Doing Costa Rica Real Estate Deals

In my southern zone real estate market there is a firmly established deal structure. It is laid out in my Costa Rica deal process article.

But is this process the only way?

No, it's not...

But it is the most prudent way for expats (meaning foreigners) to do it when international money is involved (meaning deal funds both arriving and exiting from/to the exterior).

The other way is how Costa Ricans ("ticos") do deals amongst each other. It is often also how foreigners try to do deals with ticos and sometimes the way they might insist that deals be done amongst each other.

We'll call this methodology the "tico way."

Now, there's nothing wrong with the tico way, but for reasons laid out below, I dont believe it's the prudent way for expats to do deals with one another.

I'll take each step in the Costa Rica deal process and explain the differences between the expat way and the tico way.

The Offer (Letter of Intent)

With the expat way, the offer will normally be an informal "good faith" agreement, signed by both sides, that lays out the basic deal terms.

It is not a binding contract. It is normally drafted by the real estate agent for the buyer, not by any attorney. It is usually not even reviewed by an attorney before it is signed.

However, it is important in establishing by good faith how the deal will be carried out and serves as a sort of roadmap for the buyer's attorney to prepare an actual contract.

With the tico way, there may be no written offer at all, or perhaps a sort of "back of the napkin" one. Things are done in a much more loose fashion and often strictly by hand shake.

The Contract (or SPA)

Once the offer is signed a contract, or SPA (sales & purchase agreement), will be prepared by an attorney, usually the buyer's. If all parties speak English, the contract will also be in English. There is no requirement that the SPA be in any particular language. So, if the document is going to be in, say, English, it is imperative that an attorney/notary be chosen who is capable of handling things in that language.

With the tico way, more often than not there is no contract at all.

Please note that the SPA is a legally binding agreement in Costa Rica, regardless of what language it might be written in. One very important purpose it serves is to call for an escrow account to be established by the buyer and that it be funded by a deposit.

The Escrow Account & Deposit

Once the SPA is signed, the buyer is given a set amount of time, usually 10 days to 2 weeks, to set up an escrow account and fund it with a deposit. In our area the deposit is customarily 10% of the purchase price.

The SPA will also specify a time period for the buyer to do his due diligence. The deposit will be refundable to the buyer should he back out of the deal before the due diligence period expires for a legitimate reason.

In the tico way there usually is no escrow account, nor any deposit. And this is a fundamental difference in the two ways that is important for the expat to understand.

When ticos are doing deals with one another, generally there will be no foreign money involved. Of course, that's not the case when expats are doing deals. The money is usually being brought into the country from the outside and then will again be leaving the country once the deal is completed.

And in that case, due to the very stringent anti-money laundering laws that exist in Costa Rica, the escrow is an essential player in expat deals.

The escrow is a highly regulated company that handles all the money in the real estate deal. It provides a level of 3ʳᵈ party protection to assure both sides that the money flows are exactly as the parties specify and provides assurances that no parties in the deal are engaging in money laundering.

The escrow will also be in charge of holding the deposit and releasing it should the deal go sour. Their rule book for how to do this is the SPA. The SPA will spell out the parameters of buyer's due diligence and the rules by which the buyer can back out of the deal with his deposit. If the buyer does not abide by these rules, she is subject to loss of her deposit.

This provides a level of protection to the seller. The seller has to take his property off the market during the due diligence period and is assured by the SPA and the deposit that the buyer can't simply decide at the last minute that he doesn't want the deal and provides no valid reason as specified by the SPA. In that case, the deposit would be the seller's recourse.

With the tico way, since there is no deposit, nor escrow, the parties are basically subject to the whims of good faith up until the time they sign the deed. This is a recipe for disaster and both sides are at risk in expat deals when they try to do the deal in this very loose manner.

Any real estate agent who's paid his dues long enough can provide horror stories of expats trying to do deals the tico way, in order to cut costs, or corners.

It just isn't worth the risk, or the headaches.

The Deed (Escritura de Traspaso)

This is the final stage of the deal. Here the two ways do converge. There is only one way to actually transfer ownership from one party to another, be they expats or ticos. That's called the "escritura de traspaso" and it has to be in Spanish and is the document that's actually recorded in the national registy to affect the deal and provide notice to the world of it.

One difference is that with the expat way, the closing attorney/notary will be obliged to translate the Spanish document to English, verbally at the closing ceremony, as needed by any of the parties who don't speak Spanish.

I hope this article has given you ample ammo you can use if anyone tries to suggest you do a Costa Rica real estate deal in a manner inadequate for your needs and situation.