In 4 “Easy” Steps…
I get questioned often about how the Costa Rica real estate purchase process compares with that of the U.S., or Canada...
The truth is, even though there are similarities, it does differ quite a bit. This article will walk you through the 4-strep process of completing your Costa Rica real estate deal.
Granted, there are two distinct real estate market processes, one followed by locals (and done completely in Spanish) and the other, the one described below, followed by expats. The process I am describing is geared towards the expat and to the avoidance of the particular risks most expats would prefer to avoid...
Step One – The Offer
You make your offer very informally, usually via what we call a “letter of intent.” Back in the states we used letters of intent for mergers and acquisitions type deals, but for real estate sales, offers were made via approved forms that all realtors used and would just fill in the blanks. Here in Costa Rica there is no “approved” form. The letter of intent, or LOI, is usually drafted by the realtor. They differ in content and style from agency to agency. The purpose of it is basically to hold the deal in place, so to speak, until an attorney-drafted real estate sales and purchase contract is prepared.
Key components of the LOI are of course the price and terms of purchase, the amount of earnest money deposit (usually 10% of the purchase price), the time period for due diligence and closing, and and other special terms that need to ultimately make their way into the contract, or SPA. Once the SPA has been drafted and signed by all the parties, the significance of the LOI passes into history.
Does the LOI effectively take the property off the market? It should and most of them are drafted to say such. But many realtors will continue to market and show listings under an LOI up and until the SPA is signed.
Is the LOI binding and enforceable? Not really, in so far as a suit for “specific performance” is concerned. So, in that respect, it is more like a written-down handshake agreement that will be succeeded by an enforceable contract, usually very quickly. There is no earnest money put down by the buyer as a result of the LOI. That doesn’t come into play until the contract is signed (see below).
Step Two – Contract & Escrow
The LOI starts the time clock running to get the deal to an attorney who will draft the contract, or what we call the “SPA” (for sales and purchase agreement). Usually an SPA can be drafted and ready for execution within a week of signing the LOI. The SPA is certainly enforceable, although the effort, cost, and time involved in actually enforcing one through Costa Rica courts is a topic for another discussion.
The SPA will be much more detailed than the LOI, concerning purchase terms, representations of the parties, responsibilities of the parties during due diligence, consequences of default, etc. It is customary for the buyer’s attorney to draft the SPA, unless there will be seller-financing involved. In the latter case, the seller’s attorney usually drafts it. Costs of drafting are normally split 50/50 between buyer and seller.
If the parties to the deal are English speakers, the SPA will be drafted in English. It is never recorded, so there is usually no need for a Spanish translation, unless one of the parties to the deal specifically requires it.
The execution of the SPA begins two important time clocks. One is for the buyer to set up an escrow account. Almost all deals are done through escrow in Costa Rica. This is necessary both for security of the parties, as well as compliance with Costa Rican banking laws. It is virtually impossible for real estate transactions, involving large sums of money coming into the country from outside, to be conducted without escrow. The buyer is usually given a week, or two, to establish escrow. Setting up escrow is a bit of a pain in the ass for buyers, as they have to produce detailed documentation showing the origin of the funds. You basically have to prove you’re not a money-launderer.
Once the escrow is set up and ready to receive funds, the buyer will wire the earnest money deposit into it. The earnest money deposit (usually 10% of the purchase price) is refundable to the buyer up and until the due diligence process is completed satisfactorily (see below).
And that is the other time clock that starts ticking at the time of execution of the SPA, the 30 – 45 day (or longer, as the parties may agree) time period for the buyer to complete due diligence.
Step Three – Due Diligence
The due diligence period begins at the time of signing the SPA and is customarily around 45 days, but can be shorter or longer, as the parties might agree. Items that are usually important for the buyer to investigate are: the construction integrity of the home via a home inspection; a re-measurement of the property’s borders by a licensed surveyor; and a thorough examination of the title record by the buyer’s attorney.
The buyer can back out of the deal at any time during due diligence, for any reason whatsoever. Once the due diligence period is complete the buyer will be asked to sign off and approve that he or she is ready to go forward to closing. At that point, the earnest money “goes hard,” and is non-refundable.
What happens if problems are uncovered during due diligence? These have to be presented to the seller and usually additional time will be given for the seller to remedy them, as necessary. Of course, the seller can refuse and then the buyer has to decide whether he or she will waive the objection and proceed anyway. Another way to settle these matters is with some sort of price concession.
Step Four – Closing
The SPA will also specify the length of time for closing once due diligence is completed. Customarily, this is a period of around 2 weeks. During this time the buyer will need to send the balance of the funds to escrow. It can take up to a week for these funds to reach the account and be credited and ready for closing. I’ve seen closings delayed more for the fact of money not being available than for any other reason.
The closing attorney (usually the buyer’s attorney) will prepare the deed, which in Costa Rica is called the “escritura de traspaso”, or simply the escritura. This document will be in Spanish, as it has to be recorded in the National Registry for the deal to be effective to transfer the property from seller to buyer. Unlike deeds in the U.S., the escritura is very long and detailed and the most time consuming part of the closing ceremony is when the attorney “verbally” translates the escritura into English.
What are the typical closing costs? There’s about 4% of the deal amount that I like to call “pure closing costs.” These include the transfer tax, stamp fees, and the notary fee (which is basically how the closing attorney gets paid). This 4% is customarily split 50/50 between buyer and seller. The SPA will of course specify this split and it is a completely negotiable item. With the new capital gains tax that sellers are starting to get hit with, realtors are suggesting more often that the buyer pay 100% of closing costs. It addition to the pure closing costs, the buyer will also pay for his or her due diligence costs, which can add up to another half a percent to the buyer’s side of the closing statement.
Unlike the myriad of documents one normally has to sign when closing a real estate deal in the States, in Costa Rica essentially there are only two: the escritura and the proceeds disbursal agreement that will instruct the escrow exactly how to disburse the funds at closing.
Of course there are some “details” I am leaving out and there can be (and indeed often are) wrinkles in the Costa Rica real estate purchase process laid out above in simplistic terms. However, in a nutshell, the above is basically how the Costa Rica real estate purchase process shakes out in a typical deal.