An escrow account is essentially a pass-through third-party account, created for the purpose of a Real Estate purchase. It is meant to protect both the buyer and seller all parties in the transaction. Outlier Legal highly recommends using this service for your real estate purchase – here’s why:

Example: a US national has identified a home in Escazu that they would like to purchase for $300,000. Once an offer has been accepted, the transaction moves into the contract (purchase agreement) phase with an estimated closing date. Let’s assume the earnest money amount (down payment/deposit) is 10% of the purchase price – $30,000.

The buyer is from the United States and the home is in Costa Rica. Transferring the funds becomes tricky. Between the Know Your Customer laws and the general headaches of trying to open a bank account as a foreigner here, much less with amounts in the tens or hundreds of thousands, the process has an additional layer of complication.

Even assuming that the buyer has been able to transfer purchase money from their home country to Costa Rica, he/she doesn’t want to just give the seller $30,000 – these two parties don’t know each other and there is an inherent trust issue. What if the seller absconds with the money during the due diligence phase and the property cannot be purchased? Similarly, if there was no deposit given to the seller, what if the buyer disappears and the seller is left with a property that has been pulled off market for weeks and a sale that will not happen? The possibility of falling victim to a scam are endless. Even if it is not a scam, there is always the chance that the contracts will be changed at the very last minute, forcing pressure on the other party to comply.

Enter the third-party escrow company. Important to note that in the US, the escrow account can be held by a title company or the buyer’s attorney, whereas in Costa Rica, there are escrow companies set up (and accountable to SUGEF) specifically for this purpose.

Buyer transfers $30,000 into the escrow account and the due diligence phase begins. Both parties have peace of mind – funds are protected by a third party that will ensure compliance.

Once the transaction goes through the due diligence phase and both sides are satisfied, including the execution of all documents necessary to close the transaction, the remaining $270,000 must make its way from the buyer to the seller.  Again, the buyer transfers the funds to the escrow company. The escrow company is then tasked with distributing the moneys on time and to the right parties (seller, real estate broker, government fees and taxes, mortgagee) at closing. Seller is satisfied as they have received their expected amount, buyer is satisfied that their funds were safe, and all other entities are satisfied that their portions have been paid.

Escrows can be used for the purchase of a property, the deposit on a rental property, and on the deposit of a property from a developer that has not been built yet. How many stories have we heard of insolvent developers leaving buyers high and dry without property and money?

Can you buy a property without an escrow account? Sure. Can it be seemingly cheaper? Yes. Considering these transactions can range somewhere between several hundred and several thousand dollars, the buyer (and/or seller, depending on terms of purchase agreement) in the above transaction would have spent about $1000 or more for the escrow service. That’s not an insignificant amount. But escrow accounts arose from a need of scam avoidance and the difficulties in getting funds from one country to another. We believe the price for having an accountable, neutral third party overseeing the transaction to be worth it. Outlier Legal’s job is to protect you, and we are proud to say that in over 9 years of business, we have never lost a penny of our clients’ money over a real estate transaction. Recommending the use of escrow companies is one of the reasons why.

Authors: Nataliya Schulman and Johnny Lara.