Buying Real Estate
Purchasing Real Estate In Costa Rica
Can foreign nationals legally own property in Costa Rica ?
Yes, all foreign nationals have the right to invest and purchase real estate in Costa Rica. The only exception is when applying for a maritime land zone (coastal zone) concession, which requires a certain percentage to be owned by Costa Ricans. The maritime land zone concession is addressed in full below.
What should foreigners know about investing in real estate in Costa Rica ?
Firstly, whether you already have a property in mind or are just starting your search, it is important to retain a reliable firm or attorney. A public notary is necessary to assist you with closing a real estate transaction legitimately and legally. Under Costa Rican law, all purchases of titled land must be recorded in the Public Registry of Costa Rica (PRCR) to be enforceable against third parties. Therefore, you will need a public notary to do due diligence to confirm the property’s legal status as well as draft and register the final deed of sale. Choosing the right representation is one of the most important decisions you can make to ensure a smooth transaction as reputable firms and attorneys have the expertise and connections to make the experience easy and safe.
Secondly, it is highly recommended that buyers invest in thorough due diligence on any property they are seriously considering. Rushing through the real estate purchase process without taking this step can result in costly consequences such as delays in completion or loss of investment. Due diligence on a property consists of a title search in the Public Registry of Costa Rica (PRCR) and other public entities to ensure the title, its origins, transfers, liens, encumbrances, annotations and taxes do not contain any flaws or defects that may cause your title to be annulled or challenged. More sophisticated due diligence for development or construction projects encompasses certifications of soil use, water availability and source, maritime land zone studies, property site inspections to confirm boundaries, resolve disputes and remove squatters, analysis of technical reports, etc. Generally, due diligence also includes an evaluation of the owner. If it is a corporation, it will include an analysis of the bylaws, representatives, contingencies pending or against the entity and corporate tax records. This is a critical step that should not be omitted to ensure an informed purchase decision is made.
Lastly, hire a professional real estate broker who is registered with SUGEF. An important decision when buying property in Costa Rica is whether or not to hire a real estate agent or broker. In Costa Rica, brokers are independent and work for a commission calculated on the purchase price at closing. There are no regulations in Costa Rica governing real estate brokers and no license is required. This means that anyone can act as a broker. For that reason, find a reputable professional who is registered with SUGEF and who has sufficient expertise, connections and actual property listings that justify him or her acting as an agent.
Are real estate brokers and companies required to register with SUGEF ?
“SUGEF” is the Costa Rican Superintendent of Financial Institutions. This government entity regulates and supervises financial institutions and non-financial activities and professions. In November of 2019, SUGEF approved “Agreement 13-19” which was later published in the Official Bulletin La Gaceta No. 220 on November 19, 2019. This regulation categorizes persons and companies that perform the activities provided for in Article 15 of Law 7786 into three levels. The categories are assigned based on risk exposure and establish future obligations, based on the level, as a means of combating money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction. Upon enactment, registration became mandatory for the real estate sector, applying to all natural and legal persons habitually and professionally engaged in the purchase and sale of real estate, including, but not limited to, brokers, intermediaries, promoters and developers of real estate projects. If you are thinking about working with a real estate agent or company, ask to see their SUGEF registration resolution. Registration was mandatory as of January 2020.
What role does the Public Registry of Costa Rica (PRCR) play in real estate dealings ?
The PRCR is a government institution that supervises and regulates all deeds, documents, records, surveys and general information pertaining to real estate and legal entities. The PRCR includes, among others, the Real Estate Section and the Cadaster Section. The Real Estate Section of the PRCR holds a record of any deed or title that creates, modifies or extinguishes an ownership right, easement, encumbrance, mortgage or any other right regarding real estate. These rights must be duly recorded on each property’s title in the Real Estate Section of the PRCR to give notice to third parties and be enforceable. Consequently, any right or title that is not recorded in the Real Estate Section of the PRCR is binding only on the executing parties and will not affect third parties. The Cadaster Section of the PRCR records all surveys of properties, including maritime land zones and easements. Its main function is to record, define and organize land zoning, areas, measurements, boundaries and all cartographic representations of terrains within Costa Rica’s borders. All surveys for titled properties and some untitled properties must be approved and recorded in the Cadaster Section of the PRCR in accordance with the formalities and requirements established by Costa Rican Law. Recording a survey in the Cadaster Section of the PRCR does not create any ownership rights.
What legal documents are involved in buying real estate in Costa Rica ?
If you are buying or selling property in Costa Rica, you will likely see the following documents in the course of your real estate transaction:
Letter of Intent or Offer. The LOI, offer or term sheet is a simple document outlining an agreement proposal between two or more parties prior to finalizing the transaction or agreement. It is usually not binding, unless agreed otherwise, and it serves to clarify the key points of a transaction.
Option to Purchase and Sale Agreement. The OPSA, PSA or SPA is a contract whereby the Optionor/Seller and the Optionee/Buyer agree to sell or buy one or more assets if specific terms and conditions are met within a specified period. A complete and well drafted OPSA sets the foundation for a secure and smooth transaction.
Escrow Agreement. This is a contract defining the terms and conditions under which one party deposits an asset, typically cash, with an independent third party, known as an “Escrow Agent”, who, in turn, and subject to specific terms and conditions, delivers it to the other party. An escrow agreement involves an additional cost and is normally a condition of the OPSA, PSA or SPA.
Due Diligence Summary or Report. Due Diligence is a process whereby the buyer, through a legal firm or attorney, and for a specific period prior to making the final decision to close on a property, systematically researches and verifies the legitimacy and accuracy of the title, as well as the contingencies that could obstruct it. The due diligence report is a written document containing the information uncovered, as well as a summary of the key points needed to make an informed decision.
Purchase and Sale Deed. This is a legal document prepared and authorized by a public notary whereby a seller agrees to sell one or more assets irrevocably to a buyer under specific terms and conditions. For the purchase of real estate in Costa Rica, the purchase and sale deed must be incorporated into the public notary’s protocol and registered with the Public Registry of Costa Rica for it to be binding and enforceable against third parties. The purchase and sale deed is the main document to close a deal and it should reflect all final terms agreed on during all initial stages of the transaction.
A real estate transaction may not use all the above documents. The documents required for a real estate investment depends on the participating lawyer’s expertise and the type of transaction involved.
What should I consider when buying property in Costa Rica ?
Investing in real estate in Costa Rica is more nuanced than simply choosing a property and negotiating the terms and conditions to close on the title. Many investors ignore one of the most important steps when buying real estate: doing due diligence on the land, house, concession or project being purchased. Under civil law, the concept of “due diligence” stands for “reasonable care,” which means gathering as much information as possible about a property to make a smart, safe and fully informed decision. Real estate due diligence is a process whereby the buyer, through a legal firm or attorney, and for a specific period prior to making the final decision to close on a property, systematically researches and verifies the legitimacy and accuracy of the title as well as the contingencies that could obstruct it. Normally, the information uncovered is presented in a written report or brief containing a summary of all the key points needed to make an informed decision. Below are some key points that a real estate due diligence report may contain and/or analyze:
Analysis of the property’s title as certified by the Public Registry of Costa Rica (PRCR)
Review of the property’s area and its increase or decrease in value over time
Review of the title transfer chain as recorded in the PRCR
Property site inspection to determine current status, such as boundaries and occupancy
Research of property tax status as recorded by the local municipality or Tax Agencies in the case of solidarity luxury tax
Research with SINAC (National System of Conservation Areas) to determine whether the property is located in a national park and/or a protected area
Certification of soil use by the local municipality to determine the property’s legally permitted uses
Existence of public services and utilities, such as water, electricity, internet and telephone lines
Assessment of title restrictions, such as easements, reserves, liens, encumbrances and environmental issues
Availability of construction permits
Review of homeowners’ association by-laws, meetings, budgets and owner/property good standing
Research of pending legal and administrative proceedings against the property
Certification of good standing of the companies involved in the transaction
Review of the corporate tax status of the companies involved in the transaction
Review of co-ownership, joint tenancy, usufruct, possession and other third-party rights
Certification of good standing with the Social Security Administration of the companies or parties involved in the transaction and payment of all property taxes, luxury taxes and capital gains taxes.
It is of significant importance to ask your attorney about real estate due diligence services and request a summary or report of the findings. Investing in this information ensures you are protected in all aspects of your purchase.
Should you use the services of an escrow agent for real estate transactions ?
One of the most commonly involved parties in a real estate or commercial property transaction is an escrow agent. The escrow agent is an independent third party (regulated by SUGEF if operating in Costa Rica) with whom one party deposits an asset, typically cash, that is subject to specific terms and conditions before being delivered to the other party. Retaining the services of an escrow agent implies the execution of an escrow agreement, a common document used in real estate transactions in many countries. The escrow agreement can be a unilateral, bilateral or multilateral contractual arrangement that defines the terms and conditions under which a specific transaction is executed. Escrow agreements are useful for investors to move money to Costa Rica and to secure its availability prior to purchasing the property or during negotiations. An escrow account also serves as a private bank account to keep funds available prior to opening a personal or corporate bank account at a bank in Costa Rica. The escrow agreement is a key element to making transactions secure as it serves to guarantee that each of the contracting parties will receive exactly what is agreed upon. A well drafted unilateral, bilateral or multilateral escrow agreement should include:
The terms and definitions relevant to the transaction
Clear instructions on the escrow of funds, such as acceptable use and release conditions
The escrow agent’s fees, as well as the duties and obligations that must be met
The law applicable to the transaction
Jurisdiction in the event of a claim or legal action
All transactions are unique and so it is useful to invest in the services of an escrow company or agent as they can prepare an escrow agreement tailored to the buyer’s specific needs and circumstances. Buyers can further ensure a safe transaction by confirming that the escrow company or agent is registered with SUGEF (Costa Rican Superintendent of Financial Institutions) and subject to supervision. If it is a foreign entity, it is important to verify that it is a reliable company incorporated to perform this activity.
What are the requirements to open an escrow account with a registered escrow agent in Costa Rica ?
In Costa Rica, escrow services are regulated activities that fall under the supervision of SUGEF. Escrow agents must abide by the regulations created and revised from time to time by Costa Rican regulators. The standard requirements to open an escrow account are the following:
Know Your Client forms from the person or entity funding the account
A copy of the depositor’s valid driver’s license and passport
A copy of the depositor’s tax returns for the last two or three years showing proof of income
Bank statements for the last three to six months for the origin account of the funds (checking, savings, investment account, brokerage account, IRA, etc.)
Letter of reference from a banking institution showing account information, financial products and balances
Execution of the escrow agreement provided by the escrow agent of choice
If the funds are from sources such as a loan, the sale of property, the sale of a company or inheritance, notarized and apostilled copies of the documents attesting to the origin of the funds
If the funds are from a legal entity, articles of incorporation and certificate of good standing.
Escrow services are very important and serve a critical purpose in any real estate investment or commercial transaction. Therefore, choose a reputable escrow company and be wary of any company that is too flexible on the escrow requirements or that does not require the basic documents indicated above.
Should I be concerned about the government of Costa Rica expropriating my property as a foreign investor ?
Many clients and investors interested in investing in Costa Rica ask about the threat of expropriation by the Costa Rican government. Most have heard about or know someone involved in an expropriation case. Their concern is whether their investment could be jeopardized by an expropriation procedure, making Costa Rica an unsafe place to invest.
Costa Rica has a stable climate for investment. That said, it is important for investors to take into consideration that Costa Rica, like many other nations in the world, has the right to take private property from individuals when complying with legal due process. The Constitution of Costa Rica stipulates that no private property can be expropriated from a Costa Rican citizen or foreign national without prior payment and proof of declared public interest; therefore, any private property is subject to this treatment. Due diligence is essential to determine the existence of specific public interest on certain areas or land and helps provide information for investors to avoid purchasing in these areas. Many lands involved in expropriations in the past have been areas necessary to create national parks, indigenous reserves, agricultural projects or public infrastructure. Thorough due diligence always reveals the risk of expropriation. Make sure to include this research in your due diligence prior to making an investment.
What are the most common problems experienced by investors when purchasing real estate ?
The biggest problems investors encounter are the following:
Unqualified or unscrupulous attorneys that do not provide proper counsel or that defraud clients
Squatters on properties left unattended for a long period of time
Purchasing property with defects or flaws in its title chain, located in public and restricted areas or that has overlapping problems that could have been avoided with proper due diligence
Not working with an experienced and professional real estate broker who is duly registered with SUGEF
Being careless or overly confident in the Costa Rican ways
What are the real estate closing costs ?
Closing costs in Costa Rica are based on the transactional structure and value, as well as certain technical rules established by the State. The most common structure is purchase of the property’s title. There are two major expenses when buying titled property: notary fees and registration costs. All direct purchases of a property’s title require the services of a public notary. Public notary fees are set by a legal schedule issued periodically by public executive decree by the Costa Rican government and applies to all legal practitioners, meaning all attorneys and notaries must abide by the same rules when charging for their legal services. The legal schedule contains the fees or minimum fees a public notary may charge for a specific service. Registration expenses are comprised of transfer taxes and stamps calculated on a percentage basis of the transactional value. Investors should budget around 3.7% for notary fees and registration expenses. Please see the example below on a purchase valued at US$100,000.00:
Tax stamps $1.00
Archive stamps $0.40
Attorney bar stamps $27.00
National Registry stamps $507.11
Municipal stamps $203.00
Agraria stamps $152.13
Transfer Tax $1,521.33
TOTAL TAXES AND STAMPS $2,411.48
LEGAL FEES (13% VAT NOT INCLUDED) $1,305.82
How do leases work ?
Most of the time, when investors have problems with leases, they originate from either a poorly drafted lease agreement, the non-existence of one or not reading or understanding the terms and conditions contained in the lease agreement. The first thing to do when leasing a property is to execute a clear and simple written lease agreement and understand the terms and conditions that will govern the lease relationship.
The basic lease clauses that a lease agreement must contain are the following:
Full identification of the parties that will be lessor and lessee. It is important to confirm that the lessor has the legal right to rent the property.
Identification of the property with its registration number as recorded in the Public Registry of Costa Rica, area, location, general description and survey, among other relevant information.
Use that will be given to the property, whether residential, commercial or agricultural, including all the activities or uses that will be restricted or prohibited.
Rent amount due, either in local or foreign currency, and the exact dates or days on which it needs to be paid to the lessor. The lessor has the obligation to issue a receipt for the rent. Also, it is important for the parties to include any other amount that needs to be paid, such as public utilities, maintenance fees, condominium fees, etc.
Term of the agreement, which may not be shorter than three years, unless it is a short-term rental which is governed by specific rules.
The amount of the deposit to cover any damages to the property, unpaid utilities, and in some cases, unpaid rent at the end of the lease.
The possibility of assigning the lease to a third party or subletting the property.
The lessor’s inspection rights and related terms.
Conditions in which the property is received by the lessee.
Addresses for notices or communications.
There are many other provisions that a lease agreement could include based on the complexity of the lease relationship. It is always important to seek legal advice to avoid any unfortunate situations.
What else do I need to know about rentals and rent payments ?
Lease agreements are regulated in Chapter VII of the “Ley General de Arrendamientos Urbanos y Sub-Urbanos N 7527” or Articles 56 to 69 of the “Lease Act.”
Rental price, place and date of payment: The most basic rule is that the rental price can be freely negotiated by the parties and paid in cash or any type of security. It must be paid on a monthly basis, unless the parties agree otherwise. Many problems arise regarding the payment date. Tenants have the right to pay rent within seven days after the payment date agreed to by the parties. The payment obligation starts on the date the tenant is placed in possession of the house or apartment and finishes on the date it is returned to the landlord. Rent is to be paid at the place agreed to by the parties, whether a physical address or bank account. If the parties did not come to an agreement, it is to be paid at the address of the leased asset.
How to proceed when payment is constantly late: If payments are delayed beyond the seven days granted by law, the landlord’s acceptance thereof is considered tolerance and is not to be construed as a change to the payment date, unless both parties agree otherwise in writing. If payments are late, the regulation does require the landlord to serve notice to the tenant informing him/her that no late payments will be accepted and that legal action will be taken if rent is not paid within the legal term. This communication is a requirement to be able to successfully file for eviction due to late payment. Many lawyers fail to inform their clients about this important fact and end up losing a simple eviction case due to noncompliance with this formality.
Advanced payment: Another important rule that is sometimes overlooked is that the Lease Act clearly states that in housing rental agreements, the landlord may not request more than one month’s rent in advance. Often, landlords sign contracts, hand over possession of the house or apartment, and later cannot enforce an agreement made on this issue, even with a contract in place.
Rent payments in foreign currency: It is common for rent to be negotiated in a foreign currency. However, it is important to know that rent may be paid at any time in colons, under the condition that it is paid using the sales exchange rate established by the Central Bank of Costa Rica on the payment date. Payment in colons is not to be construed a breach of contract, even if many landlords dislike this practice.
Public utilities as part of the rent payment obligation: Payment of public utilities is considered a unique and indivisible part of the rent payment obligation. Non-compliance with this obligation is cause for eviction. However, the tenant and landlord must agree on who is to pay the utilities. If no agreement is made by the parties, the tenant is required to pay all utilities except the basic water rate, which is to be paid by the landlord. If the landlord fails to pay the utilities, the tenant has the right to pay them and deduct the corresponding amount from the rent for the following month. Non-payment of utilities by the tenant is cause for eviction since payment is considered part of the rent payment obligations.
Liens on the tenant’s assets in case of non-compliance of rent payments: If a tenant fails to pay rent, the landlord has the right to establish a lien and to retain all legally attachable assets in the house or apartment belonging to the tenant, the tenant’s spouse, the tenant’s children or the tenant’s parents. It is presumed that the assets in the house are owned by the tenant unless documentary evidence is submitted to demonstrate otherwise. The landlord also has the right to require that any assets taken off the property be returned. This must be done in court and will require legal counsel.