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Real Estate Transactions
The purpose of this article is to highlight the responsibilities and procedures that need to be followed to have a successful real estate closing in Costa Rica. We have handled thousands of real estate transactions in Costa Rica.
What is the Responsibility of the Real Estate Agent ?
First and foremost, it is crucial to address whether the Real Estate Agent works on behalf of the buyer or the seller. Typically, the Real Estate Agent acts as an agent for the seller, as they are compensated through the real estate commission paid by the seller. However, when a Real Estate Agent has a signed contract with the buyer to represent their interests, they become a “buyer’s agent,” and their fiduciary duty shifts to the buyer. To prevent conflicts of interest during the transaction, it’s advisable for the real estate agent to clearly communicate whom they are representing from the outset.
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 there is an agreement about price and general terms and conditions it is time to put it all in writing.
What does the Real Estate Attorney do and when should they get involved ?
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.
The Role of the Real Estate Attorney during the Pre-Closing Process
In the process of purchasing real estate in Costa Rica, the involvement of a Real Estate Attorney is essential due to the legal requirement for property transfers to be executed before a Notary Public, who must also be an attorney. The role of the attorney is to safeguard the buyer’s interests throughout the purchase process. Thus, engaging a knowledgeable attorney before signing any purchase agreement and depositing money is highly recommended to ensure proper legal guidance from the start.
During the pre-closing stage, the Real Estate Attorney performs a series of crucial tasks:
- Conducts an initial title search by accessing the National Registry to ensure the property’s title status.
- Undertakes due diligence based on the nature of the transaction, which could involve more comprehensive searches for certain property types.
- Prepares the detailed purchase agreement, which outlines the terms and conditions of the transaction and serves as a guiding document for the process.
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 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.
I am Ready for Closing Now What ?
In Costa Rica, the transfer of property title exclusively occurs through the execution of a property transfer deed before a Notary Public, who then handles the payment of relevant transfer taxes and the recording of the property transfer deed. The duty of drafting and recording the deed lies with the closing Attorney. Following the completion of the recording process, the Attorney is responsible for delivering the original document to the Buyer. In cases where the sale involves a stock transfer of a corporation, the closing Attorney will compile the requisite documents to effect the transfer of property ownership 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.
- 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.
- 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.
- 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.
- 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 explicitly outlined within the Purchase Agreement, a document signed by both the Buyer and the Seller. The agent should incorporate provisions that account for commission splits in the event of a default by the Buyer. Additionally, I recommend including a clause that grants the escrow agent the authority to disburse the commission directly to the real estate agent concurrently with the closing process.
The Real Estate Attorney / Notary Public is bound by the minimum Fee Schedule established by the Costa Rican Bar Association. Compliance with this minimum fee schedule is obligatory for all Costa Rican Attorneys / Notaries. In the context of real estate transactions, the current minimum fee schedule is as follows:
- Up to 11 Million Colones: 2%
- Exceeding 11 to 16.5 Million Colones: 1.5%
- Exceeding 16.5 to 33.5 Million Colones: 1.3%
- Exceeding 33.5 Million Colones: 1.0%
It’s important to note that this Notary Transaction Fee covers the drafting and filing of the property transfer deed. Any supplementary services such as drafting a purchase agreement or establishing an escrow account are separate and additional charges.
The parties involved in the closing transaction are responsible for remitting the appropriate property transfer taxes and registry recording fees to the Notary Public. These fees usually encompass: (a) Property Transfer Tax at a rate of 1.5% (b) National Registry Fee of 0.5% (c) Documentary Stamps at approximately 0.6%. An estimation of your closing costs can be obtained using our Real Estate Closing Costs Calculator.
For a considerable duration, transferring the stock of a corporation was a common practice to evade property transfer taxes. Nevertheless, the government introduced an indirect transfer tax that applies to the transfer of stock of corporations owning real estate. Opting to transfer the property directly is generally more straightforward and eliminates potential liability concerns associated with the property. Acquiring an existing corporation involves additional due diligence due to the lack of centralized corporate debt filings in Costa Rica, making it difficult to identify hidden liabilities. Consequently, when purchasing through a corporation, the Buyer assumes a certain level of risk that wouldn’t apply when transferring property title 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.
- 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.
- The Local Municipal Government.
When you 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 [5] 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.
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