How Does Escrow Work in Costa Rica real estate?
Why use escrow in Costa Rica real estate and how does it work? Some foreign buyers of Costa Rica real estate just assume that this works the same as it does back home. Wrong!
Let’s start at the beginning. In Costa Rica, local buyers, as well as sellers, do not use escrow. They don’t even know what it is. Attorneys who don’t specialize in real estate, usually don’t know what escrow is.
Buyers and sellers just agree on the sales price. Then at the signature of the purchase option, the buyer hands the earnest money to the seller. At closing the earnest money is deducted from the sales price.
I once experienced a seller passing away just before closing. Then we found out that the seller or the seller’s family long spent the money on other things. And because of the death of the seller, and there was no living will, the property could not be sold.
I have also experienced that the seller used the same earnest money they received from their buyer, to get a purchase option for the house that they were planning to buy. So when the first deal goes bad, the second one does too.
Do you want to get involved in a weird deal like that? Of course, you don’t!
So learn how escrow accounts in Costa Rica function before you do any business. In case you wonder, “fideicomiso” is the correct word in Spanish.
Money Laundering Law
Law # 7786, referred to as the “Drug, Money Laundering and Financing of Terrorism Law” (Ley sobre estupefacientes, sustancias psicotrópicas, drogas de uso no autorizado, actividades conexas legitimación de capitales y financiamientos al terrorismo) now regulates large amounts of money.
This is controlled by SUGEF, the Financial Institution Superintendency of Costa Rica. These financial controls are worldwide and controlled by The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog.
Origin of funds
Law # 7786 obliges your banker, your lawyer, and your real estate broker, to request proof of the origin of funds. If you have nothing to hide, you have nothing to fear. SUGEF only wants to know where you acquired the money you’re using to make a property purchase in Costa Rica.
You can prove this by supplying the last 3 months of bank statements, the deed of a property sale in your own country, income tax statements, or other proof.
If you’re a citizen or a resident, you probably have your own bank account already. If you already have the money for the property purchase sitting in your account. BUT, are you planning to wire the funds for the purchase to your local bank account from somewhere else? Then your bank will probably freeze those funds until you’ve shown the origin of the funds.
You might not have access to your money for a while, after wiring these funds into your account. So, before you wire the funds into your account, tell your banker and request the required documents to prove the origin of the funds.
If you’re not a resident, you will only be able to open a simplified bank account. This account will only allow you a maximum balance of $1,000/month, barely enough to pay your utility bills. That’s what that account is for.
BUT, if you want to wire the necessary funds for a real estate purchase in Costa Rica, you cannot use this simplified account. Therefore, we recommend using escrow.
Once you have agreed with the seller on a sales price, you’ll probably want to take the property off the market until closing. That’s done by making an earnest money deposit. As I said at the beginning of this blog, you don’t want to give this earnest money deposit to the sellers, which is how the local buyers and sellers do this.
Escrow is a perfect solution for this. Your attorney will be able to describe what will happen to the earnest money deposit in the purchase option agreement. That way, your money is safe until closing.
Before you sign the purchase option though, ask your real estate agent for escrow company options. Contact one of them and complete all the requirements before you wire any money.
There are several good reasons to use escrow:
- By using escrow, the buyer only has to present all the documents required by SUGEF once. The escrow company shared the documents with the buyer’s lawyer and the real estate company. It’s a one-stop thing.
- The buyer’s earnest money deposit is tied up by the purchase agreement and held by the escrow company until closing
- All the funds will be available at closing.
- The seller can give the wire instructions to the escrow company well in advance
Therefore, the use of escrow takes the stress out of the purchase -sale for all parties.
The Know Your Customer (KYC) form is a simple form that explains who the buyer is. Click on the image below to download an example.
The form will require
- your personal information,
- your employment information,
- the purpose of the transaction,
- a certification that you’re not a person who performs important public functions,
- and a statement that the funds were acquired in legitimate activities and are not the proceeds of any criminal activity or violate international money laundering regulations.
If you purchase a property through one of our affiliates, the agent will assist you as much as possible with the escrow company. For any questions, contact us.
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