Property Purchase Agreement Process | Negotiation | Consultation | Terms and Conditions |
There are many ways by which the acquisition of a property in Costa Rica can be handled. From the simple hand shake and immediate purchase (not recommendable) to the most detailed review and acquisition process. The level of detail of the process will depend on the complexity of the transaction and of the property being acquired, but, in general terms, the normal acquisition of a standard property in Costa Rica is a rather simple process if properly held.
For explanatory purposes, we have divided the typical process of the acquisition of a property in Costa Rica by a foreigner in the following stages:
a)- first steps and negotiation of the Letter of Intent or Offer to Purchase: this is the phase during which Buyer is looking for a property, finds a property and negotiates the terms and conditions of the transaction, ending up with a Letter of Intent or Offer to Purchase signed and accepted by both Parties;
b)- sale and purchase agreement: during this phase a formal reciprocal promissory sale and purchase agreement (SPA) is prepared and executed by the parties setting in details the terms and conditions of the transaction and during this phase the typical initial deposit (earnest money deposit) will take place;
c)- due diligence period: during this phase the corresponding due diligence is performed as per the terms and conditions agreed by the parties in the SPA, in order to determine if the terms and conditions agreed by the parties for the transaction can be achieved or not;
d)- closing: in this phase the closing of the purchase of the property takes place, the price (or its initial payment as it may have been agreed in the sale and purchase agreement) will be paid to Seller and the corresponding transfer documents will be executed by the Parties;
e)- inscription in the Registry: during this phase the transfer documents will be sent by the Notary Public that handled the processing of the documents to the Property Registry and the corresponding registration of the documents will take place.
B)- First steps and negotiation:
During this phase, you will be initially looking for a property that fits your desires and needs.
While the market is full of different types of offerings, it is advisable to use the help of a good reputable real estate agent or broker in the process of finding the property that you need. Such an agent or broker will be able to show you different types of properties in the area you are searching and should be able to provide you with helpful insights of the area and the properties being visited.
At the present time, real estate brokering or activities as a real estate agent are not fully regulated in Costa Rica and you will find all types of persons or outfits performing (or pretending to perform) such type of activity, from the opportunistic fellow who thinks he deserves a full commission for merely introducing a buyer to a seller willing to sell a property without doing anything else to the fully fledged agent or broker who will provide you with a complete service in your search for the property you need.
At the end of this phase, if you find the property that fulfills your needs, you should be reaching an initial agreement with the Seller (through the help of your agent or broker) about the terms and conditions that will apply to the transaction. Typically, the parties will be signing a Letter of Intent or Offer to Purchase document that will establish the basic terms and conditions for the transaction, which shall be included in the corresponding SPA.
If you are not using a real estate broker or agent and are purchasing on your own, we can provide you with the corresponding services for the preparation and review of the Letter of Intent or Offer to Purchase.
Items to be considered.
You need to make sure that clear agreements and understanding exist on all of the items that will rule the transaction. Such items, for explanatory purposes, should include the following ones:
Likely this is the main item, and therefore it should be clearly established and determined. Some recommendations:
i)- make sure that the figure is clearly understood by both parties and the currency being used is clearly agreed;
ii)- clearly establish how the price will be paid, that is, determine if the transaction will be a cash transaction (payable at closing) or if terms will apply;
iii)- if terms are to be applied, make sure that the corresponding schedule of payments is clearly determined indicating the date of each payment and the amount to be paid in each date; if a guarantee instrument will be used to guarantee the payment of the balance of the price, make sure it is clearly established what type of instrument will be used;
iv)- if interests will be paid over a balance of the price, make sure the interest rate is determined and make sure to include the periodicity of the interests payments as well as if the interest are paid by due period or in advance;
v)- normally, an initial deposit will be required, and its amount will be established by joint agreement by the parties; this initial deposit is normally placed with an escrow agent and remains refundable (should the due diligence determine that the terms and conditions of the transaction can not be met) during the totality of the due diligence period; normally, once the due diligence period is finished, and if the due diligence did not produce any negative results which do not allow the terms and conditions of the transaction to be completed, then the initial deposit will become hard and non-refundable and will be paid to Seller at closing; in normal circumstances, if the due diligence produces negative results which do not allow the terms and conditions of the transaction to be completed (e.g. liens that can not be removed, lawsuits, etc) then the initial deposit will be returned to Buyer (minus the corresponding escrow agent fees); typically, if once the deposit becomes hard and non-refundable Buyer changes his mind about the purchase for reasons not legally justified then the deposit will become the ownership of the Seller whom will take it as his full indemnification; the above indicated terms for the initial deposit are an example of the typical rules existing in the current market, so, please keep in mind that the exact terms on how the initial deposit will be handled will be set by joint agreement by the parties and therefore could be different than the ones above used as an example;
vi)- make sure that there is clarity on the who the escrow agent will be; typically, Buyer will have the right to select the escrow agent; in any case, make sure that the selected escrow agent is a reputable one; the escrow agent should be registered on in the process of being registered with SUGEF (the Costa Rican entity ruling and supervising financial operations), and the account to which the funds will be sent should be an account specifically dedicated to such type of operations by the escrow agent; also make sure that the escrow agent fees are clearly determined; typically, such fees will be paid by Buyer; we can help you with finding and referring you to a reputable escrow agent.
b)- conditions of the property:
This item comprehends the conditions in which the property is expected to be received. Some recommendations:
i)- clearly establish what the conditions of the title will be at closing, that is, if the title will be clean and with no attachments or liens of any type, or if there are any attachments (such as existing easements or other registered conditions) which you will be accepting; for such purposes it would be good to have your legal counsel at Sanchez and Associates make an initial review of the title of the property to initially establish the existence of any liens or attachments on the property; if the property has any mortgages or other attachments that shall be cleaned by Seller at closing, make sure that this is established;
ii)- if any other specific items are agreed (such as specific conditions of the property or of any existing improvements) they shall be established in a clear manner;
iii)- make sure that you have clarity on how the property is accessed from a public road; it may be that the property borders with a public road in which case you will have a direct access to the public road, but it also may be that to access your property from a public road you have to go through an access road or easement; in this later case, you need to make sure that: i)- a legal easement will be established on favor of your property allowing you access to the public road, and ii)- there is clarity on any obligations assumed in regards to road maintenance;
iv)- it is important that the property has legal water availability, that is that is has water from a public water system or it has water from a source (water stream or water well) for which the property has a registered concession (the right granted by the authorities to use such water); having legal water availability is a requirement to obtain building permits;
v)- if electric power availability is a required item for your purchase decision then you may want to include a condition requesting public electric power lines to be located in front of your property; electric power availability is also a requirement for building permits;
vi)- make sure to include a condition indicating that the property must be up to date in the payment of land taxes, Luxury Residence Tax (should it apply), any other applicable municipal or national taxes and any applicable municipal or national fees.
c)- Closing date and place and preparation of closing documents.
The date on which closing will take place needs to be determined by the parties, as well as the place where the closing meeting will take place. It is also important to indicate which Law Firm or Law Firms will be handling the preparation of the documents and the actual closing documents and their registration. Make sure that your legal counsel or the Law Firm representing you will be a part of that process and, especially if you are sharing the closing costs, that the fees arising from the legal transaction will be shared by your legal counsel or Law Firm and the one representing Seller, should they be different ones (in some cases, the parties agree to have the same legal counsel or Law Firm represent both of them).
d)- Closing costs.
It will also be necessary to indicate how the closing costs will be paid. Closing costs, as customarily understood in Costa Rica, include Notary fees, registration stamps and transfer taxes. Normally, unless otherwise agreed by the parties, such closing costs will be shared in equal parts by Seller and Buyer. Each party may incur in other costs related to the transaction, which are paid by the corresponding party incurring in them (such as, in the case of Buyer, the costs related to the due diligence –see below-).
e)- Other items.
Depending on the case, other items may apply to your purchase. For example:
i)- if the property you are acquiring is subject to some sort of Covenants, Conditions and Restrictions (also known as CCRs), you may want to establish a period of time during the due diligence for you to have an opportunity to review them with your legal counsel and determine if you want to continue with the purchase or not;
ii)- if the property is subject to common obligations with other properties, such as water system fees or road maintenance fees, make sure that the yearly amount of those fees is established as well as an indication on how such fees are adjusted or determined.
C)- Reciprocal Promissory Sale and Purchase Agreement (SPA).
Once you have reached an agreement with Seller for the terms and conditions of your purchase and the corresponding document (Offer to Purchase or Letter of Intent) has been signed by both parties, said document should be sent to your legal counsel in order to have the corresponding SPA prepared.
This Agreement will be a document in which the terms and conditions of the transaction will be established in more detail and which will serve as the main guide document for the purchase process.
Likely, an initial draft will be prepared and submitted to all parties for their review and comments. Once a final version is approved by all parties, it will be executed and signed by all of them.
D)- Due Diligence.
During the due diligence period established by the parties, Buyer (normally through his legal counsel and in part through the agent or broker for the transaction) will have the opportunity to review several items in regards to the property being acquired in order to make sure that the condition of said items is consistent with the terms and conditions agreed by the parties and therefore ratify the decision to purchase the property.
The number of items that are to be reviewed during the due diligence will depend on the demands of the Buyer, but, for illustration purposes, we could say that there are typically three groups of items:
a)- basic items, which are the minimal items to be checked in order to ensure that the acquisition of the property (as far as to make sure that you will get ownership of the property) can happen successfully;
b)- desirable items, which are items that would be desirable in order to make sure that you get a clear understanding of regulations that may be applying to the property you are acquiring;
c)- additional items, which are items that would be ideal to have performed during the due diligence period.
Depending on the point of view of the Buyer some items could be considered part of a category different than the one where they have been included as our classification is merely for illustrational purposes.
a)- Basic items:
Within this category we consider the following items:
i)- a review in the Property Registry of the title inscription of the property, and of the title's history for at least 10 years back in time; this review will allows us to achieve several goals such as confirming who the registered owner of the property is, finding out if the property holds any mortgages or other sort of pledges, verifying if the property is subject to any attachments (such as leases, easements, etc), reviewing if the property is subject to any liens and being able to check is any important situations have happened in regards to the title during the last ten years; it is important to indicate that the review is based on the records of the title inscription as they are shown by the Property Registry;
ii)- a review of the inscription of the current existing survey of the property; normally, the title inscription of the property will indicated a survey number for the property; the review of the inscription of said survey will help in verifying that in effect such survey is properly registered and corresponds to the respective property; this review is based on the records of the survey inscription as they are shown by the Survey Registry (Catastro Nacional);
iii)- a review of land and municipal taxes owed by the property; this review is made with the corresponding Municipality of the jurisdiction where the property is located and it allows to review if land taxes and any other taxes applicable to the property by the Municipality are paid and up to date or, in the opposite case, to know what is the amount owed;
iv)- a review of Luxury Residence Tax situation; at the present time, Costa Rica applies a tax to Luxury Residences (properties with residential use improvements with a value higher than 133 million colones -$221,666.66 at the exchange rate of 600 colones per dollar); therefore, if the property you are buying includes residential use improvements it will be necessary to review the situation of the Luxury Residence Tax for the property in order to make sure it is paid and up to date or, in the opposite case, to know what is the amount owed;
v)- a review to confirm that Seller is up to date on all obligations required for the transfer of the Property.
b)- Desirable items:
Within this category we consider the following items:
i)- zoning certification; this item basically comprehends obtaining a certification from the Municipality of the jurisdiction where the property is located, indicating if the property is zoned for the intended use for which Buyer is acquiring it; to obtain this certification, a copy of the survey of the property being acquired is submitted to the corresponding Municipality with a request indicating the intended use for the property;
ii)- boundaries review and survey auditing; for these purposes an independent surveyor is sent to the property being acquired in order to measure the boundaries of the property as they currently are on the field, in order to compare such information with the one shown on the current existing survey of the property; with this information, a report will be generated by the surveyor indicating if the boundaries on the field are accurate in relation to what is shown in the survey of the property or indicating what differences were found; the surveyor will also be looking for water streams or water springs on the property or its vicinity, as certain setbacks apply to them.
c)- Additional items:
Within this category we consider the following items:
i)- having a soil test performed on the Property; this item comprehends hiring a company specialized on this type of test in order to perform drillings on the property’s soil and an analysis of the physical conditions of the property’s soil in order to produce a report which will indicate the conditions of the soil (permeability and percolation analysis included) and which will include what recommendations should be considered for a building process on the property given the results of the test;
ii)- engineering and structural review of improvements; if the property has any buildings or houses, an independent engineer will be hired in order to make an engineering and structural review of said improvements in order to determine their condition.
E)- Notification after due diligence.
Once the due diligence has been completed, several scenarios could take place:
a)- if all items of the due diligence were cleared and therefore the terms and conditions of the purchase can be achieved, then Seller must notify Buyer that he/she will go ahead with the purchase of the property; normally, the lack of any notification is taken as an affirmative decision; typically, if all items of the due diligence were cleared and therefore the terms and conditions of the purchase can be achieved, and Buyer changes his mind about the purchase and wants to “walk away from the deal”, the initial deposit placed in escrow will become the ownership of Seller whom shall have it as his sole and complete indemnification;
b)- if one or more items of the due diligence cannot be cleared and therefore the terms and conditions of the purchase can not be achieved, then Buyer can “walk away from the deal” and the initial deposit will be returned to him/her (minus the corresponding escrow fees).
F)- Closing procedures.
Once the due diligence period has been cleared, the corresponding Law Firm will proceed to get one of their Notary Publics to prepare the corresponding closing documents, the main one being the public transfer deed.
The transfer of the property is documented in a public deed that is signed before a Notary Public. Said document is inserted in what is called “the protocol book” of the Notary Public.
At the corresponding closing meeting, all closing documents, including the public transfer deed, will be signed and executed and the payment to Seller will take place.
G)- Closing costs.
The typical closing costs (which do not include any costs in which you may incur for your due diligence or in for the formation of any entity (corporation, LLC, etc) that you may use for the purchase of a property) include the following items:
a)- Notary fees:
This item corresponds to the fees that are paid to the Notary Public for the preparation, execution and registration of the public transfer deed by means of which the transfer of the property is documented.
The rate of these fees is regulated by the Costa Rican Government by means of an executive decree. They are established as a percentage over the value of the transaction and operate on an incremental basis.
b)- Transfer tax:
All transactions of property in Costa Rica involving a sale or transfer of a property are required to pay a real estate transfer tax.
Said tax is equivalent to 1.5% of the purchase price of the property.
The transfer tax is calculated using as a basis the purchase price declared in the public purchase deed; nonetheless, if the registered value of the property is higher, the transfer tax will be calculated using said registered value as the basis.
Not declaring the real purchase price of a property in the corresponding public transfer deed (in order to try to pay a lesser amount of transfer tax), asides from having future tax consequences for the purchaser, is a criminal action as it constitutes a tax fraud.
c)- Registration stamps.
The registration stamps are a group of stamps that need to be paid for the registration of the public transfer deed. These stamps correspond to fees or taxes created by different laws.
Most of said stamps are calculated using as a basis the purchase price declared in the public purchase deed; nonetheless, if the registered value of the property is higher, said registered value will be used as the basis to calculate the amount of stamps to be paid. Some of the stamps are based on an incremental base or on a fixed amount.
Though the exact figure needs to be specifically calculated for each transaction, as a rule of thumb you can calculate that the closing costs are equivalent to 4% of the purchase price, and typically those costs are paid in equal parts by both parties.
Depending on the specifics of the transaction there may be other charges you as Buyer may need to assume.
H)- Document registration.
Once the public transfer deed has been signed and executed in the protocol book of the corresponding Notary Public, a certification of said document will be issued by the Notary Public. The corresponding registration stamps and transfer taxes will be paid and the payment receipts for those items will be attached to the certification of the public transfer deed and the document will be sent to the Property Registry for the corresponding registration process.
The registration process may take even up to four weeks, depending on the complexity of the transaction and on the workload of the Registry; sometimes, the registry will request the Notary Public to make clarifications or data corrections, situations which may add up to the time required for the registration.
Once the registration is completed, the original documents will be sent to the Notary Public that handled the process and the corresponding changes will be shown in the informational computerized system of the Property Registry. Make sure that you are provided a set of copies of the registered documents for your records.
Purchasing under an entity.
One of the frequent questions that arises during the process of purchasing a property is if the property should be purchased under the personal name of the purchaser or under the name of an entity owned by the purchaser. There are pros and cons for both options.
Purchasing the property under the name of an entity owned you has two initial advantages:
a)- it provides an extra layer of liability protection as any liability you may personally incur initially will not affect the assets owned by the entity as you are not the owner of the assets but the assets are owned by the entity, which is a separate legal person; while your personal liability may affect the stock you own in the entity, initially the assets will not be affected; and
b)- if you are not going to immediately live in Costa Rica, the granting of any required powers of attorney or authorizations for the entity is a rather simple process that can be handled while you are abroad, without you having to come to Costa Rica.
The downside of the ownership through an entity is that it implies costs for the creation of the entity and for its yearly up keeping.
Purchasing the property under your personal name has two initial disadvantages:
a)- any liability you may personally incur initially will likely affect the assets owned under your personal name; and
b)- if you are not going to immediately live in Costa Rica, the granting of any required powers of attorney or authorizations for the entity will require that you appear before a Costa Rican Notary Public in Costa Rica or at a Costa Rican Consulate in your country of residence.
The upside of the ownership under your personal name is that does not imply periodical up keeping expenses.
There are basically two types of entities that you may incorporate in Costa Rica. One of them is the shares corporation, called in Spanish Sociedad Anónima, which works best when you have multiple partners participating in the business venture. This type of entity requires having a Board of Directors of at least three members and one Overseer or Fiscal.
The other type of entity is the limited liability company, called in Spanish Sociedad de Responsabilidad Limitada. This is a type of entity that works best in closely held business ventures and which is a lot simpler to manage as you do not need a Board of Directors nor a Fiscal and you just appoint the Manager or Managers you may desire to appoint.
Based on the information I have received for you, for your case it seems the limited liability company would be a more suitable option.
The following would be the basic points for an entity of this type:
Name: While you can have a custom name registered for the entity, the name needs to be not similar in the way it is written, in the way it sounds and in the way it translates into Spanish to the name of any other previously registered entity. With over 800,000 entities registered in Costa Rica, getting a custom name accepted by the Registry can be complicated sometimes. The other option is to have the identification number of the company serve as the name for the company, which is the simpler option being used by a lot of persons.
Domicile: You will need to appoint an address to be the domicile of your company. If you want, we can have our offices be the domicile for your company.
Corporate capital: We incorporate the company with a nominal capital stock value of 100,000 colones which is represented by 100 quotas of 1,000 colones each one. In this case, unless otherwise indicated by you, such quotas will be owned by you and any other person you may indicate.
Managers: Unless you otherwise indicate, we would appoint you and any other person you may indicate as the Managers of the company having full powers of attorney to act on behalf of the corporation.
The costs for the incorporation of the company, including the value added tax, would be $904 which would include the incorporation of the company, payment of the registration fees, registration of the company, issuing the stock certificates and issuing the duly legalized corporate books for the company.
Additionally, it will be necessary to register the company with the Tax Administration, a process that we can handle for you and which would have a cost of $169.50.
On a yearly basis, there are certain additional obligations that the company must fulfill:
a)- the yearly payment of the Tax on Corporations, which initially will be of around $120 and which may change depending on the net taxable profit that your company may make every year if your company starts generating income;
b)- the yearly declaration of the ownership of the stock of the company with the Transparency and Final Beneficiaries Registry, a process for which we can help you and handle it for you and for we currently charge $452, value added tax included;
c)- the yearly income tax declaration, which has to be presented even if the company has no income;
d)- the yearly fee for the resident agent services and custody of corporate documents, which is $254.25 per year.
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“Shawn has been the best. He has helped me through the entire buying process and more importantly he followed up with all the details after the sale! He even helped us get our residency. Thanks for the great service, support and team resources Shawn!!!”
The Arnold Family (Developer Client), London