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Saturday, May 28, 2022

Costa Rica Real Estate: The Closing Process and Costs

When buying or selling a property in Costa Rica it is important for both parties to be aware of the normal obligations and expenses they will likely encounter, both as seller and buyer. Here is a summary explanation of the requirements for individual property transactions.

The sale of buildings or large projects will include what is explained here but you can expect the documentation and expenses to be more complex and expensive.

The closing process will usually begin with the buyer asking his/her real estate agent for an option to buy so their attorney can do the due diligence on the desired property. That option to buy will usually require a 10% down payment on the part of the buyer.

This document is very important to both parties because it sets out the initial contract conditions and because at the time of signing this option it is likely the buyer will know very little of the legal status of the property.

The buyer will basically be trusting his real estate agent that he is depositing this 10% on a viable property. Nevertheless, the real estate agent does not necessarily know the true legal aspects, encumbrances, liens, or limitations weighing upon the property and even if he does know them, he may not understand their full legal implications.

Who holds the 10% deposit? It can be the real estate agent or either party´s attorney or a trust company if the amount is significant enough. It will depend on who the parties trust to hold this deposit.

On the other hand, the seller will be very interested in the wording of this option because, as the due diligence progresses, it is probable that the buyer´s attorney will require different documents from the seller and these documents can cause substantial expenses which the seller will have to pay and if, in the end, the buyer backs out of the deal, the seller will have spent substantial amounts of money for no reason.

Therefore, both parties will have to negotiate whether the initial 10% deposit will be forfeited by the buyer if he backs out and if so under which circumstances. Also, the real estate agent can have an interest in this deposit too because he will have incurred expenses of time and money which they may expect to be reimbursed if the seller gets to keep the deposit as compensation.

It is not unusual for real estate agencies to require a 50% payment of the amount the seller keeps from a forfeited deposit.

The more urban a property the simpler the closing will probably be because all the legal aspects will be more easily defined. The more rural a property, the more likely there is to be size issues, agrarian limitations, water issues, electricity issues, liens or encumbrances, possession issues and other essential legal aspects.

This is also applicable to the size of the property. The smaller properties are much easier to investigate whereas large properties with trees or plantations or fencing problems can require deeper due diligence by the buyer´s lawyer and specialized engineers for measuring the true extent of the land, construction problems, soil quality, water availability, subdivision possibilities, rights of possession, plat map (cadastral map) accuracy and many other complex legal issues.

The first two items your lawyer will analyze will be the registration of the property in the Costa Rica National Registry (Registro Nacional) which maintains a detailed and very sophisticated data base of all registered properties and the property plat map.

The registration will tell you the number of the property, its legal location, what it can be used for, the extent of land, the neighboring borders, the number and year of the plat map, where the property comes from, when it was last transacted, the fiscal value of the property (which is not necessarily the market value), if the property has any judgements against it, mortgages, limitations or any other important legal aspects that affect the property, such as, forestry limitations, water issues and many others.

The registration of the property is critical because the real title to the land rests upon what is registered. If there are any issues or disputes with the property registration these will probably have to be addressed in a judicial proceeding.

Once your attorney has clearly identified the property, he will need to determine the true identity and circumstances of the owner, whether it is an individual or a corporation. In the case of an individual, he will need to know the marital status of that person both at the time of buying the property and at present and this is because there may be family law issues that can affect the property, such as alimony and/or child support or divorce proceedings.

If the owner is a corporation, he will need to know that the company is in good standing with the government, that it is up to date with its taxes, that it has reported the company share distribution to the proper authorities, that the company representative has enough power to sell and that he will be available at closing for the signing.

People would be surprised at how many times a property sale falls through because one or more of these issues has not been clarified.

The most important person in a real estate transaction, after the buyer and seller of course, is the Notary Public that will be responsible for the transaction. A notary public in Costa Rica is very different from the USA or common law concept of Notary Public. In C.R. only a lawyer can be a Notary Public (except for consular notaries for diplomatic purposes).

Each Notary is assigned a special book of registration called a Protocol, (which will remain in the National Archives forever) and in that book he must write down, in letters only (cannot use numbers) all the legal details required for the transaction.

When two parties are negotiating a property the buyer will usually get to choose the Notary if he is paying in cash (by this I mean a one-time payment) and the seller will get to choose the Notary if there will be a mortgage guaranteeing the debt and this is only logical because in the case of a cash payment, it is in the interest of the buyer to make sure the property is registered correctly and quickly in his name, since the seller may no longer be available after the signing.

In the case of a mortgage debt, it is in the interest of the seller that the mortgage be registered correctly.

Nevertheless, the custom that has developed is that each party has his or her own attorney, both of which will probably be Notaries and each party will pay his own lawyer fees. Also, the custom is that the buyer will negotiate a final price which the seller will receive net, which means that the buyer will be responsible for all closing expenses, of which he should be aware in advance.

The expenses and attorney fees for the transaction itself are established by law and cannot be changed. It is possible that some attorneys may give their client a discount on fees, but this is illegal and considered to be disloyal professional competition. Both the legal fees and the Real Estate agent commission require a 13% Valued Added Tax.

In properties that have a greater set of complexities there may be additional legal fees, expenses or taxes because additional work has to be done, such as obtaining various permits and certifications which establish that the property does not have any limitations the parties are not willing to accept. The most usual example is a property that cannot be subdivided or a property that has forestry law limitations or is limited by a Forestry Reserve.

These issues can be complicated and expensive to define and resolve. A property may be within a biological corridor for which reason it may belong to a private individual but it cannot be developed, thus the buyer could end up with a very expensive piece of land that is useless for his/her intended purposes.

One of the most critical issues which parties tend to address at the end of the process and instead should really be established from the beginning is, how payment (s) will be made. Costa Rica has very strict rules as to how payments can be made in order to protect against money laundering and other criminal activity.

The Notary authorizing the sale for registration must indicate the origin of the funds through a sworn statement on the part of the buyer which could have criminal (money laundering) implications if not explained adequately. Furthermore, unless the money is already in a Costa Rica bank, the transference of overseas funds to Costa Rica can take various amounts of time and have different levels of cost.

In any case, the parties should decide if the price will be paid through a personal/company check, a wire transfer, direct deposit, certified check or other means and all of these could have their own implications. It can become quite tricky to establish the mechanics of how the buyer will transfer the money to the seller who will only sign upon receipt of funds. This is why many buyers are now using Trust Companies to handle these issues.

The expenses for the purchase of a property are a 1.5% transfer tax, various tax stamps (which are taxes assigned for specific government institutions), legal fees and value added tax on the legal fees. These tax stamps have a separate calculation for each one. For example, on a $100,000.00 the parties will have to pay approximately $3,872.00 including all legal fees, transfer taxes, stamps and V.A.T. On a $200,000.00 sale, the parties can expect to pay about $7,369.00 for these same items.

Finally, the seller must be aware that they may be responsible for capital gains tax if there is a difference between the original price they paid for the property and the sale price. If there is a profit, they may have to pay capital gains tax and that is something the seller will want to know, in advance, even before they put the property on the market.

In closing, these are some of the most important legal aspects of a property transfer that parties will encounter. The best advice is to have a very reputable real estate agency helping you and a very reputable attorney protecting your interests.

We would love to hear your comments and questions, you can reach attorney Jorge Montero at [email protected]

Lic. Jorge Montero B.
Attorney At Law
[email protected]
Tel / WhatsApp- 506- 8384- 2246

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