight months to build and six months to sell, at least in this area. Your results may vary. If you’ve done your market research well — have chosen a property with compelling features, have designed for the market and have priced it competitively — you should be able to sell it in about six months.

A spec home under construction. (Courtesy of Ben Vaughn)

A spec home under construction. (Courtesy of Ben Vaughn)

The example I’ve chosen is in what I’d call the bread-basket of the market. A nicely designed, well-built home here with an ocean view, or some other nice amenity like a river nearby, in the $420,000 range, stands a good chance of selling in the current market within six months.

As our spec home builder qualified her statement at the beginning of this article, you do need to have some liquid cash available to take advantage of what I call “the season of the spec home.” In our example, you’d need $260k. But if you have that kind money, you might be able to turn it into quite a bit more.

I’ve developed this idea more extensively on my blog. I invite you to go there for further aspects of this strategy, along with some links to available properties.

Ben Vaughn moved to Costa Rica in 1999 with his family and started working in real estate in Dominical in 2004. He keeps what may be the longest running Costa Rica real estate blog. His blog deals with the nuts & bolts of real estate and its changes over the years, as well as what it’s like to relocate and live in Costa Rica. Ben is available for real estate services in the southern Pacific zone of Costa Rica. Contact him by email at ben@guysinthezone.com or by phone at 8816-9444.

13 Comments »

    Tom Rosenberger | March 16, 2016

  1. I’ve been building and inspecting construction in Costa Rica since 1992. During 2015, I inspected several homes along the Pacific coast, south of Dominical Beach. One in Domincalito was a $750K spec home that a lender hired me to inspect to make sure that the construction progress was keeping up with the funds being advanced. Another was a $650K luxurious home in Ojochal that was built and furnished on speculation. During my visits to this area, I was amazed at how many expensive homes have been built in this area, which is now much more easily accessible with the new coastal highway.

  2. Lee R | March 16, 2016

  3. Sounds like a big crap shoot.TO MANY IF’S COSTA RICA IS A VERY POOR PLACE TO INVEST IN !!!

  4. Lee R | March 16, 2016

  5. Many more people have lost there shirt here than gained one.And anyone saying otherwise is selling something!I know that is not very nice.I can say that because, I paid the Price.

  6. ann cabezas creed | March 16, 2016

  7. Where can I find a 2 acre beach front lot for $100,000? !!

    costaricalearn

    ann cabezas creed

  8. Ken | March 16, 2016

  9. Seemingly written while wearing rose-colored glasses, but generally an interesting article. I appreciate this peak into the thinking of real estate speculators.

    The question that haunts me, though, is what does Costa Rica get out of these spec homes?

    Sure, the seller of the land gets paid for it, but with that the seller’s profits stop. The seller can never again buy the land at the price for which it sold, since it will be developed, and nothing else will be able to be built on that land for a very long time–no factories, no office parks, not even a soda or surf shop. Local economic devopment will end with construction of the spec home.

    Of course, that construction will provide jobs–mostly manual labor and those for only a few months. After the spec home is built, we’re looking at maybe the owner hiring a maid and indirectly supporting some other service workers–grocery store cashiers, waiters and bartenders, even a few automechanics. But few of the jobs will be good jobs, and most of those who work them will have to bus in from the hinterlands, since they won’t be able to afford to live in an area where housing is appreciating.

    The government will also collect some taxes, some up front and more from the annual property tax. But for this it will have to provide police and fire protection for the residents of the spec homes, public schools for the children of the service workers in the hinterlands, and prisons for the malcontents who burglarize the spec homes.

    Are gringos really so greedy that even after they already have $260,000 in extra cash they want to make $50,000 more in a foreign country in an investment that does little good for anyone but themselves? Can’t they just use that $260,000 to buy an annuity paying around $1300 a month on top of their Social Security and other pension income and live happily? And if they must covet profits, can’t they think of a business to start that employs Ticos, enables them to develop skills, and promotes them?

    Just me, you could remove your rose-colored glasses, hand me my $50,000 profit up front, and I still wouldn’t do the deal. I appreciate learning about others who do, though. It’s a nice window into an expat mindset.

  10. David Lockshin | March 17, 2016

  11. YOU FORGOT THE INS IN THE EQUATION.
    One must pay taxes on the profit made according to your USA tax rate.
    Failure to do so results in a tax fine. I know first hand.

  12. David Lockshin | March 17, 2016

  13. #IRS sorry I put in ins. But you know what I mean

  14. Ivo Henfling | March 17, 2016

  15. Building spec homes in Costa Rica will generate a lot more jobs than you might think Ken. It starts with the surveyor, the guy with the back hoe, the architect, the engineer, the construction workers (of which some will be Nicas), the need to be fed, so someone will be cooking for them while on the job. The people at the municipality, the water and power company will have some work. Once the house is built and someone purchases it, and turns it into a vacation rental, someone will need to do the property management, the cleaning of the house, which will pay some taxes and keep municipal and tax authorities busy. Those who will rent the vacation house, will spend their money in the bars, the restaurant, the supermarket etc. All this is called a growing economy. That’s how a small place in the middle of nowhere grows into a town which grows into a city. And it feeds everybody. It’s better than building a factory in China. I don’t see any rose-colored glasses except for a real estate agent who writes an articles about a possibility of investing your money in a beautiful place in the Southern zone of Costa Rica that has a growing economy.

  16. Tim | March 17, 2016

  17. Ken, I’m in Canada and annuities are part of my business. So, you are going to have to be 65 years old for $260,000 to through off $1,300 per month in income. In that case I suspect that most 65 year olds are more interested in retirement than spec building a home. The spec market is generally a game played by those in their 40s or 50s. So if they want to throw the dice on a spec house why not? The end buyer is going to be pumping something in the neighborhood of $20 – 30K annually into the economy, more if the house is rented to vacationers. I don’t see the down side, unless you are the builder and it takes you 3 years to sell your spec house.

  18. Tim | March 17, 2016

  19. Proof read! “throw off” not “through off”

  20. John Moldthan | March 17, 2016

  21. Hi Ben, I’m in St Louis, Mo. A little over 12 years ago we took a family vacation to Costa Rica for an immersion experience. We loved the country, the people and the total feeling of peace we had so much that I bought a canyon and adjacent land soon after. Long story short, we developed the land into 5000 sq mtr lots and I’d like to relate my experience here. The property is in Turrialba in the central valley. While it’s NOT my intent to promote my project here, I would like to relate my experience because I believe it is unique!!!

  22. karla | April 2, 2016

  23. You are saying Costa Rica houses are over price!

  24. Ben Vaughn | May 12, 2016

  25. I’m late getting back to read the comments on my article. I’ll do a few responses starting from the bottom (just above this comment) and working up.

    Karla, as for whether houses in Costa Rica are over-priced or not, only the future will tell. The point being made in the article is that, in the current market, the differential between what one can buy an existing home for, and what one can buy land and then build for, is sufficiently spread to justify spec-homing as an investment strategy – emphasis on “in the current market”.

    John, please feel free to share your experience with me. I’d love to hear it.

    Tim, thanks for what seems to be an insightful response regarding annuities and the seasons of life when making investment decisions.

    Ivo, thanks for weighing in with your obvious knowledge of both Costa Rica and the market.

    David, thanks for sharing what must have been a costly and painful oversight. I’m hearing “watch your IRS obligations with whatever investment strategy you choose”. Do I have this right?

    Ken, thank you for the in depth comment. I don’t present myself as an investment counselor, so I learned a bit about annuities from your post, and frankly, you’ve got my interest. I do however, present myself as one who has had a considerable amount of exposure to real estate in Costa Rica over some years. If someone asks my opinion on spec-ing, here, now, they will hear what I wrote in the article.

    As for the impact on Costa Rica, hmmmm… frankly… well… I know this may sound strange coming from a guy who supports himself in real estate in Costa Rica, but I would prefer if the whole thing went back to the days when there was a single, shared phone in a barrio. When there were pulperáas and a soda on every block. This largely due to the fact that hardly anyone had a car to get to the centro back then. Granted, when I lived in that world, that now seems like ancient history, I wasn’t working in real estate, but I don’t think that’s relevant. I would trade what I make in real estate to have the ability to turn it back. I LOVED the Costa Rica of that time.

    I moved here from the Aspen valley in Colorado USA thinking that the place was getting just too darned developed. Now it’s happening again in Uvita and the surrounding zone. I find myself thinking “if Costa Rica isn’t it, what is? Where to next?” We’ve got a 60 unit condo complex on the beach, town-homes up in the coastal range, and new hotels planned etc, etc… The population is about to boom here, me thinks. But, no one is asking me my opinion. Development is going to do what it has always done – that is, at least until we tap out whatever natural resources we use and have our hands forced.

    Ann, I don’t know of any 2 acre beachfront properties for $100,000. “Ocean view” (what’s stated in the article) and “beachfront” are 2 different types of property. As mentioned, I do know about a few 2 acre ocean view lots for $100,000.

    Lee, any supporting data on the assertion that many more have lost than those that have gained in Costa Rica? I’m serious. If this is based on actual data, please share.

    Tom, it is great to hear from a home inspector. Thank you. And yes, there are some pricey homes here in the southern pacific zone.

    Whew! I think that in the future I’ll re-visit my articles more quickly.

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