The Process for Purchasing Property in Costa Rica

Unfortunately, I have seen and heard enough stories of people losing thousands, or millions of dollars because of bad real estate transactions. Sadly, more often than not, people look for legal advice when they already have gotten into a problem. It is rare for people to think of legal services as a preventive measure in order to avoid a fiasco.

This time, I am going to elaborate on the intricacies of buying or selling real estate. Hopefully, you will find this information valuable as a starting point when planning to buy real estate in Costa Rica. Please note that although my goal is to elaborate into real estate in Costa Rica, some of the language used is the English version as used in most US jurisdictions. I decided to do it with the US language as most readers are from the US. If you are not familiar with some of the terms, then my suggestion is to first educate yourself with some of the legalities related to property law in your state. You can acquire “Property Law for Dummies” through Amazon

Legal Options for Owning Real Estate

Under Costa Rican law, the following options are available to purchase and to own real estate.

Fee Simple Absolute

It is the absolute title for a piece of land, free of any other claims against the title, which one can sell or pass to another by will or inheritance. This is a redundant form of “fee,” but is used to show the fee (absolute title) is not a “conditional fee,” or “determinable fee,” or “fee tail”.

Tenancy in Common

This option allows two or more people to have title of a given piece of property, in which each has an “undivided interest” in the property and all have an equal right to use the property, even if the percentage of interests are not equal or the living spaces are different sizes.

One example is that two friends decide to purchase a hectare of land in the country or a house in the city. Their ownership is going to be defined in the deed according to their agreement. It can be in equal parts of 50% each, or any other proportion they see appropriate. Once the deed is recorded in the recorder of deeds (Registro Nacional) the records will show how much ownership each person will have for the property in question.

Tenancy by the Entirety

This is a variation of co-tenancy, in which there is joint ownership of title by husband and wife, and by which both have the right to the entire property.

Although, the Recorder of Deeds may not necessarily reflect the 50% ownership of both spouses, the reality is that under Family Law, each spouse is entitled to 50% of the assets of the other spouse. If, during the marriage a couple purchases a home, lot, condo, etc, each spouse is 50% owner of that property. Rarely, couples proceed to indicate in the deed the proportional ownership of the property, which as you may expect, will later result in legal battles in family court if they decide to get divorced.

Life Estates

A life estate is the right to use or occupy real property for one’s life. Often this is given to a person (such as a family member) by deed or as a gift under a will with the idea that a younger person would then take the property upon the death of the one who receives the life estate. Title may also return to the person giving or deeding the property or to his/her surviving children or descendants upon the death of the life tenant-this is called “reversion.”

Life estates are not very common. An example is when an owner wants to pass property to his/her children prior to death. The owner passes the ownership but retains the right to use the property until his/her death. Upon death, the possession and the right of use will be passed to the children.

As you can see, these options are very similar to the ones you can find in other countries. There is something that baffles me and bothers me about expats buying real estate in Costa Rica; they seem to forget about the rules they knew back home. I have seen it time and time again, when expats buy real estate in CR, their common sense dissipates into thin air and disaster happens. For instance, I have seen endless number of times when expats “buy” real estate and do not get any type of title to the property, they believe it is normal because they are in another country and they believe this is the way things work, and they believe that because their attorney told them, or the real estate agent told them, or they found it in a blog.

What to buy and not to buy and the myth of the corporation option

Let’s debunk a fallacy: It is not required to have a corporation in order to own property in Costa Rica. If you buy property in Costa Rica, then buy property, do not buy a corporation.

Unfortunately, expats have become prey of mediocre unscrupulous attorneys. Expats have been sold the idea that they are required to have a corporation to do almost any transaction in Costa Rica, such as to purchase and own real estate, or to own a vehicle, or to open a bank account and even to own guns. In some instances, their attorneys tell them to get the corporation to protect their assets from liability in case they have a car accident. Well, there is a simple solution to that: buy insurance!!! Furthermore, in Costa Rica, the courts have been adopting the theory of “piercing the corporate veil” when the corporation is not used for its intended purposes, which is to do genuine business, not to hide assets.

Anyhow, the Costa Rican Constitution protects the rights of foreigners to own real estate. According to Section 19th, foreigners have all and the same rights as Costa Ricans, including the right to own property. Therefore, foreigners can own property outright, and as far as ID requirements, a passport will suffice, there is no requirement to own a property through a corporation. I have not met a person in this country who can convince me that having a corporation is a good idea as far as owning real estate, especially when considering the increasing difficulties to deal with corporations, which is a topic for another discussion. Having a corporation can be convenient when you actually have a business.

If you are looking to buy a piece of real estate, keep the above ownership options in mind. However, the best thing to always buy is fee simple absolute, where you are the master of your domain and you are not sharing any ownership rights with anybody.

When buying real estate, before you make an offer or during the Due Diligence Period,  you would like the make sure that the property has at least the following:

1. Survey (plano catastrado) which must be approved by the county and registered with the recorder of surveys (Catastro Nacional).
2. Property ID (folio real).

Both the survey and the ID confirms the property legally exists. If you are offered a piece of land with none of these features,  just make things simple for you and walk away from it and avoid trouble. However, there are instances where the seller owns a big piece of land and wants to sell you a little piece of that land, but if that little piece has not been registered or surveyed. It is legally possible to purchase that piece of land in a safe manner, but very specific clauses need to be added to the purchase agreement, in addition an escrow must be included as part of the purchase agreement. We will discuss these items below, but once again, try to buy a piece of land that has already been recorded.

You will also want to consider the following issues:

Whether the property is in the maritime zone.

First of all, Maritime Zone (ZMT) regulations does not allow foreigners to “own” property in this zone,  you need to be at least a legal resident. Second, ZMT has been clouded with a lot of corruption, red tape and mediocrity from government institutions, such as the local municipalities and the ICT. Once again, do yourself a favor and stay away from it.

I am sure that you may know people who own it, but ask them how difficult it was or whether they own it outright.

But let’s start with making something clear, with ZMT, you do not get ownership, you get a lease, which is not freely transferrable at your own will. Everything that happens with ZMT needs to go through the Municipality and/or the ICT. There are some beach front properties that may not be affected by the ZMT, a due diligence will clear this out for you in order to decide whether to buy.

Whether the property is IDA or IDER property.

These properties where granted by the CR government to poor people in order to farm and make a living, and it came with strings attached.

Whether the property has water and other utilities.

It rains a lot in Costa Rica, and I am surprised to see how many people have water issues. When it comes to real estate, water is a particular issue if you want to build. No water translates into not being able to obtain a building permit.

Whether it has any easements or covenants of title.

It is common to see, particularly in rural areas, that a tract of land will have easements for water or transit. Make sure to understand the limitations the property has when it comes to these issues.

Whether it has any liens.

A report from the recorder of deeds will indicate whether your property is subject to litigation or whether it has a mortgage. Needless to say, this is a significant issue.

To Build or Not to Build

Are you planning on building your dream home? If you have already built a home before, then you know what to expect. But, if you have not ever built a home before, then be prepared for a ride. If you know someone who built a home back in your hometown, go and ask them what their experience was.

Bad contractors are as common as bad attorneys and bad real estate agents. There is certainly a number of people who do a good business, but you are always running the risk to deal with the bad apples. If building a home in the US (Canada or Europe for that matter) is a daunting task, imagine doing it in a foreign country where you do not speak the language, of which you do not know the laws, and you are surrounded by people eager to suck the last drop of cash out of you. Would you do it? Once again, I would suggest to lower your risk and buy something already in place. Otherwise, get ready to get some Pepto-Bismol. Contractors in Costa Rica are not regulated, so anybody can be a contractor in Costa Rica, the same way that everybody is a yoga instructor, a photographer, and a chef.

When building a home, you need to consider two legal situations, doing the deed for the transfer of the land, and doing the construction contract. Be particularly careful when the seller and the contractor is the same person, try to avoid that situation and use a simple principle: do not put all of your eggs in one basket. There are certainly a number of projects in this category who actually do a good business, but special considerations need to be included in the contracts in order to lower your risk.

How to Buy Real Estate

Have you found that piece of heaven you want to buy? 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 of them are very eager to sell you what they have, and are willing to say what you want to hear and to lie to you as well. My suggestion, be skeptical. Do not trust anybody.

They want to rush you through the deal. Costa Rica is currently a buyers’ market. There are thousands of properties for sale and that have been sitting there for years. Do not feel rushed by the seller and the agent. They all want you to believe that the properties are selling like hotcakes and that you need to close within a month. My suggestion, 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 5%. Do the offer in writing, even though real estate agents are not used to it here.

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:

1. 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.
2. A complete description of the property, including survey number, property ID, location, size, whether it has any structures, whether it has any easements, etc.
3. 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.
4. The method of payment should include the earnest money and details for the escrow. Never pay more than 20% for earnest money.
5. Description of the closing costs and indication of who will pay the closing costs.
6. The name of the Escrow Agent.
7. The name of the Notary Public who will do the closing.
8. Due Diligence Period. You want to allow yourself some time to do some research on the property.
9. 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:

1. it is registered,
2. it has an ID,
3. it has a survey,
4. it is clear from liens and encumbrances, and it does not have any encroachments
5. the seller is the legitimate owner and that there is a clean chain of title
6. it is suitable to build, or that existing structures have building permits
7. it has water
8. taxes are up to date
9. if it is in a corporation, that the corporation is clear
10. 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.

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:

1. 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.
2. The parties to the contract should sign a share transfer agreement which should contain the details for the transaction.
3. The information for the new owner of the shares should appear in the registry book for share holders.
4. 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 in order to avoid being victim of fraud.

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.