Purchasing: The Details

Buying Existing Property
You know you want a piece of property in Costa Rica, so now what? You start house hunting with your Realtor as you would just about anywhere. But first, you need to establish a relationship with a reputable real estate agent. Easier said than done, right? In Costa Rica, the government is pretty hands off when it comes to regulating the real estate industry. So make sure you find a Realtor you can trust. Ask local homeowners in the area for an agent with a good track record and which agencies have the best reputation. When you get a name, don’t hesitate to ask that agent for references. Here’s why it’s so important to find somebody competent, and don’t fool yourself into thinking you can go it alone. Your Realtor will not only show you property, they will work directly with the lawyer, the property owner, and the National Registry (where all property is registered), to follow up on a host of details until the transaction is complete.

There are no formal escrow companies, mortgage companies or banks that assist with the process. In many ways, that puts more responsibility on your agent. You’re going to come to rely on this person to help guide you along the way.

Buyer Beware
Watch out for people trying to sell you real estate off the street. Believe it or not, bartenders, taxi drivers, anyone in Costa Rica can be a Realtor and may approach you with a “good deal". It’s likely these folks have no real sense of real estate from a business perspective and are primarily chasing a commission (typically around 5%), which means their interest will outweigh the concerns and protections of yours, the buyer.

What About For Sale by Owner?
Be advised of the potential pitfalls of purchasing a For Sale by Owner. Primarily, first time sellers may have problems negotiating contracts on their own. This is a big reason why the real estate professional exists, because the legalities and contractual stipulations are far too complicated for a non-professional to navigate.

Realtor Commissions and Financing
The agent represents both the buyer and seller (unlike in the U.S. where there’s a separate buyers and sellers agent) and helps draw up the sales document and discuss pertinent details before closing a transaction. The buyer typically absorbs the cost for the agent’s commission, which is around 5%, unless you work out a special arrangement with the seller for a split. As far as financing goes, Costa Rica allows equal credit access to both foreigners and nationals, but it’s more difficult for foreigners to quality. Even then, interests rates in Costa Rica are extremely high, so it’s probably more practical to finance in your home country. That and many properties in Costa Rica don’t quality for a mortgage. This includes many beachfront properties because technically the land is owned by the state, not the occupant. For beachfront properties that don’t qualify for a mortgage, it’s best to finance in your home country, or pay cash.

So, let’s say you’ve put in your offer, everything was agreed upon and a contract drawn up. Now it’s time to begin the title transfer process.

Closing on the Property and Transfer of Title
There are a few nuances to be aware of, that are different than what you’ve experienced buying property in the past. If you’re financing the majority of the purchase price, the seller has the option to choose a Notary Public who will be handling the paperwork and title transfer. A Notary Public in Costa Rica is also an attorney. If you end up choosing your own Notary, choose carefully. There are over 16,000 lawyers in Costa Rica. Of those, half were licensed in the past eight years, so their experience may be limited. Ask your agent for a good recommendation, as they will work closely with this attorney at closing. You may also check with your country’s embassy or one of your consulates as they may have a good suggestion. The Costa Rican-American Chamber of Commerce is also worth a call.

The Transfer Deed
When you transfer a title from one party to the next, it’s called an escritura, or transfer deed. Custom dictates that if the buyer pays in cash, he or she selects the attorney to draft the transfer deed. If the purchase is financed, then the transfer can be made in these other ways.

1. If the seller finances the majority of the purchase price and a mortgage is drafted to guarantee payment, the seller's attorney may draft the transfer deed upon seller's request.
2. If a property is purchased 50% cash and 50% financed, the buyer's attorney and seller's attorneys can draft the transfer deed and mortgage in a single document. This process is called a co-notariado.
3. A buyer may have his attorney write the transfer deed and let the seller's attorney draft a separate mortgage instrument. Since the mortgage agreement is being drafted separately, registration fees are higher.
   

The notary/attorney will make sure you get a clear title. Property titles are registered in the Public Registry and have a folio real or titled registration number. This is the "social security" number of the property and what the attorney uses to track down critical property details such as titleholder name, any existing liens, mortgages or easements and the tax appraisal. Make sure the attorney does this search and an independent title search before closing.

Concessions in the Maritime Zone
Concession property is commonly referred to as beachfront property. In Costa Rica, 95% of property is considered concession property and is governed by the Maritime Zone Law and other specific regulations. These legal conditions dictate under which circumstances foreigners and local residents can own the property in this zone, which is considered the first 200 meters measured horizontally from the high tide line – including islands, rock formations, mangroves, estuaries, small islands and any natural formation over the ocean line.

The 200-meter zone is defined this way:

1. Public Area: The first 50 meters measured horizontally from the high tide line. This zone is not available for ownership of any kind. No kind of development is allowed except for constructions approved by governmental entities. This is a public area for the enjoyment of all. In other words, there are no truly private beaches in the Maritime Zone.
   
   
2. Restricted/Concession Area: The next 150 meters. This area is available for granted concessions, or rather a “lease” on the property granted to the lessee for a specific period of time. Normally the concession period is 20 years. An owner of a concession may build on that concession, subdivide the concession and perform other acts to the property with the appropriate permits from the local municipality. Anything built will convert to local governments at the end of the lease, if the lease is not extended.
   
   
3. Ownership Limitations: Unlike fee simple property, foreigners do not have the same rights as citizens when it comes to purchasing concession property. Under law, foreigners cannot be majority owners of a concession property. A foreigner can, however, enter into a partnership with a Costa Rican citizen where the ownership is divided 49% / 51% between the foreigner and Costa Rican. One exception is if a foreigner has resided in Costa Rica for at least five years, then they may be majority owners of a concession. Both foreigners and Costa Ricans are required to purchase all Maritime Zone property through concession.
   

Transfer of the Property and Registration
Once you have a clear property title, the transfer deed is drafted and you pay the appropriate fees, which break down to 1.5% of the purchase price and an additional 1% for stamps at the Public Registry. Now, you’re ready to close and prepare for a celebration. At closing, the notary presents the deed and has it signed. It’s the responsibility of the notary to record the deed at once with the Public Registry. This is a two-part phase. First, the notary presents the deed – from then on the property is protected from any third party interest. After the registry verifies the deed is structurally in tact, registration begins and the property is recorded in your name. Follow up with the Public Registry to make sure the deed was in fact registered, so your property rights are secured. If you want to verify information you have on a specific property, you can do so by visiting the Public Registry web site, but keep in mind this in only a starting point, and the information on this site is all in Spanish.

What Will You Pay in Closing Costs?
The actual costs to close your transaction will vary depending on the specifics of your deal, but they generally include government taxes and fees, notary fee, and mortgage costs, if any. Ask your notary and they will probably throw out a figure of roughly 4.25% of the purchase price for total closing costs. Ordinarily, closing costs are split between you and the seller, with mortgage costs paid by the buyer. Since Costa Rican properties have a low property tax appraisal base in relation to market value, it’s a common practice to run property sales through at the registered value (declared by the government in common law), which is usually substantially less than the actual sales price of the property. That means, all transfer faxes and fees would be based on the registered value, not the sales price. There is considerable savings with this approach but some risk, so make sure you run this by your attorney.

A Complete Breakdown of Fees

1. Transfer taxes, stamps and other charges: in order to record the transfer of the property, the government charges 1.5% of the purchase price and an additional 1% for other stamps at the Public Registry.
   
   
2. Notary Fees: Notaries are required by law to charge 1.25% in legal fees.
   
   
3. Survey fees: If you require or demand a new survey for your property, there are qualified surveyors available to perform this function. Pricing depends on the location and size of the property.
   
   
4. Mortgage registration fees: The government charges 0.6% of the mortgage value to register the mortgage deed on the property.
   
   
5. Escrow Fees: Fees are dependant on the escrow provider.

Yearly Taxes
Property taxes are relatively low when compared to the United States and Canada. There are two types of taxes, the Municipal Tax and Real Estate Tax. The Municipal Tax is paid quarterly and is based on the type of property and location. The Real Estate Tax used to be based on 6% of the declared value of the property, but was recently amended and is now only 0.25% of declared value. There is no capital gains tax, so whatever you profit when you sale your property, you will not be taxed on it. However, if you bring back and declare earnings in your country of citizenship, you will be taxed.