The Process of Buying a House in Puerto Rico
Week #14
Hello! I’m Aaron Kardell. In this Sunday newsletter, I pick one random topic weekly to go deep on and have some disparate quick hits at the end.
I have so much to write about on Puerto Rico in general and the continuation of our short-term rental adventure. However, to maintain some variety and ensure no single post gets too long, I’ll plan on writing about one post a month on this topic. This week, I’ll share some takeaways from the buying process.
Finding a House
Real estate agents in Puerto Rico don’t post every listing on the MLS as consistently as they do in the rest of the United States. A higher percentage of agents in Puerto Rico are not REALTORs and do not participate in the MLS. For that reason, if you’re looking for a house, you’re going to want to float between at least the following three sites in your search:
Clasificados Online. This is basically the Craigslist of Puerto Rico. It’s every bit as bad as Craigslist. But there are listings on here that you won’t find anywhere else.
Zillow. Quite a few listings in Puerto Rico do make their way to Zillow. But it’s definitely far less than 100%. Don’t assume you’ll find everything here.
Brokerage / Franchise Apps or Websites with a Presence in Orlando(!!). My real estate tech friends may find it interesting that the Puerto Rico Association of REALTORs partners with Stellar MLS as their MLS Provider. The net result is that any brokerage or franchise app or website that allows you to search for listings in the Orlando area will probably work in Puerto Rico since they’re sourced from the same MLS. Here are some apps that work in Puerto Rico that happen to be partnered with the best tech company in real estate: BHHS Florida Network Realty, Engel & Völkers, Mark Spain Real Estate, NextHome, and Realty ONE Group.
If you’re looking to buy a short-term rental, pay extra close attention to which communities and homeowner’s associations allow short-term rentals. I got copies of corresponding homeowners association documents for any homes we were seriously considering. It was often the case that there was a mixture of documents in English and Spanish. When I encountered a Spanish PDF, I used Google Docs to convert the PDF to text and then used Google Translate. It wasn’t perfect, but it worked well enough.
Working with Real Estate Agents
It is standard for a seller’s agent to pay the buyer’s agent commission in the US and Canada. Therefore, agents are amenable to representing buyers without charging a fee directly to the buyer.
However, this is often not the case in Puerto Rico. Many properties in Puerto Rico are listed by sellers’ agents with no offer of compensation to buyers’ agents. This is more aligned with the European / Australian model of real estate. Sellers’ agents in Puerto Rico are used to making all their money by working directly with buyers.
As such, don’t assume you can find an agent as a buyer who will be motivated to show you all the inventory out there.
Contracts and Closing
Most state REALTOR Associations have standard paperwork that REALTORs use to make offers in the US. There is no such thing as a standard purchase offer contract in Puerto Rico. The seller’s agent will propose some paperwork. As the buyer, it is up to you to find an attorney and review the paperwork. And I highly recommend you do so.
Most of these agreements are structured as option agreements. Option money is put up instead of earnest money, usually to the tune of 5%. And perhaps a little unsettling – you wire the money right into the listing broker’s trust account.
Contracts in Puerto Rico can be written in either English or Spanish. Both are official languages. Fortunately, our sellers knew way more English than I did Spanish and were okay with writing all our contracts in English.
In Puerto Rico, the “notary” title designation means something entirely different than it does in the rest of the US. Notaries in Puerto Rico are full-fledged attorneys. And notaries are responsible for pulling together all the paperwork for closings. Although notaries are attorneys, they are supposed to be neutral in the transaction – effectively representing both sides.
It is usual for the seller to pay more of the notary fees as part of the closing costs. In my case, however, I offered to pay a portion of the notary fees in return for being able to pick the notary and guide more of the paperwork process pre-closing.
Most closings don’t involve a closing agent, title company, or title insurance. In my case, I chose to get a title company involved and buy title insurance. It was a significant enough investment that I felt more comfortable getting some more eyes on things and ensuring that the right amounts of money were making it to the right places.
The closing documents are all retained in a bound book by the notary at their office with stamps attached. I’m told this is similar to the Spanish system.
Appraisal and Comparable Sales
We put a clause in the option contract that would allow us to cancel if we received an appraisal meaningfully below the proposed purchase price. I was nervous about overpaying, so I ordered two different appraisals.
Finding comparable sales data takes a lot of work. There’s no equivalent of county record websites where you can see property tax, appraisal, or past transaction information. And don’t expect to find Zestimates or past sales on Zillow.
You can pay for subscriptions to services called TasaMax and PuertoRicoE.com to look up historical sales. Unfortunately, while both have a lot of data, they are still incomplete.
Insurance
Only a handful of major insurance companies offer homeowners insurance in Puerto Rico. Mapfre is the prominent choice many rely on.
Financing
Since Puerto Rico is a US territory, many things about mortgages are similar on the island. For example, conforming mortgages are bought and sold by Fannie and Freddie. Credit reports are pulled from the same bureaus. 30-year mortgages are standard.
With that said, for all the similarities, there are plenty of differences. Most mainland US banks do not lend in Puerto Rico. My favorite mortgage lending site suggested it would lend there when I entered the zip code for the property we were purchasing. It even quoted a rate. But a few steps into the application process, it was apparent that it wasn’t supported. Sites that quote you mortgage rates from various lenders (like Bankrate) don’t have any support for Puerto Rico either.
When you find banks in Puerto Rico that will lend to you, they’ll typically charge 1-1.5% higher rates than whatever is current in the rest of the US.
Of the various non-traditional lenders who focus on lending to LLCs for short-term rental properties, I couldn’t find one that would lend in Puerto Rico.
In Summary
Be prepared to take ample time for your search and for closing. Never assume that just because you know a thing or two about real estate, you’re also prepared for all the nuances you’ll encounter in Puerto Rico. I didn’t know what I was getting into, but I’m still grateful we moved forward!
Special thanks to Diane Cohn for her article 14 Things We Learned Buying a Home in Puerto Rico written in November 2014. If you’re considering buying in Puerto Rico, it’s still a must-have resource. Little has changed since the article was written.
This Week’s Quick Hits
Many of you have asked if we have posted the rental on Airbnb. We do now – check it out here. I’m a little self-conscious about posting it publicly. It’s a nice place – significantly nicer than our place in Minnesota. The nightly rate is high. We are offering a family and friends discount on a limited basis. Email me if you’re curious.
Thanks to all who read last week’s post on How I Write Each Week and gave me feedback on what topics you want to hear more on. More to come on the feedback I received and one of the requested posts next week.