Seller Financing for Property in Nicaragua
Looking for property in Nicaragua? Here’s a guide to seller financing for your next real estate investment.
It’s more challenging to finance a property in Nicaragua than elsewhere. The banking sector in Nica had just begun seriously lending to foreigners when the political unrest began in early 2018. As a result the major lenders Banco Lafise Bancentro, BAC, and BanPro all pulled back significantly on mortgage lending, especially to foreigners.
I wrote the article Getting a Mortgage in Nicaragua in March 2018, but the lending market has changed considerably since then. There is now much less traditional financing available. Those three main banks are still doing some lending, but it’s generally related to projects they are already involved in.
For a few properties, like Plaza Talanguera in San Juan Del Sur, BanPro is still offering mortgages. They will finance some of the remaining apartments in the building. Interest rates are high at 10% though. This makes it less attractive if you only need a few years to pay off the principal.
The national economic slowdown has affected property prices as well. Real estate values have declined 35% on average from the record highs of early 2018. You can see this in the number of reduced and value properties.
Early last year very few sellers were willing to finance. The market was so hot that most rightly believed they could sell for cash rather than wait to receive payments over time. Now things have changed.
More sellers are willing to consider financing buyers to facilitate the transaction. In the current market they recognize thats it’s beneficial to offer financing and broaden the pool of prospective buyers. Paired with the decrease in bank financing it means most properties carrying mortgages are of the private variety.
So how does seller financing work in Nicaragua?
The first thing to know about financing of any kind in Nica is that is almost certainly involves a Promise De Venta or PDV. The PDV is a publicly registered document that goes along with the Escritura (deed) in the public registry. It outlines the terms of the agreement in a clear and consise way. It spells out the deposit, payment terms, interest rates, rights and responsibilities of both parties, and repercussions for non compliance.
The PDV precedes the final closing which takes place as standard on the completion of the final payment. Your lawyer will still perform a due diligence and all of the required procedures to make sure the property is free and clear. For more on the entire closing process check out the article 14 Things to Know About Buying Property in Nicaragua.
A qualified lawyer can walk you through the process for the PDV and make it easy to understand. I like Dr. Javier Quinto at the firm of Salazar & Bendana. He speaks English, offers free consultations, and you can reach him at email@example.com
Inside the Promesa De Venta all the terms from above will be clearly stated. Normal down payments are 30-50%, with 50% down being the most common. Although it does vary a little depending on term lengths and interest rate.
At the moment standard interest rates for seller financing are between 5 and 7%. That’s considerably less than the aforementioned bank rate of 10%. The trade off is that term lengths are usually shorter. Most sellers prefer to keep the amortization to 2-3 years or less. We do see some terms of 4-5 years but those aren’t as common.
Private sellers aren’t usually as concerned about earning interest income. They just want to sell. As opposed to banks who build their business on long term interest. Sellers are also less selective about the credit of the prospective buyer. The property does not actually change hands until the final payment is made, so if the buyer defaults the seller keeps the house and the cash.
Default terms vary by transaction. Usually there is a clause in the PDV stating that if the buyer is more than 90-180 days late on a payment they are in default. In that case the sellers’ lawyer would act on the clause to reclaim the home. Normally there are also late charges for payment more than 7 and 30 days late.
An important note is that we are recommending buyers consider the use of Sociedad Anonima (S.A) corporation for their new real estate purchases. You can read all about the benefits of an S.A. in this article. It’s very useful as well when paired with a Promesa De Venta for seller financing.
When you sign a PDV in the name of your S.A. corporation that entity is now the owner of the rights of that agreement. It gives you a lot more flexibility in terms of your ability to exercise the Promesa de Venta.
Let’s say hypothetically that you finance a property with a Promesa De Venta over three years. It’s in the name of a corporation you founded for that purpose. After two years you decide you want to sell the property, before you have finished paying it off. How can you do so?
You can sell all the shares in the corporation. By selling the corporation you also sell the Promesa De Venta it holds for the property. The new owner of the corporation would pay you out the difference and assume the agreement.
The use of corporation lets you sell that asset before completing payment. It also lets you change the ownership structure with minimal expense of time and funds. For example taking on additional partners without paying all the transfer taxes and closing costs.
Looking for a property with seller financing? Here are some options:
There are more available too. It just comes down to connecting with the individual sellers and seeing which are open to financing. For that and all of your other real estate needs in Nicaragua contact me any time.
Joel Stott-Jess is an agent / broker with Century 21 / Nica Life Realty in San Juan Del Sur. Originally from Alberta, Canada he has been doing business in Nicaragua since 2014. A serial entrepreneur, surfer, and outdoor enthusiast he is an expert on real estate and investment in Nicaragua.
Century 21 / Nica Life Realty
San Juan Del Sur
(+505) 8176 8624