Purchasing is Easy! Simple Steps to Purchasing in Costa Rica
Once we have found a property that you would like to purchase, we will then go through the following steps.
- Submit an Offer Letter / Purchase Sale Agreement
- Once the offer is accepted, your lawyer will set up an escrow and deposit 10% of funds.
- Due Diligence will be done which includes a title research on the property and that there is are no liens or outstanding debt.
- Closing will involve Transferring the Deed, Endorsement of Shares and/or Mortgage Deed and distribution of funds.
Step 1. Option to Purchase – The Offer
Once we have found your property, I will speak with you regarding the terms of the offer and if contingencies will be included. We will then submit an Offer to Purchase, also known as a Letter of Intent to the Seller’s listing agent. The seller’s agent will submit to the seller.
Step 2. Deposit Fund into Escrow Account
After the Offer is accepted, you will then take that to Costa Rica attorney and they will draft the formal Sale and Purchase Agreement. This document is a legally binding document, and it clearly states all conditions necessary for the transfer of the deed.
Your lawyer will also establish an Escrow account to handle the deposit and final balance payment. In most cases an Escrow service is recommended as a third party holding for deposits and final balance transfer to the seller at closing. An escrow service such as Chicago Title and or Stewart Title will act as a neutral third party and only do as stated in the mutually signed sales contract. Highly recommended, and the service is typically paid for by the Buyer at a minimal cost.
Some attorneys have Escrow and trust accounts, however to be assured, I would recommend in most cases utilizing an internationally recognized Escrow title company such as Stewart title or Chicago Title, these are names you most likely recognize and will give you the reassurance you may be looking for when transferring large sums of money to a foreign country. If you do decide to hold the money in the lawyer’s escrow, they charge less and we do work with some who can do this.
An escrow account can be used in the sale of a house, for example. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In this case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a third party. This assures the seller “in the process of allowing the house to be inspected “that the buyer is capable of making payment. Once all of the conditions to the sale are satisfied, the escrow transfers the payment to the seller, and title is transferred to the buyer.
Documents you will need to provide for Escrow
NOTE: All escrow service companies will require you to have the following:
Two forms of identification (all pages) must be valid and issued by a government entity (only one ID required from seller)
Escrow Agreement duly executed by both parties (handled by the lawyers)
Know Your Customer (KYC) form duly executed by the Depositor.
Copy of Utility bill showing buyers current physical address (less than three months old)
Proof of income supporting transaction amount (Any of: Tax Returns, W2 Form, CPA Letter, IRA, A Final Closing and Purchase agreement will be established approximately 5-10 days prior to closing to ensure all is in order. The closing documents will include, a Closing statement and Escrow agreement, (which outlines the disbursement of funds, attorney’s fees, taxes, commissions, mortgages, Escrow and title fees, and all other fees that must be paid out of the sellers proceeds prior to the seller receiving funds (a separate closing statement will be issued to the buyer and the seller with their respective closing fees)), Final Purchase agreement, and a Share transfer (in the case a corporation is purchased which holds the title). The appointed Escrow Company will be responsible for issuing payments to all respective parties and ensure payments are completed. Register final title or corporation transfer in the National Registry. You attorney will be responsible for the final registration in the National registry to show you as the new titleholder and or manager of the holding corporation. I will always advise that in any case, you follow up with your attorney as well as request your real estate agent to follow up with your attorney until the registration is completed 100% (this process can take between 2-4 week to reflect in the national registry, however all documents are legally signed and you are officially the owner and title holder).
Step 3. Title Search – Due Diligence
Your lawyer will then complete the Due Diligence, which is the complete legal research of the property to insure there are no liens, contingencies, legal issues, and that it has absolute fee simple title. Surveys, soil tests, home inspections, and other studies requiring professional services are included in this period. If the property is being sold with an existing company, then the research of the company for any legal contingencies will also be completed during Due Diligence.
Folio Real – Part of Due Diligence
Most properties in Costa Rica are registered in a system called “Folio Real.” This system is centralized at the offices of the Public Registry in San José. Before buying land, or even before seriously considering an offer to buy land, a title search in Folio Real should be performed which is done by your lawyer during due diligence. Such a title search will show all data on the property, including area, ownership, boundaries, location, mortgages and other liens.
Ownership through a corporation allows one to have flexibility and more predictability in areas ranging from estate planning (if share ownership is properly structured the investor can avoid his heirs a painful and lengthy long-distance probate procedure), tax management (as an example, rules on corporate expenses are more flexible than the ones on personal ones), and representation (shareholders meetings can facilitate granting special powers of attorney or other types of authorizations for many actions thus not requiring local presence in the country).
The first question often asked by our clients is whether to use (or form) a Costa Rican corporate entity or use one already existing and controlled by such individuals abroad. Our advice is, in most cases, the use of a local entity. Although foreign corporate entities can own land and engage in business activities in the country, registration procedures (both at the Public Register and with government entities) as well as negotiation of contracts with private parties can get complicated, delayed and/or find obstacles when they are involved.
In any event, if a foreign entity will be used, note should be taken that we normally recommend registering the foreign entity in the Costa Rican Commercial Register as a branch or at least to register specific powers of attorney for such also in the Costa Rican Commercial Register. Both cases require a special and formal procedure that may take several weeks.
As mentioned before, in the great majority of cases, the use of a local corporate entity is preferred. Although Costa Rican commercial law contemplates many types of corporate forms, only two of them offer the investor the comfort of having structures similar to the limited liability companies to which he or she may be used to in their countries of origin.
Such corporate forms are the Sociedad de Responsabilidad Limitada and the Sociedad Anonima. In both cases, shareholders are only responsible for their participation on the company’s social capital and their own personal assets are fully protected and out of reach from any potential creditor the company may have.
Step 4. Closing
The Closing (conveyance of the deed) occurs before a Costa Rican Notary Public, who will register the property under the new company or owner. Alternatively, if the property is being purchased with an existing company, then the shares of the company are transferred at this time by a Shares Transfer Agreement. In this case the Notary Public will make the corresponding changes to the company’s ownership in the National Registry.
Declaring the property before the corresponding Municipality for property tax purposes by filling out a simple form and presenting it along with the some other documents either yourself or through your attorney
The government collects a 2.5% transfer tax on all Real Estate transfers. The total taxes levied on a purchase are about 3.8% of the declared value. Nevertheless, a lot of homes are held as a corporation, so simply buying the corporation includes the Real Estate as an asset and no transfer tax is required, just a small attorney (Notary) fee of 1-1.25% of the declared value. The cost for setting up a new corporation, called a Sociedad Anonima, is about $800.00. Title insurance is also available here through Chicago Title and Stewart Title Latin America, your attorney or realtor can advise on this option.
Real Estate taxes here are very little, ¼% of the total value. Taxes on a $100,000.00 home are about $250.00 per year.
Financing real estate in Costa Rica is not always an easy task, but possible.
Bank financing is similar to that found in other countries. The down side to bank financing are the interest rates. Current interest rates on real estate loans are very high, 8% to 15% per year. An option used here is to obtain an interest only loan for 3 to 5 years. The interest is paid and a final payment is made for the principal amount. Many United States and Canadian Banks have branch banks here. The possibility exists to arrange for a secured loan in the US or Canada and use the funds to make a cash deal here in Costa Rica.
One viable option, and one of the better ones, is to arrange for the seller to carry the mortgage on the property. Many sellers will, some will not. Your attorney or realtor can offer advice during the pre-search, qualifying process. One thing, do not look for 25 or 30 year loan terms. The normal is 3 to 5 years with a balloon payment.