Real Estate Purchase Process in Costa Rica

  • 2 years ago

In Costa Rica just like most other countries around the world, it is customary to tender an earnest money deposit in real estate transactions.

In Costa Rica, a deposit is known locally in several different names such as “deposito de garantía”, “arras confirmatorias” or “reserva”.  The amount of the deposit is generally negotiated between the buyer and the seller.  The seller will generally want to get as large of a deposit as possible while the buyer prefers as little a deposit as possible.  The more customary deposits are in the 5% to 10% range.   The deposit is refundable depending on the contingency or due diligence conditions indicated in the Purchase Agreement.  However if one of the parties fails to abide by the terms of the Purchase Agreement the deposit can become non-refundable.   To make sure you do not put your deposit at risk be sure you clearly understand the Purchase Agreement.   Pay specific attention to the breach or termination of the agreement section of the Purchase Agreement since it will dictate how the deposit is to be handled.  It is recommended that you use the services of an approved Escrow company to ensure that the deposit is held by a third party.  If the deposit is given directly to the Seller and they refuse to give it back for any reason you would have to initiate legal action which is time-consuming and costly

Considering Buyer or Building in Costa Rica ? Buying property and constructing buildings or a home can be an intimidating process, even when you are at home in your own culture and knowing what to expect and plan for. In a foreign country, the same processes can be downright frightening. In a new setting, you need to learn what the usual way to go about things is and also who is legally and ethically responsible for what-in other words you should invest some time in learning how things work and how to protect your investment.

Fortunately, in Costa Rica there is a defined process through which an intelligent buyer and builder should proceed. In addition, there is a licensing body for Architects and Engineers, which also sets standards for fees should you decide to build. But let’s start at the beginning.

I want to purchase property in Costa Rica. What is required?

So you’ve found, either through a real estate agent or your own searches, a piece of property that is perfect for you. Once you have negotiated a sales price and the seller has accepted your offer, generalky through an Letter of intent and a sale and purchase agreement then the legal procedures for transferring ownership of title begin.

LETTER OF INTENT A letter of intent is a basic letter outline your intentions to buy, generally it is used to negotiate the price, terms and conditions of the purchase. Terms could include financing or time lines to close among other issues. Conditions could include home inspection, land survey, due diligence on any aspect of the property and title.


SALE AND PURCHASE AGREEMENT 
The sale and purchase agreement is a formalized agreement drafted by an attorney, it uses the terms in the Letter of intent to finalize the sale and purchase agreement.

In Costa Rica just like most other countries around the world, it is customary to tender an earnest money deposit in real estate transactions.

In Costa Rica a deposit is known locally in several different names such as “deposito de garantía”, “arras confirmatorias” or “reserva”.  The amount of the deposit is generally negotiated between the buyer and the seller.  The seller will generally want to get as large of a deposit as possible while the buyer prefers as little a deposit as possible.  The more customary deposits are in the 5% to 10% range.   The deposit is refundable depending on the contingency or due diligence conditions indicated in the Purchase Agreement.  However if one of the parties fails to abide by the terms of the Purchase Agreement the deposit can become non-refundable.   To make sure you do not put your deposit at risk be sure you clearly understand the Purchase Agreement.   Pay specific attention to the breach or termination of the agreement section of the Purchase Agreement since it will dictate how the deposit is to be handled.  It is recommended that you use the services of an approved Escrow company or attorney (your attorney) to ensure that the deposit is held by a third party.  If the deposit is given directly to the Seller and they refuse to give it back for any reason you would have to initiate legal action which is time-consuming and costly

How is title transferred?

In Costa Rica, property is transferred from seller to buyer by executing a property transfer deed (escritura) before a Notary Public. Unlike common law countries, such as the United States and Canada, where the role of the Notary Public is limited to authenticating signatures, in Costa Rica the Notary Public has extensive powers to act on behalf of the state. The Notary Public must be an Attorney and he or she may draft and interpret legal documents, as well as authenticate and certify the authenticity of documents.

In order to close on the property, the buyer and seller must select a Notary/Attorney who will draft the transfer deed and register the sale in the centralized property registration office known as the Public Registry (Registro Nacional). All documents are centralized at this location. As such, all deeds executed in the provinces of Costa Rica must be filed in the Public Registry. The local custom is that the buyer may select his or her Notary/Attorney to draft the property transfer deed if the buyer is paying cash for the property. If the portion of the purchase price is financed by the seller, there are generally three alternatives for selecting the Notary/Attorney.

1. If a large percentage of the purchase price is being financed by the seller and a mortgage needs to be drafted to guarantee payment, then the seller may request that her or his Notary/Attorney draft the transfer deed.

2. If a property is purchased 50 percent cash and 50 percent financed, it is common for the buyer’s Attorney and Seller’s attorney to jointly draft the transfer deed and mortgage in a single document. This is known as co-notariado.

3. Finally, the buyer may insist that his or her Notary/Attorney draft the transfer deed and let the seller’s Notary/Attorney draft a separate mortgage instrument. In this case, because the mortgage is being drafted separately, it carries a higher registration fee. The registration fees are discussed below in the section on closing costs.

At your option, the property can be purchased in an individual’s name, jointly with other persons, or in the name of a corporation. The decision as to ownership should be based upon your particular situation and after consultation with your Attorney.

How can I ensure that I have clear title to the property?

Costa Rican law requires that all documents relating to an interest and/or title to real property be registered in the property section of the Public Registry (Article 460 of the Civil Code). Most properties have a titled registration number known as the folio real, and the records database can be searched with this number or by name index. The Public Registry report (informe registral) provides detailed information on the property, including the name of the title holder, boundary lines, tax appraisal, liens, mortgages, recorded easements, and other recorded instruments that would affect the title.

Since Costa Rica follows the doctrine of first in time, first in right, recorded instruments presented to the Public Registry are given priority according to the date and time in which they are recorded. Obviously, every situation differs and in some cases, a review of the Public Registry record will not be enough to uncover all encumbrances. That is why it is important that the buyer have her or his own attorney conduct an independent title search and investigation rather than rely on the seller’s
attorney.

You can conduct a property title search at the website of the National Registry of Costa Rica which is www.rnpdigital.comThe resulting title report will look like the sample set forth below:

How about closing costs?

The general custom is for the buyer and seller to share equally in the closing costs. This can be modified by agreement and usually depends upon the particular transaction. Closing costs involve three things: Government transfer taxes and registration fees, Notary Legal fees and mortgage costs, if any.

[A] Government Transfer Tax and Registration Fees

(1) Real Estate Transfer Tax. The government collects a property transfer tax (Impuesto de Traspaso ) which is equal to 1.5% of the registered value of the property. The Public Registry will not record a transfer deed unless the transfer taxes and documentary stamps have been paid.

(2) Documentary Stamps. The government also requires that documentary stamps be affixed to the deed. These stamps include the following: Municipal Stamp: (Timbre Municipal) ;Legal Bar Association Stamp (Timbre del Colegio de Abogados); Agricultural Stamp (Timbre Agrario); National Archives Stamp (Timbre del Archivo Nacional); Fiscal Stamp:(Especie Fiscal). The Public Registry also imposes its own tax of .05% on documents presented for recordation to the Public Registry. (Derechos de Registro)

[B] Notary Fees. The Notary that drafted the contract for sale, carries out the real estate closing and records the property title transfer is entitled by law to a fee which is based upon a percentage of the value of the transaction. The Notary Fee Scheduled establishes the fees as a percentage of the value of the transaction as follows:

Up to 11 million Colones 2% of the value of the transaction
On the Excess of 11 million Colones to 15.5 million Colones 1.5%
On the Excess of 15.5 million Colones to 32 million Colones 1.25%
On the Excess of 32 million Colones 1%

Pursuant to the law these fees are the minimum that may be charged by the Notary Public. Depending on the circumstances and if the client agrees they may charge more than the amounts set forth above.

[C] Mortgage costs. It is customary for the person who is receiving financing to pay the costs of drafting and registering the mortgage instrument. A mortgage can be created simultaneously at the time of sale by adding a mortgage clause in the transfer deed. Or, a separate mortgage instrument can be drafted. A mortgage document pays registration fees and documentary stamps. The Notary Public will also charge for drafting and recording the mortgage instrument and that fee is applied according to the same schedule as indicated above.

The buyer should be aware that Costa Rican real estate transactions sometimes work on a two-tiered system. Since many Costa Rican properties still have a relatively low property tax appraisal base in relation to market value, it has become a local practice to run property sales through at the registered value, which may be substantially less than the actual sales price of the property. In such a case, all transfer taxes and fees discussed above would apply to the registered value as opposed to its sales price, with the exception of the notary fee. Buyers should be cautious and consult with their Attorney about the potential risks involved in undertaking this practice.

Registration of the transfer deed.

Once all the fees have been paid, it is the obligation of the Notary Public who drafted the transfer deed to ensure that the deed is presented (anotado) and registered (inscrito) in the Property Section of the Public Registry. I have stressed the words presented and registered to highlight the importance of following up with the notary to ensure registration. Although presentation guarantees your priority (i.e., first in time, first in right), it does not automatically guarantee registration. The Public Registry will not register a transfer deed unless all taxes and registration fees are included; a certified copy from the Municipality where the property is located is provided certifying that the seller’s property tax (bienes inmuebles) and municipal assessments (impuestos municipales) have been paid through the date of closing. Likewise, any prior
instruments that encumber the property (i.e., mortgages, liens, judgments, etc.) must be lifted before your transfer deed will be registered.

Once a transfer deed is accepted for registration, the Public Registry will return the original document with all the documentary stamps affixed to it and properly sealed. Assuming no defects in the transfer deed, it should be registered by the Public Registry with 30 to 60 days after presentation. It is therefore important to follow up with the Notary Public to ensure registration, otherwise you will run into problems in the future when you decide to resell the property and find out that your sale was not
properly registered.

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