Why should you use a regulated Escrow Account in Costa Rica?
Now that you have entered a sales and purchase agreement for a Costa Rican property, you should focus on setting up an Escrow account. We will explain why it is recommended. An Escrow account is essentially
Now that you have entered a sales and purchase agreement for a Costa Rican property, you should focus on setting up an Escrow account. We will explain why it is recommended.
An Escrow account is essentially a pass-through third-party account, created for the purchase of Real Estate. It is meant to protect both the buyer and seller in the transaction by guaranteeing that the initial/earnest deposit is there and that no funds will be released without your authorization. The biggest impact the Escrow account has, is for your peace of mind and tranquility.
Keep in mind that you are buying a property in a foreign country and perhaps even from a local who is likely better versed in Real Estate transactions. As with any seller/buyer relationship, there is rarely built-in trust.
What if the seller runs off with the money during the due diligence period 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 the market for weeks and with hopes of a sale that will not happen? The possibility of falling victim to scams is endless. Even if it is not a scam, there is always a chance that the contracts will be changed at the very last minute, forcing pressure on the other party to comply.
Lastly, when it comes to funding, it is always a bad idea just to hand out money to people you barely know. You should enter a regulated Escrow account in Costa Rica. Unlike the US in which the real estate attorneys or title companies have their own Escrow Account, Costa Rican Escrow accounts are regulated. They must register and comply with SUGEF -the local regulator for financial institutions such as banks and trust companies- regulations and laws, which of course are not easy to comply with. Once you are registered and have passed all the barriers, you are less likely to run away with the deposit of your clients, and in the event that you do, there is someone who can be held accountable. Many “realtors” claim they will safeguard the money for you, but without a regulated Escrow account, this “realtor” can run away with your funds. Unfortunately given the snail-speed at which the Costa Rican penal system works, it will be almost impossible to stop or persecute them.
This registered third party Escrow, will act and protect both buyer and seller, and will hold the funds for the purchase on their behalf.
Each Escrow provider will have different requirements. However, the necessary documents to set up an Escrow account are:
Copy of your passport
Copy of your driver´s license
Copy of a utility bill that shows your address
A proof of the source of your funds (They will ask to see your last year’s tax return and three months of bank statements)
Conozca su cliente “Know your customer” form complete and signed (provided by each Escrow provider)
If your funds are coming from a corporation or a business account, or if a third person or family is wiring funds on your behalf, they will likely require other documents to insure the source of the required funds.
Once the Escrow account has been set and your initial deposit is wired into it, the due diligence phase begins. Both parties have peace of mind and the funds are protected by a third party, that will ensure compliance.
After both sides are satisfied and the transaction passes the due diligence phase, the property can head for a closing. Again, the buyer transfers the funds to the Escrow company. The Escrow company is then tasked with distributing the funds on time and to the right parties (seller, real estate broker(s), government fees and taxes, mortgagee, etc.) at closing. The seller is satisfied as they have received their expected amount, you are left satisfied that your funds were safe and your obligations have been paid, and all other entities are satisfied that their portions have been paid and no one is left hanging or asking for their funds.
Can you skip the escrow account? Yes.
Is it cheaper? Sure.
However, as mentioned before, as you are making an investment with the expectation that you will not lose your hard-earned money, we recommend that you cross all the T´s and dot all the I´s when protecting your investment, and in the long run, your peace of mind and tranquility is priceless.
It is Outlier Legal’s job to protect you, and we are proud to say that in 10 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.
Now that you understand the importance of setting up a regulated Escrow Account, we can say Congratulations! you are one step closer to owning your own piece of paradise.