How to purchase property for sale in Costa Rica and what to watch out for
Purchasing Costa Rica property for sale is a great investment: prices are reasonable, the laws are clear and many areas have great potential for growth in the near future. However, as with purchasing any land for sale, you should know what the law in Costa Rica is and how to protect yourself. The most basic protection you can have is to work with a reputable realtor. He or she will help you avoid an inappropriate purchase, help you negotiate a fair bargain, and help you find a property suitable to your needs, lifestyle and budget. Your American-European real estate agent will guide you through the process described below.
Costa Rica Land: the title transfer process of land for sale
When you buy Costa Rica property for sale, the seller transfers land to the buyer by executing a transfer deed (escritura) before a notary public. Unlike common law countries, such as the United States and Canada, in Costa Rica the notary public has extensive powers. The notary public must be an attorney and may draft and interpret legal documents, as well as authenticate or certify the authenticity of documents.
In order to close on the property, the buyer and seller must select a closing attorney who will draft the transfer deed and register the sale in the Public Registry (Registro Nacional). Locally it is customary for the buyer to select the notary/attorney who will draft the transfer deed if paying cash for the property.
Selections of the closing attorney
If the purchase price is financed, there are 3 options for selecting the notary/attorney:
- If the seller is financing a large percentage of the purchase price 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.
- 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.
- 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.
Ways to own Costa Rica property for sale
Property can be purchased in one person’s name, jointly, or in the name of a corporation. It is very common in Costa Rica for individuals to put property in the name of a corporation in which they own all the shares. Particularly Costa Rica developers like to create corporations for the properties they develop and then transfer the corporation to the buyer. The new corporation tax has slowed down this practice a bit. You should discuss this asset protection with your accountant and attorney so that you will be informed of the tax implications in your individual situation.
Checking for Clear Title of Costa Rica property for sale
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 Costa Rica 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 web site for the National Registry is www.registronacional.go.cr
The 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 title. Since Costa Rica follows the doctrine of first in time, first in right, recorded instruments regarding land for sale presented to the Public Registry are given priority according to the date and time in which they are recorded.
For purpose of the transfer of real estate, this means that any mortgages or liens, which are not recorded at the time that title is transferred, are invalid. Since the certificate of title issued by the Public Registry is prima facie evidence of the condition of title on the date issued, any instrument not recorded at the time the certificate is issued is invalid. This eliminates the need for title insurance since any instrument omitted from the report is deemed invalid.
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. And some buyers feel more comfortable purchasing title insurance, in which case the title guaranty company will take care of the search.
Closing Cost Traditions
It is customary for the buyer and seller to share equally in the closing costs. This can be negotiated. There are three closing costs: government taxes and fees, notary fee, and mortgage costs. See below for details, click here for an example of Costa Rica transfer taxes and closing costs on a $100,000 transaction.
Government taxes and fees on Costa Rica property for sale
This includes a real estate transfer tax of 3 percent; a registration fee of 0.5 percent; and documentary stamps (agrarian, hospital, municipal, bar association, national archive and fiscal stamps) totaling approximately 0.55 percent.
Notary fees on Costa Rica property transfers
The notary who drafts the transfer deed is entitled by law to charge 1.50 percent of the first one million colones of the sales price, and 1.25 percent on the balance. However, many attorneys will accept much less since a property with a high value involves the same work as a lower priced property.
It is customary for the person who is receiving financing to pay the mortgage costs. 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 within a transfer deed pays registration fees of 0.25 percent in registration fees and approximately 0.53 percent in documentary stamps. The notary will also charge for drafting the mortgage instrument and that fee can range from approximately 0.525 percent to 1.25 percent of the amount of the mortgage, depending on the circumstances involved.
You should know thatCosta Rican real estatetransactions commonly operate on a two-tiered system. Since Costa Rica land has a low property tax appraisal base in relation to market value, it is a customary practice to run property sales through at the registered value, which may be substantially lower 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. Ask your attorney about the potential risks of this practice.
Registration of the transfer deed
Once all the fees have been paid, it is the obligation of the notary who drafted the transfer deed to ensure that the deed is presented (anotado) and registered (inscrito) in the Property Section of the Public Registry. You should be very sure to follow 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 Finance Ministry (Ministerio de Hacienda) is provided certifying that the seller’s property tax (impuesto territorial) payments are current; and a municipal certification is provided from the municipality where the property is located certifying that both buyer and seller are current on municipal tax payments. 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 45 to 60 days after presentation. It is therefore important to follow up with the notary 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 registered.
Costa Rica beach front property
When you plan to buy Costa Rica beach front property, you need to read up on some of the articles we have on our website about this. There are restrictions that you need to know, especially when you are a foreign buyer and you need to take your precautions. Our affiliate realtor Daveed Hollander has also written the First Time Buyer Tips that are very interesting to read.