Q and A on CLOSING COSTS, LEGAL PROCESS, MAKING AN OFFER, OWNER FINANCING, INSURANCE AND TAXES, AND BUYING A PROPERTY WITH A COSTA RICAN CORPORATION
Q. What are my rights as a non-Costa Rican buying property in Costa Rica?
One of the main attractions of Costa Rica real estate is that you have the same rights as any Costa Rican resident to own titled, fee simple property in Costa Rica. If you are buying CONCESSION property (which I don’t list or sell), there are restrictions if you are not a naturalized citizen. However, I only list, represent and sell FEE SIMPLE, TITLED PROPERTY, in which you are 100% eligible, entitled and protected under Costa Rica law to own property here.
Q. What are the costs typically involved in the purchase process in Costa Rica real estate and do I need a lawyer for the transaction?
You must use a lawyer for any property/title transaction in Costa Rica, and the Buyer is typically responsible for closing costs and the legal fees, so this is good information to know prior to making an offer.
The lawyer is a key player in the transaction as their duties include legal representation and counsel, due diligence and background check on the property, registration of property deed, and certified public notary for all documentation.
As a rule, your lawyer should be bi-lingual (if you don’t speak Spanish), with an office and website, dependable, computer literate, and with a good work ethic etc. and remember, NEVER deposit any funds into a lawyer’s personal account or seller's account, alwasy use a registered escrow account. If you lawyer doesn't have an escrow company, this is a red flag.
Q. What law firm do you recommend?
I use and recommend to my clients the law firm of RE and B. The partners are fully bi-lingual, the firm has an office in Jaco and another in San Jose, I’ve used them almost exclusively for over ten years, there site is here http://rebattorneys.com/ and the escrow firm I use is Trust Co, with Scotia Bank, their website is here http://www.trustcocr.com/
Q. What are the typical closing costs and legal fees?
Here are the basic fees that you’ll need to know about, all percentages will be based on the actual Purchase Price.
1.25% percent Legal fee (lawyer’s fee)
1.5% percent transfer tax
$800 for new corporation (in most cases, you’ll want to hold your property in a newly registered corporation that has no past history or holdings)
0.8 % percent for new corporation stamps and fees
$500 escrow fee
$350 due diligence fee
Please note that sometimes Sellers want their own lawyers to check the documentation; however that is not part of your expense.
Q. You mention “corporation”, why should I use a corporation to buy and sell property in Costa Rica?
Almost all of Costa Rica property transactions are done using a corporation. This option has many benefits and is the obvious choice for ownership of property and advisable if you are planning on opening up a business in Costa Rica. Some benefits include…
A corporation allows you to separate your personal liability from your property
It’s easier to transfer property out of your corporation into another in the case of a sale
You can also open a bank account and conduct business and pay taxes and bills using your corporation
The assignment of corporate shares can be divided as needed in the case of multiple owners.
Q. How do I get a corporation?
In many cases the seller will sell his property with the current corporation and all shares will be assigned to you as the new president of the corporation. This helps save money on closing costs (approximately 0.8%, as well as $800 dollars for a new corporation). Your lawyer will perform a background check on the corporation to make sure there are no liens, lawsuits, encumbrances etc. After the background check the lawyer will advise that you can proceed with buying the property with the corporation, or, recommend that you buy the property with a brand new corporation.
Q. And what are the steps involved in making an offer and closing?
Here’s a brief description of the steps involved.
I will create a LETTER OF INTENT for you that we will send to the seller which will outline the basic points of the deal (price, terms, timeline, etc).
Seller will review and has the right to counter, accept, or reject. When both Buyer and Seller have come to terms that are mutually accepted and LOI has been signed by both parties, Buyer can then open up an escrow account. Through the law firm of RE and B, we use the escrow company Trust Co. a fully registered escrow service, set up specifically for real estate transactions in Costa Rica. Their website is here, www.trustcocr.com
You will need to deposit 10% of the purchase price into escrow to take the property off the market and lock in the terms.
When deposit is confirmed, your lawyer performs the due diligence on the property and gives you the results. I also help at this stage to assemble all paperwork, and/or receipts proving that all bills, taxes, etc are paid up to date and all services are in good standing. You can also order a home inspection at this point if desired.
You have 48 hours after the due diligence report has been finished and sent to you, to either proceed or cancel the deal. If you cancel at this point, your deposit is fully refundable.
If lawyer recommends proceeding and the due diligence report is acceptable, we move to the closing stage. Once a closing date is set, the balance of the funds are sent to escrow. On the date of closing, paperwork is signed and notarized by the necessary parties, funds are wired from escrow to the designated account(s), and new ownership information is duly registered in the public registry.
Q. What about getting financing with a Costa Rica bank?
Costa Rica Banks typically don’t loan to foreigners unless you have property free and clear already in country that they can use for collateral. There may be some exceptions but the application process is lengthy and tedious. You are better off considering owner financing or getting a home equity loan in your home country to leverage your Costa Rica transaction. In the case of buying in a new development, there may be developer financing available as well.
Regarding the increasingly common option of Seller/Owner financing, these terms can vary but here’s an example of what I’ve seen lately in this kind of arrangement.
Half down (or more) at closing.
Balloon payment of the balance in three to five years (or sooner).
“Interest only” style of loan (you are paying interest on the balance, this resets every year. Interest only loans do not pay off the principal so it’s basically just buying you time). Percentage rates can vary but are usually in the 4% to 8% range. You can pay off additional principal in small balloons if you want and that could lower your interest payment accordingly.
No prepayment penalty.
Property is annotated with a registered mortgage lien or in other cases in a Guaranteed Trust.
EXAMPLE (let’s run some numbers on a theoretical purchase price of 195k)…
With a purchase price of 195k, let’s say Buyer paid 100k at closing and Owner financed 95k for three years with an interest only rate of 7%. Buyer would be paying $6650 a year every year in interest until Buyer paid off the 95K in a balloon at the end of the term or sooner. Remember, Buyer can reduce your interest payment if you make some smaller balloon payments prior to the end of loan term.
Q.What about taxes and insurance?
Taxes and Insurance are about the same amount, and cheap! Taxes are 0.25% of the registered purchase price per year. And basic insurance is about the same. So for a house valued at 200k, we are talking $500 dollars per year. Basic insurance is for flood, earthquake, rain damage, tree damage etc, again about $500 per year for a home valued at 200k.
Inventory Insurance for personal belongings, (inside the house) is an additional fee based on your inventory; the insurance company will come out and give you an assessment and estimate for that.
What about costs for Maid/Pool/Gardener?
Manual labor for maids and gardeners can run from $2 to $ 4 dollars an hour and a pool guy will run you about $50 dollars a month for most average size pools this will include all chemicals.