The key to a successful real estate closing process in Costa Rica is constant communication and coordination between all the parties to the transaction, the Buyer, the Seller, the Real Estate Agent and the Real Estate Attorney.
The Real Estate Closing Process in Costa Rica
What is the Responsability of the Real Estate Agent
Does the Real Estate agent work for you as the Buyer or do they work for the Seller. This is the first question you need to address. Generally the Real Estate Agent is an agent for the Seller of the property because this is the person that will pay them the real estate commission. If the Real Estate Agent has a signed contract with the Buyer to represent their interest then we have what is called “buyers agent” and the agency relationship changes since the agents fiduciary duty must be to the Buyer. In my view the real estate agent should make it clear from the outset who they are representing to avoid conflicts of interest during the transaction.
What the Real Estate Agent Should do ?
A well trained real estate agent will generally do a preliminary title review of the property they are listing to ensure that the property can be sold without major glitches. As such the agent should always pull the title report (informe registral) and obtain a property survey map (plano catastrado) for the property. This information is available on-line from the National Registry of Costa Rica . With this information the real estate agent should verify that the property which they are going to list and sell is free of any liens or annotations which would make title un-marketable.
Although this appears to be a logical process you would be surprised how many times a real estate agent comes to the Attorney ready to sign a purchase agreement only to discover that the property has a Lis Pendens or some other defect that derails the sale of the property.
Negotiate the Sales Price of the Property
If a Real Estate Agent is involved then they are the ones that are spending most of the time with the Buyer showing them properties. When that Buyer decides on a purchase it is the Real Estate Agent that negotiates the price between Buyer and Seller and sits down with both to establish the price and terms of the sale. Once the there is an agreement about price and general terms and conditions it is time to put it all in writing.
You will need Real Estate Attorney involved in your purchase. The reason for this is that in Costa Rica to transfer and record real estate you need a Notary Public who must be an Attorney. It is the responsibility of the Real Estate Attorney that you hire to safeguard your interests during the purchase process. That is why it is best to have an Attorney involved that is looking for your interest.
What does the Real Estate Attorney do and when should they get involved ?
In real estate transactions that we handle we prefer to designate our escrow company as the escrow agent for the earnest money deposit. Some Sellers will accept this while others will insist on holding the earnest money deposit. You will have to treat this on a case by case basis. Regardless, the conditions of escrow and disbursement of the earnest money deposit to either the Seller or the Buyer needs to be fully addressed and understood by all parties to the transaction. On many occasions we find contracts that are vague regarding the disbursement of the earnest money deposit and vague as to what constitutes a breach of the closing terms and conditions of the agreement.
The Role of the Real Estate Attorney during the pre-closing stage
It is always recommended that you engage your Real Estate Attorney before you sign any purchase agreement and tender any deposit money. Once you have signed and turned over deposit money it is very difficult for the Attorney to advise you after the fact.
During the pre-closing stage the Real Estate Attorney will will perform the following:
1. Initial Title Search
Most title searches initiate with a computerized title search which is conducted at the National Registry where all real estate titles in Costa Rica are recorded. Depending on the property and the findings of the initial search the title search can be expanded to include a more in depth search at the National Registry Archives.
2. Due Diligence
Depending on the transaction the amount of due diligence required must be contemplated and proper time allotted for completion. If you are purchasing a property with the intent of doing a development then the amount and cost of due diligence will be significantly more then somebody that is just purchasing a residential home or condominium.
For example if the property that is being sold is raw land that will be used by the Buyer for construction then it is very important to obtain a Zoning Use [Uso de Suelo] from the Municipal Government where the property is located. This will ensure that the Buyer will be able to use the property as they intend. Some properties have use restrictions and construction coverage limitations which need to be explained to the Buyer during the due diligence process. In addition Costa Rica has many environmental regulations that need to be reviewed to ensure that the property that is being purchased is not affected by environmental limitations.
3. Preparing the Purchase Agreement
Once the Real Estate Attorney has completed their review they will proceed to draft the purchase agreement. The Purchase Agreement should be as detailed as possible since it will be the guiding document for the entire transaction. A poorly drafted purchase agreements can be a source of major conflict when problems arise during the closing process so be sure that nothing is left open for interpretation.
Many real estate agents use their own particular form to set out the offer made by the Seller. Many forms are short and modeled on a US style purchase agreement. Agents must keep in mind that Costa Rican law is very formal in the execution of documents. Failure to comply with some of these formalities could affect the enforceability of your contract. The two most typical pre-sale contracts in Costa Rica are the Reciprocal Promise to Buy and Sell (Promesa Reciproca de Compra Venta) and the Purchase Agreement (Opcion de Compra). These contracts do not formally pass title of the property from the Seller to the Buyer but set out the terms and conditions that must be satisfied prior to closing and establishes the obligations of both the Buyer and Seller during the due diligence period of the transaction. As previously indicated some agents will use their own form and only contact the Attorney to handle the actual property transfer deed. Other agents prefer to have the Attorney involved from the beginning and have the Attorney prepare a formal Buy Sell Agreement. We recommend that the agent pay special attention to transactions that include an inventory in a house or those transactions that require certain construction or repairs to be done to a dwelling prior to closing. This must be spelled out in very detailed form so that each party is clear on what to expect at closing time. We have seen Purchase Agreements that result in bickering and fighting at the closing table because the Buyer expected more than the Seller thought he had to give.
Setting up Escrow When Possible
In the real estate transactions that we handle we prefer to designat an Escrow company as the Escrow Agent for the earnest money deposit. Some local Sellers will accept this while others may insist on holding the earnest money deposit directly. You will have to deal with this on a case by case basis. Regardless, the conditions of escrow and disbursemetn of the earnest money deposit needs to be fully addressed and understood by all parties to the transaction. On many occasions we find contracts that are vague regarding the disbursement of the earnest moeny deposit and vague as to what constitutes a breach of the closing terms and conditions of the agreement.
I am ready for Closing Now What ?
In Costa Rica, the transfer of property title can only pass by executing a property transfer deed before a Notary Public who in turn pays the applicable transfer taxes and records the property transfer deed. It is the responsibility of the closing Attorney to draft the deed and record it. Once the recording is completed they must deliver the original document to the Buyer. If the sale is being done by way of a stock transfer of the corporation the closing Attorney will prepare all necessary documents to transfer ownership of the property from the Seller to the Buyer.
Before Closing Gather the following documents:
Prior to closing the Real Estate Agent should obtain from the Seller all necessary documents that will be required by the Attorney at closing and coordinate with the Buyer to retain the services of those professionals required to complete the due diligence and/or conditions set forth in the Purchase Agreement.
i. Utilities. Make sure the Seller is current with the payment of all utilities, Electric, Water, Telephone, Cable TV & Internet. Be sure the Seller will leave a telephone line in the property for the Buyer.
ii. Property Taxes. Make sure the Seller has paid the property taxes and ask them to produce a receipt and or certificate that the property is current in tax payments. Don’t wait until they are at the closing table for the Seller to tell you that he hasn’t paid the taxes.
iii. Condominium Property Sales. When the sale of a condominium is involved the Condo Association must provide a copy of the CCR’s (Reglamento del Condominio). Also required is a letter from the Condo Association indicating that the condo unit that is being purchased is current with all fees and assessments. I also like to see a copy of the financial statement of the condominium to look at it’s financial situations. After all when you purchase in a condo you are inheriting the association as well and you would not want to inherit their liabilities.
iv. Home Inspections. If the Purchase Agreement specifies that a home inspection must be prepared prior to closing then the Real Estate Agent should coordinate the inspection with the inspector and the Seller of the property to insure it is done well in advance of closing. This way, the Seller has ample time to correct any deficiencies that would delay closing.
v. Review the Property Inventory. If the property being sold includes a home and an inventory list of items it is very important for the Real Estate Agent to properly describe and list each item included in the sale. Prior to closing the Agent and the Buyer should inspect the home once again to insure that the items described in the inventory list are as warranted. You would be surprised how many misunderstanding arise at closing because of a poorly drafted and detailed inventory list.
How Should I Title My Property ?
The most typical forms of ownership are
(a) Personal ownership. This is where the property is owned in the personal name of one individual.
(b) Joint Ownership. This is where one or more individuals own the property jointly and each have an undivided interest in the property. This is locally referred to as “derechos”.
The Buyers should be aware that this is NOT the equivalent of a Joint Tenancy with Right of Survivorship (JTWRO) that is common in the United States where the joint tenant automatically inherits title to the other joint tenant. In Costa Rica the 50% owned by your spouse will not automatically pass to the other spouse upon death and must be probated.
(c) Corporate ownership. This is a property titled in the name of a corporation. In this form of ownership the Real Estate Agent should verify with the Seller that he has the authority to act for the corporation. Ideally the Agent should procure from the Seller a copy of the corporate documents.
You will not be able to use your foreign (non Costa Rican company) unless you go through the tedious process of having that foreign corporation registered in Costa Rica.
The decision as to the best structure for you will depend on your personal circumstances and you should discuss these options with your Attorney to determine which is the best fit for you.
What Does This All Cost ?
The Real Estate Agent should ensure that the commission agreement is specified within the Purchase Agreement signed by the Buyer and the Seller. The agent should include provisions which contemplates any commission split in the event of a default by the Buyer. I like to include a clause which authorizes the escrow agent to disburse the commission directly to the real estate agent simultaneously at closing.
The Real Estate Attorney / Notary Public must abide by the minimum Fee Schedule established by the Costa Rican Bar Association Compliance with the minimum fee schedule is mandatory for all Costa Rican Attorney’s / Notaries. For real estate transactions the current minimum fee schedule is:
First 11 Million Colones 2%
Excess of 11 to 16.5 Million Colones 1.5%
Excess of 16.5-33,5 Million Colones 1.3%
Excess of 33.5 Million Colones 1.0%
The parties to the closing transaction must deliver to the Notary Public the applicable property transfer taxes and registry recording fees due on the transaction and these typically include: (a) Property Transfer Tax of 1.5% (b) National Registry Fee of .5% (c) Documentary Stamps of Approximately .6%. You can estimate your closing costs on our Real Estate Closing Costs Calculator
For many years there was a common practice to transfer the stock of a corporation instead of the property itself to avoid the property transfer taxes. However, the government imposed an indirect transfer tax which taxes the transfer of stock of corporations that own real estate. It is generally much cleaner to transfer the property outright since it cuts off any potential liability for that property. If you purchase the existing corporation it involves additional due diligence on the corporation. ince there is no centralized corporate debt filings in Costa Rica there is no way to check for hidden liabilities. As such, when purchasing by way of a corporation the Buyer will assume a certain degree of risk which would not be the case when you transfer title to the property outright.
I Own the Property Now What Do I Need to Do ?
If all the parties to the transaction have followed the guidelines set forth above and worked together during the entire closing process the closing should be smooth. I don’t like surprises at closings and neither do the other parties to the transaction. By dealing with all issues up front and well in advance of closing we can address any problems that arise so that closing is limited to the exchange funds and execution of the closing documents.
The following are some of the items you will need to address once you have purchased your property.
1. Dealing with Utilities
(a) Changing the Name on the Utility Bills. Once the property transfer title is recorded it is the responsibility of the property owner to transfer utilities from the name of the Seller to the name of the Buyer. Although this would appear to be a simple task, in Costa Rica it is not so be sure you discuss this with the Real Estate Agent and Real Estate Attorney so you have a process in place to get this done post closing.
(b) Delivery of Utility Bills to the New Owner. The Real Estate Agent should obtain copies of the utilities installed on the property [electric, water, telephone, cable TV, internet] to determine where the bills are being mailed or delivered. The best way is to have the bills sent to your e-mail address.
2. The Local Municipal Government.
When your purchased your property your Real Estate Attorney / Notary Public recorded the deed in the Property Section of the National Registry which is the official national registry for recording titles to property. However, you pay property taxes at your local Municipal Government. The two are currently not connected in a way that the local government knows when a sale has occurred. As such it is the responsibility of the Buyer once they receive the recorded property transfer deed back from the Attorney to deliver a copy to the Municipal government and fill out a property tax declaration form to inform them of the transfer so they can collect property taxes from the new owner. The property tax law requires that a Property Tax Declaration Form (Declaración de Bienes Inmuebles) be filed by every property owner every five  years. This form is the basis used by the Municipal Government to establish the value of the property which in turn is used to calculate the property tax. At present the property tax rate is 0.25% of the value of the property and it is paid quarterly. Some property owners elect not to fill out the form and by not doing so the Municipal Government has the right to conduct an appraisal of the property and set the property tax. You can read my article on Costa Rica Property Taxes here.
Congratulations you are now and expert in the Real Estate closing process in Costa Rica !
This article is copyrighted to Roger A. Petersen and may not be reproduced without the express written consent of the author. Contact me if you have any questions about the closing process in Costa Rica.