A great number of Americans who head to the Caribbean every year for vacation enjoy the experience so much they end up purchasing second homes there. The geographic options are endless, from lushly tropical Jamaica and St. Lucia to the more arid Aruba and Curacao, from the Bahamas archipelago near Florida to Trinidad and Tobago near Venezuela.
Many of the islands are independent countries, but others wave the flags of France, Great Britain, the Netherlands or – in the case of the U.S. Virgin Islands and Puerto Rico – the Stars and Stripes. Buyers usually make their purchases in one of three ways: self-funded and payment in cash, self-funded with the capital coming from a home equity or other form of second loan on a primary property in the U.S.; and, in the cases of Virgin Islands and Puerto Rico, with a mortgage obtained on the islands.
The two U.S. territories differ from the other Caribbean islands. While the single-family residential markets in the U.S. mainland have weakened, they also began to soften in Puerto Rico and the Virgin Islands. However, other popular second-home locations in the Caribbean, such as Punta Cana in the Dominican Republic, continue to expand and are still booming.
The Dominican Republic is shaped like a triangle, with the apex pointing eastward at the island of Puerto Rico. This eastern tip was largely virgin forest until 1969, when an unlikely quartet of investors bought 58 million square meters of land on the coast and developed the Punta Cana Resort & Club mega-development. The four investors were fairly well-known outside of real estate: Dominican financier Frank Ranieri, U.S. labor mediator Theodore Kheel, fashion designer Oscar de la Renta, and singer Julio Iglesias. For all practical purposes, they kicked off a building boom in Punta Cana that not only is still going strong today, but has also attracted a new generation of developers such as Donald Trump.
Although Americans have been longtime real estate investors in the Dominican Republic and a mortgage can be obtained locally, most brokers recommend that capital be already available when making a purchase.
It's difficult to get a mortgage in Punta Cana, explains Rico Pester, owner of the RE/MAX Island Realty office in the region. ‘About 95 percent of the condo and home deals are all in cash. Financing is still difficult here, because everything that is sold in Punta Cana is in U.S. dollars. If you can find financing locally, it would take a couple of weeks to get approvals and, by that time, the property would be sold.’
Sometimes it's necessary to have mucho dinero available. At Trump's property in Punta Cana, the land was divided into 68 lots and then sold at prices ranging from $3 million to $7 million. Within four hours, 64 of the 68 lots were sold, and about 30% of the buyers were American.
That was way back in another economy – in 2007 – before the subprime mortgage collapse and subsequent credit crisis in the U.S. Pester says there are still Americans looking for second homes in Punta Cana, just not as many. Their presence has been replaced by Russians and Canadians.
Not only is the Canadian dollar and commodity-centric economy relatively strong, but Toronto-based Bank of Nova Scotia has planted Scotiabank branches throughout the Caribbean, including the Dominican Republic. U.S. banks are not as well represented there. Citibank has a presence in the Dominican Republic, but it does not originate residential mortgages. However, Citibank offers home equity loans for those who already own property in the country.
Greetings from Roatan
Canadians have also replaced the diminishing American crowd of buyers in one of the more remote Caribbean locales, the island of Roatan off the northern coast of Honduras.
Roatan doesn't have a long history as a North American outpost for vacationers and expats, but with a good airport and direct flights to the U.S. and Canada, it began attracting second-home buyers over the past decade. Although not inexpensive, prices on Roatan compare very favorably against other places in the Caribbean.
‘Americans used to be 75 percent of the market,’ says Steve Hasz, an agent for RoatanLife Real Estate, ‘but now they are about 50 precent. We're getting more Canadians and Europeans, many of whom used to go to the Caymans. There is currently a problem in the Caymans about length of time foreigners are allowed to reside on the island.’
In 2007, Hasz's business was hopping. This year's sales haven't dropped much, but inquiries are definitely down. ‘You can get good value on an existing property, especially if it is owned by an American investor who has issues back home,’ says Hasz.
As can be expected, most home purchases are done with cash. Unlike Punta Cana, Roatan attracts a more middle-class wanderer, and Hasz says a lot of homes were financed through a second mortgage on the buyer's primary property in the U.S.
‘Although it's tougher to get that second, I still have buyers doing it. That's probably because the average Roatan investor is financially sound with good credit and a lot of assets,’ he reports.
A branch of London-based HSBC Holdings plc opened in Roatan, and it has been offering mortgages. ‘I have not done a mortgage with HSBC yet,’ Hasz says. ‘It seems to take a lot of time, and the owners have to stand idly while financing goes through.’
One of Hasz's most recent deals was the sale of small lot (less than a half-acre) near the beach to Italian investors for $100,000.
Virgin Islands' example
That $100,000 won't buy you much in St. John, one of the three main islands that make up the U.S. Virgin Islands. The other two islands are St. Thomas and St. Croix, which are less expensive locales than upscale St. John, but in the Virgin Islands, no matter which island you enjoy, there are really no bargains.
Perhaps because it is a U.S. territory and has a very long history of mainland Americans visiting, vacationing and even some not returning, it has become one of the most popular second-home markets in the Caribbean.
In 1989, Hurricane Hugo pounded the Virgin Islands, pretty much devastating St. John, and that really marked a recent low point for island real estate. For the next decade, second-home buyers steadily started buying up property. Then, after the terrorist attacks of September 11, 2001, when Americans started looking to spend their vacations closer to home, the whole Virgin Island property market went into a boom period that lasted until 2007.
‘I sold a three-bedroom, three-and-a-half-bath house with a nice view of Magens Bay, St. Thomas, in late 1999 for $750,000. I sold it in 2007 for $2.5 million,’ says Justine Mis, a Realtor with Sunhaven Realty LLC in St. Thomas.
Even before the subprime blowout, the Virgin Islands real estate market had begun to slow down, and 2007 wasn't a very good year. Brokers appear more optimistic for 2008.
From late 2007 through 2008, 708 homes over $1 million in value sold in the Virgin Islands, which ‘isn't bad considering the economy,’ says Mis. ‘What you see here in this market are luxury homes. The majority of the homes here are over a million dollars and, frankly, most of the buyers don't even finance. They pay in cash.’
Mis adds, ‘These are well-heeled investors, and often, this is not their second home – it could be their third or fourth home.’
Over in St. John, Merry Nash, owner of Islandia Real Estate, notes, ‘On June 30, we had a home sell for $4.6 million – a cash closing.’
What's the low end in St. John? ‘About $1.5 million,’ Nash responds.
Since the Virgin Islands is a U.S. territory and the housing market is generally brisk and upscale, one would think this would be a perfect outpost for U.S. banks or mortgage companies. That's just not the case at all.
Among the banks offering mortgages in the Virgin Islands is Scotiabank, a Canadian lender that is aggressively asserting its financial viability. A spokesman for Scotiabank's Virgin Islands operations recently issued a press statement insisting that ‘Scotiabank USVI is in excellent financial strength and has not been impacted in any way by the financial crisis that is affecting many U.S.- and Puerto Rico-based banks.’ The statement also added that the bank had ‘no direct exposure to U.S. subprime mortgages.’
Also present are two Puerto Rican financial companies that have branches in the Virgin Islands and offer mortgages: Banco Popular, a unit of Popular Inc., and First Bank of Puerto Rico. (Both banks sell to Fannie Mae and Freddie Mac.) Private mortgage companies also operate in the Virgin Islands, and clients of Merrill Lynch – which has an office in St. Thomas – can get a mortgage through the company.
In Puerto Rico
The other U.S. territory in the Caribbean, Puerto Rico, is a very different market from the Virgin Islands. It boasts a large population (about 4 million inhabitants), large capital city (San Juan) and a mixed economy.
The housing market mainly consists of primary homes for Puerto Ricans and, to a lesser degree, second homes for mainlanders and other foreign investors. The island's very cyclical housing market boomed in the first part of the decade, only to completely fall apart around 2005.
The market is still contracting, says Jorge Zabala, an agent with Coldwell Banker Isla del Coqui in the township of Guaynabo. ‘Home values have decreased by 5 percent to 30 percent, depending on the location, over a two-year period.’
It used to be relatively easy to get a mortgage in Puerto Rico, as the local financial system is fully integrated with the U.S. banking industry, even to the extent that Fannie Mae and Freddie Mac offer the same financial backstop as on the mainland. Actually, it was probably too easy to get a mortgage in Puerto Rico, because almost all of the island's homegrown banking companies have been or are still under regulatory investigation because of the way mortgages were handled.
‘In 2006, the federal government came here to check out the bank books, and they found the banks were doing things they were not supposed to, like selling each other millions of dollars worth of mortgages,’ says Zabala.
‘You can still get a mortgage, but it is really hard,’ he says, ‘almost impossible, because Freddie Mac and Fannie Mae are the real lenders, and standards change weekly.’
Even with full integration with the U.S. banking system, there are no major U.S. banks represented on the island. Citibank recently departed, leaving the field to Scotiabank, Spain's Banco Santander and the local banks such as Banco Popular, Doral Financial and R&G Financial.
‘Mortgage requirements are very strict now,’ confirms Molly Assad, a principal in local Paradise Properties. ‘I had someone with a good credit score trying to finance a $500,000 house get told he had to come up with $100,000 equity to make the deal happen.’
On the other hand, Assad sold a condo one block from the beach in the San Juan area for $145,000 to an investor from Atlanta. ‘He was thinking about just getting a line of credit from his bank in Atlanta,’ she says, ‘but decided instead to get a mortgage here. Doral provided the mortgage at a 5.5% interest rate. The price of the condo was incredibly low.’
Steve Bergsman is a freelance writer in Mesa, Ariz., and the author of the new book "Passport to Exotic Real Estate: Buying U.S. and Foreign Property in Breathtaking, Beautiful, Faraway Lands," published by John Wiley & Sons.