Due Diligence Process for Purchasing Real Estate and Verifying Title and Taxes
Essentially a Due Diligence is the process of really making sure that everything is as it was presented to the buyer, before proceeding to make any potential purchase. When a company or a person is interested in acquiring
Essentially a Due Diligence is the process of really making sure that everything is as it was presented to the buyer, before proceeding to make any potential purchase. When a company or a person is interested in acquiring land, and given the economic magnitude of the transaction, it is convenient to research the property beforehand in order to bring to light certain aspects that might not be immediately apparent. The objective is to analyze, carry out an investigation, and collect information during the initial negotiations to determine the real risks and when possible, minimize them.
Taxes and titles are key elements of a proper due diligence when buying a property. Purchasing a property without verifying taxes and title is a game of chance, plain and simple. While property sellers generally have good intentions, their information regarding the lien position and taxes owed should be considered as this may lead to great regrets if not verified in a correct manner prior to making the purchase. It may seem like a good purchase, but is it really? After reviewing the property’s title, it is possible to discover liens, such as mortgages, which may in some cases be just one of among other high-ranking liens totaling a significant amount of money. Imagine acquiring a property without having previously reviewed this important data. I have no doubt that the result of such a purchase could generate a complete loss of capital.
The Due Diligence process must examine all the aspects of the real estate and should involve the detection of deficiencies or contingencies. That is why the research must cover the financial aspect, the land’s legal limitations, water and building permits, title, and taxes.
We at Outlier Legal Services complete a title analysis using an Ownership and Encumbrance report or title search. When necessary, we also complete a history of the title transfers and possible segregations that the real estate may have undergone.
A Title Report should include the following: a) Property registration number; b) Legal description (nature); c) Intended use d) Location; e) Liners; f) Area; g) Owner; h) Survey or cadastral map; i) Impairments such as liens, entries and encumbrances; j) Permits such as water permit, construction permit and electricity; k) Taxes; and l) History of the title transfers and possible segregations that the real estate may have undergone.
It is important to talk about property taxes which are essential to the purchase of a property since these taxes must be paid to the corresponding municipality every three months or once a year. I will proceed to explain the taxes that correspond to the property and that are part of the Due Diligence Process.
If you own a property in Costa Rica, paying annual property taxes on a quarterly basis is obligatory. Most municipalities will give you a discount if you pay the whole year in advance. The tax is 0.25 percent of the registered value of your property in the municipality (not in the National Registry), as regulated by Law 7509. Starting this year, and every five years after that, you have to declare the value of your property yourself. If you don’t, the engineering department of the municipality will do it for you. The property tax is paid in the municipality where your property is located.
Luxury home tax
The luxury home taxes must be paid before January 15th each year, and should only be paid if the construction value of your property exceeds ¢128 million ($242,000 at today’s rate). This tax is 0.25 percent of the total value of the property for properties with values of up to ¢319 million including the land value, and goes up to 0.55 percent for a property of ¢1.9 billion. If you are not sure about the value of your property, hire a licensed appraiser. The Luxury Home Tax can be paid at any Banco de Costa Rica.
As previously mentioned, a Real Estate’s Due Diligence Process enables you to discover possible hidden liabilities in the property, review contingencies that may have occurred, identify liens, entries, encumbrances, and easements of the property and convey to the buyer an easy understanding of every aspect of the property, with the intention of giving the buyer a clear understanding of what it is they will be purchasing.
As also mentioned above, the due diligence process should be carried out once the parties have agreed on the most general terms, which is usually included in a letter of intent or offer to purchase agreement. From that moment on, usually within 30 days, the due diligence is completed, with the aim of having a wide margin that would allow the buyer to make the most informed decision on whether to move forward or not with the purchase.