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Many of us have found it very difficult to find somewhere safe to place our hard-earned cash that will contribute income towards the lifestyle we would like to enjoy. For the past few years we have been faced with yields of 1 or 2% in US dollar investments with financial institutions, including the bond market. It takes a lot of money to get a decent income at that rate of return!
The stock market has been scary where seemingly solid companies have stock values plunge, while a virtually worthless one that has caught the emotion of the market soars, only to take a dive shortly afterwards. The old way of analysing a company for its value doesn’t seem to help in these days of manipulated markets.
The one thing that has always showed gains, in spite of temporary dips from time to time, is well placed real estate. Most great fortunes have a significant real estate factor, and many retirements are possible because of the gain in the value of the family home. It takes a lot of money and steady nerves to speculate in real estate, but real estate can be used to guarantee a source of income greater than any other safe, reliable investment. In Costa Rica the yield on real estate based loans is far higher than in developed countries, and the safety factor is increased as the real estate market has not fully recovered, ensuring loan guarantees will appreciate.
If the guarantee is good, there are few foreclosures, but it can happen. The possible downside is, therefore, becoming the owner of a Costa Rican property at far less than its market value. The property can then be sold at a profit, or kept for the use of those who funded the loan.
This is not to say that real estate based loans are without risk. Casa Canada has been in the business of administering loans for clients since 1992 and has learned a lot. A very important item is the wording of the mortgage or trust agreement. It took years to perfect the documents used today, and to eliminate the loopholes.
Another vital step is the valuation of the property. Casa Canada has its own experts. It is important to avoid loans in areas with difficult access, off the beaten track, or in a run down neighbourhood where the value will not increase,. The most secure loans involve the borrowers personal house or the building housing a personal business.
Administración Hipotecas Canadiense Costarricense S.A. (AHCC) is the Casa Canada owned administration company that administers mortgage or trust loans.
Steps to approve a loan
1. The borrower brings the completed application form and all specified supporting documents to Casa Canada along with a $100 processing fee.
2. On line credit checks and a property study from the central registry are done. Loans will not be granted to those with bad credit records or if there are liens or charges against the property. Mortgages are always in first position.
3. A study is made by the accounting department to establish ability to meet loan payments.
4. If everything appears to be in order, the mortgage manager and real estate experts will visit the property to ensure it will be saleable if payments are not made, and to get an approximate value.
5. If it appears there is sufficient value in the property to justify the loan, the loan application will be discussed by management of Grupo Casa Canada at their daily 8 AM meeting.
6. Should the loan be approved a written offer of credit, stating the amount and conditions of the loan, will be prepared and presented for the applicant to sign as accepted.
7. The mortgage or trust will be prepared by an experienced lawyer and signed by the borrower. Once the mortgage is registered in the central registry the funds will be disbursed.
8. When all legalities are in order and necessary documents accompany the application, a loan can be approved and disbursed in as little as a week. A rejection will usually be decided within 3 working days.
TERMS & REQUIREMENTS FOR A LOAN
NOTE: Interest rates and amortization period can vary depending upon the value to loan ratio of the security and other pertinent factors.
• Interest rate – generally 14% per year, 1.17 % per month, on the outstanding balance.
• Amortization period – generally 10 years so the loan is fully paid at the end of the 10-year term.
• Loans and payments are in US dollars, or the equivalent amount in colones at the time of payment.
• Past due interest on late payments is the rate of interest plus one-third of the interest rate.
• Fees – 3% plus legal costs are payable from the amount of the loan, or can be added to the loan.
• Broker fees can be paid from the loan proceeds, but only with written permission from the borrower.
• A non-refundable deposit of $100 must accompany the application.
• Construction used as security for the loan must be fully insured to its replacement value with inflation clause, with claims payable firstly to the lenders.
• Life insurance on the borrower is required for not less than the loan amount, payable to the lenders.
• There is an annual renewal and trust fee payable of 0.75% during the term of the loan.
• Proof of insurance and of payment of territorial and municipal taxes must be provided annually. If insurance or taxes are not paid, AHCC, can at its option, either pay amounts due and add the costs and service charges to the loan, or declare the entire loan amount due and payable.
• AHCC loans only in first position – no second mortgages. Trust loans don’t allow second degree mortgages. Should additional funds be granted an addendum is then attached to the original trust.
• Where construction provides most of the value of the property, loans can be made up to 50% of the value.
• Where the property is a lot or raw land, the maximum loan will be 25% of the value.
• Advances on loans for construction shall be payable directly to the contractors, unless proof that the contractors are fully paid is provided. The borrower will pay costs of progress inspections.
• Loans cannot be made on leased, concession or possession land, only on titled property.
• Should a loan be made for a bar or restaurant the borrower must give the liquor license as guarantee and grant a chattel mortgage on fixtures and equipment.
• Action to foreclose the property will start once payments are 9 weeks past due.
• A loan can be repaid at any time by paying principal and interest at the date of the payout, or large payments can be made to reduce the balance and interest. There are no charges for early payment. Interest is calculated on the outstanding balance at the time of each payment.
ADVANTAGES OF AHCC MORTGAGES
While AHCC interest is higher than that from banks and mutuals, there are a number of advantages that make this loan program attractive to borrowers, particularly those who need money quickly to take advantage of an exceptional purchase are to get a project started.
- The procedure for approval or rejection is fast; generally a decision is made within a week.
Banks can take months to approve a loan. Where an exceptional deal is available on a property or business the opportunity could be long gone by the time a bank loan is approved.
It is not necessary to pay appraisal fees.
AHCC fees are much less than most banks and other lending institutions.
- There are no hidden fees, and legal fees are generally less than those of other lenders.
Loans are practical for short periods of time, as there is no penalty charge for paying the balance whenever the borrower chooses; therefore a loan to take advantage of a sudden opportunity can be repaid as soon as alternate financing is arranged.
Lump sum payments can be made on the loan at any time to reduce the interest cost, or to reduce the payment.
Large loan reductions can be borrowed back at a later date if the loan is in good standing.
AHCC understands developer financing, and special terms can be arranged for financing subdivisions or condominium developments.
The partners or owner of the loan pays nothing to arrange the financing. Casa Canada looks after all due diligence, and the borrower pays legal costs, registration and other fees. Casa Canada lawyers are experts in the mortgage loan field, and management checks all legal documents before funds are disbursed. Lenders are welcome to copies of the executed and registered loan documents.
Mortgages or trusts are in the name of the lender, or a company owned by the lender. Casa Canada follows up on mortgage payments, contacting the borrower the day after a payment is due, and continues to follow-up frequently until payment is made. Casa Canada receives 2% of the interest in payment for its services, payable when each payment is received. The balance of the payment is promptly passed on to the owner(s).
Should a loan go into arrears Casa Canada arranges follow-up letters, and on the rare occasion it is necessary, arranges for legal action to take title to the property.
Property secured loans can be a good way to earn income at well above the rates available in most investments. In extreme cases where foreclosure is necessary, the owner(s) receive a title to good property at a bargain price. This can then be sold at a profit, kept as an investment or retained for personal use.