Purchasing a Property in Costa Rica
When purchasing a property you want to make sure you are not buying into a problem.
Sadly, there are enough stories out there about bad real estate deals. Most of the time people act with lack of knowledge. A significant challenge in Costa Rica is that there is no mandatory licensing for real estate agents. In addition, there is no regulating agency overseeing the process or regulations related to real estate transactions. This situation results in lack of uniformity with real estate transactions and thus everyone does what they think is right, and what is right for some people is not right by other people.
The laws in the books set forth some basic framework related to the transfer of title, taxes and legal fees, but it does not regulate the process between offer and closing.
This time, our goal is to lay out the process for purchasing real estate, step by step and will lay out relevant regulations and good practices for people to have a secure transaction. The content is extensive and cannot be published in just one post. This will require a series of over a dozen posts for people to get a very good picture of what is involved in the process to purchase a property in Costa Rica.
How to Buy Real Estate
This is what you need to do in order to have a safe transaction.
There are two things to keep in mind when dealing with the seller and the agent:
- They will tell you anything you want to hear. Both are very eager to sell you what they have. My suggestion is to be skeptical. Do not trust anybody.
- They want to rush you through the deal. Costa Rica is currently a buyers’ market. There thousands of properties for sale and that have been sitting there for years. Do not feel rushed by the seller or the agent. My suggestion is to take your time.
I guarantee you that you will hear stories on both sides of the fence, telling you: “my purchase was easy, I had no trouble”; or “it was a nightmare, I wish I have been more careful”. Having said that, I want to be clear that my purpose here is to tell you the steps you need to take in order to lower your risk when buying real estate. You may not follow these suggestions and still be fine, but once again, my goal is for you to be preventive. It is like having a fire alarm and an extinguisher at home, hopefully you will never have a fire, but it is a good idea to get precautionary measures.
- Get your own attorney.
If you are actively looking to purchase real estate, the first thing to do is to get your own attorney in order to research the properties you are interested in. You may look at dozen different properties from different agents and it will be a good idea to have some preliminary information about the property prior to making an offer. This does not mean that you will do a Due Diligence for every property that you see, but it is good to check.
Never use the attorney of the real estate agent or the seller. If you get your own real estate agent, it is Ok to use that agent’s attorney. But never, never, never, use an attorney related to the seller or the seller’s agent.
Of course, the seller or its agent are going to tell you to use their attorney, that everything is fine, that he/she is trustworthy, blah, blah, blah. The only thing you would want to hear coming out of their mouths is: “we strongly recommend that you seek independent legal advice”.
- Make an offer.
Never pay the asking price. As noted, Costa Rica is currently a buyer’s market. You can at least knock the price down 10%. Do the offer in writing, and have an attorney review it prior to sign it and sending to the seller. I have seen a lot of offers that are poorly drafted and the buyer is forced into terms that are not ideal, like very short closing dates not allowing you to complete due diligence. As noted earlier, do not pressure yourself and take your time to review and make the correct offer. A poorly drafted offer will bound you to comply to purchase into a problem.
- Sign a purchase agreement.
If your offer has been accepted, then go ahead and sign the purchase agreement. The purchase agreement is the road map to the deed. These are the elements that you should find in the purchase agreement:
- Description of the parties. Both the seller and the buyer must be clearly identified. If the property is in a corporation, the name and ID number of the corporation should be included as well as the details of the representative of the corporation.
- A complete description of the property, including survey number, property ID, location, size, whether it has any structures, whether it has any easements, etc.
- Price and method of payment. The purchase price is essential to the transaction. This issue requires particular attention as generally, closing attorneys will recommend to indicate a lower price in order to save money in transfer taxes. My suggestion is to make sure that all documents reflect the actual purchase price of the property. Indicating a lower price is tax fraud and I am sure you do not want to go to jail in a foreign country.
- The method of payment should include the earnest money and details for the escrow. Never pay more than 20% for earnest money.
- Description of the closing costs and indication of who will pay the closing costs.
- The name of the Escrow Agent.
- The name of the Notary Public who will do the closing.
- Due Diligence Period. You want to allow yourself some time to do some research on the property.
- Closing Date.
- Use an escrow agent.
The purpose of the escrow agent is to protect your money. You want to show the seller that you are serious about the purchase, so make the deposit for the earnest money. However, do not give it to the seller as you do not know whether you will find some issues during the Due Diligence, instead, deposit the money with the escrow agent. If you did not find any issues with the property during Due Diligence Period (DDP) then you can deposit the remainder of the purchase price with the escrow agent in order to proceed with closing. On the other hand, if you find substantial issues with the property, then you will be able to withdraw from the agreement and get your earnest money back, of course it all depends on how the purchase agreement was drafted, but certainly you would not like to have that money sitting with the seller or his attorney. Therefore, use an escrow.
- Do the Due Diligence.
The purpose of the DDP is for you to find any substantial issues with the property as far as clean title is concerned. During this period, your attorney should research the property to make sure that:
- it is registered,
- it has an ID,
- it has a survey,
- it is clear from liens and encumbrances, and it does not have any encroachments
- the seller is the legitimate owner and that there is a clean chain of title
- it is suitable to build, or that existing structures have building permits
- it has water
- taxes are up to date
- if it is in a corporation, that the corporation is clear
- if there are existing structures, do an inspection to make sure that it is safe and sound.
If you did not find any issues during the DDP, go ahead and proceed with closing.
This is the day both you and the seller will sign the transfer of the deed. Both of you need to be in front of a notary public in order to sign the deed. A proxy can be used if either party would not be able to appear at closing. There are particular requirements for the proxy in order to be valid.
The deed needs to be executed by a notary public of your choice. As mentioned above, use your own attorney/notary public. The whole process with the notary public should not take more than an hour. Once both parties have signed, the notary can send confirmation to the escrow agent in order to release the funds. The deed should be recorded with the registry, and within a week the registry should have completed recording the deed in your name.
If the property is a corporation, then the transaction will be a little different. Instead of transferring the property, the closing will result in a transfer of shares of the corporation. When transferring the shares of a corporation, three things should happen:
- The share holders should meet in order to agree with the sale of all of the shares of the corporation. This agreement should be logged in the book for the share holders meeting.
- The parties to the contract should sign a share transfer agreement which should contain the details for the transaction.
- The information for the new owner of the shares should appear in the registry book for share holders.
- New stock certificates should be issued with the name of the new share holder.
Once these steps have been completed, you will be the owner of a new property. Hopefully, you will take precautionary measures to avoid being victim of fraud, or to avoid tax liabilities.
Please note that this is a brief summary with the purpose to understand some basics about purchasing real estate in Costa Rica. This information should not be interpreted as legal advice. It is strongly suggested to seek independent legal advice. If you have further questions about this issue, please feel free to reach me and I will add the answer to the thread in the blog.
As noted in the beginning, this is part of a series that we will be publishing for you to get better knowledge on how to do a secure transaction.