What Are the Real Risks in Signing One?
You’ve been diligently searching in the Costa Rica real estate market and have finally found your dream property.
Your buyer-agent drafted an offer (or letter of intent) and after a bit of back and forth, it was accepted by the seller.
What’s next?
The next step is for you, the buyer, to choose an attorney to represent you in the deal.
The very first task of your attorney will be to draft the SPA (or sales and purchase agreement).
Unlike the informal offer (or LOI) the SPA is a legally binding contract between the buyer and seller. It should restate the basic terms of the deal, as set forth in the offer. But it does much more.
How concerned should you be in signing the SPA? What are the "real" risks?
The SPA will become the roadmap for your deal. It will set forth certain milestones and provide a timeline for achieving them.
Those would be:
- the time for you to perform your due diligence
- the closing date
- the time for you to set up your escrow account and fund it with your deposit (usually 10% of the purchase price)
These deal time-clocks will start ticking once the SPA is fully signed. The date of the last signature will be the starting date.
Typically around 10 "business" days are given for setting up and funding your escrow account. Thirty to forty-five calendar days are typically given for due diligence. And usually closing is around 10 calendar days after the end of due diligence.
The SPA will lay out in much detail exactly what is required for due diligence.
In Costa Rica there are no "seller disclosures" as is typical in the States. Rather, buyer beware (or caveat emptor) applies. You as the buyer have the responsibility to inspect the property, both from legal and technical viewpoints. You have the full due diligence term, together with any extensions, to do so.
What happens if during the due diligence period, you discover problems with the property?
At that point (and certainly before the end of the period) your attorney will need to make a detailed declaration of negative due diligence.
At that point the seller can either (1) fix the problems to your satisfaction; or (2) re-negotiate the deal.
Barring either of the above ways of remedying negative due diligence, the deal will terminate and the buyer can receive a return of the deposit.
If nothing is discovered during due diligence that would prevent the deal from moving forward to close, a positive due diligence declaration is made and the deal proceeds to the closing phase.
So, what are the major risks to the buyer of entering into an SPA to buy a Costa Rica property?
While sellers in Costa Rica do have a legal right to the remedy of specific performance, which means that a court could force a breaching buyer to perform under the contract. This is very rare in Costa Rica, since court remedies are expensive and incredibly time consuming.
For the most part, the biggest risk to the buyer is loss of the deposit.
This can and does occur usually due to buyers simply changing their minds and not providing a valid reason for backing out of the deal.
What happens if the buyer backs out after the SPA is signed, but before the deposit is funded?
In general, in those situations, the seller is out of luck.
Therefore, let this SPA tutorial serve as a warning to buyers.
If you move forward to purchase a property in Costa Rica and fund the deposit, you could very well lose it by breaching the terms of the SPA.
If you decide to back out of the deal, you'd better have a legitimate reason for doing so!
