Investing in Costa Rica
An investment in Costa Rica real estate is not something that you should take lightly. We suggest you meet with one of the top attorneys we work with from the start in order to learn Costa Rican real estate law, how it applies to you, and what your options are. There is no better way to get the information that you need to feel protected in your investment. Let us show you how to make your first real estate investment in Costa Rica safely and intelligently.
The Buying Process
- Establish a set of search criteria prior to your arrival. We will work through all local listings (online) in the desired search areas, including that of all other real estate agencies and brokers, to ensure no stone is left unturned. Once all listings have been viewed and sorted through online, we will begin to create a “Short List” of all your favorite listings. Once your arrival dates have been set, we will create a schedule for you to confirm, and begin making appointments with all other agents and homeowners to allow us access and to view the listings. A detailed schedule is very important as we will need to give renters sufficient notice, arrange keys, and use your time wisely, as well as give you some time on the beach to enjoy all the reasons you love Costa Rica!
- View and narrow down listings. Over the course of a few days, we will be able to work through and view all listings within your search criteria. Once we have narrowed the search, we will then begin re-visits and obtain any information crucial to making your decision and an offer.
- Meet local professionals. We suggest you meet with a local real estate attorney and other professionals such as banks, property managers and contractors who will be able to explain and answer any questions in person about the legal process of buying real estate in Costa Rica, and any fees and duties. The process will not only educate you further, it will allow you to establish additional contacts with local professionals, who will also be looking out for your best interests. NOTE: In all cases, we will remain as transparent as possible and will recommend that you interview several professionals in Real Estate Law, Property Management, Banking, and Contracts. None of these professionals work directly for, or with me, and we will only recommend the best in the area based on previous experiences and testimonials of prior clients. We will be able to provide you with the list of professionals, as well as arrange for and take you to appointments to meet and understand their services.
- Begin making offers. In Costa Rica, it is common to make more than one informal offer using a Letter of Intent (LOI), which is a non-binding offer outlining the terms and conditions. An LOI will also allow us to determine the motivation of the seller, begin the negotiations and determine if you will be able to come to terms prior to entering into a formal legal agreement. A formal Option to Buy and Sell Agreement will be created once the price and terms have been negotiated. This Option agreement will be a binding agreement by both parties and allows a due diligence term to begin.
- Enter the Due Diligence Period. A Due Diligence period will always be requested to allow any and all investigations into the title, corporation, home inspection, property survey or anything else deemed necessary to purchase the title of a property free and clear of any liens, mortgages or encumbrances. (“Due diligence” is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for acquisition.)
- Establish an Escrow account to handle the deposit and final balance payment. Some attorneys have Escrow and trust accounts, however, I would recommend in most cases using an Internationally-recognized Escrow title company such as Stewart Title or Chicago Title. These are names you most likely recognize and will give you the reassurance you may be looking for when transferring large sums of money to a foreign country. An Escrow account can be used in the sale of a house, for example. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use Escrow. In this case, the buyer of the property will deposit the payment amount for the house in an Escrow account held by a third party. This assures the seller – in the process of allowing the house to be inspected – that the buyer is capable of making payment. Once all of the conditions to the sale are satisfied, the Escrow transfers the payment to the seller, and title is transferred to the buyer.
NOTE: All Escrow service companies will require the following:
- Two forms of identification (all pages) must be valid and issued by a government entity (only one ID required from Seller)
- Escrow Agreement duly executed by both parties.
- Know Your Customer (KYC) form duly executed by the Depositer.
- Copy of utility bill showing Buyer’s current physical address (less than three months old).
- Proof of income supporting transaction amount (Any of these forms: Tax Returns, W2 Form, CPA Letter, IRA)
- Establish a Final Closing and Purchase Agreement. This will be established approximately 5-10 days prior to closing, to ensure all is in order. The closing documents will include, a Closing statement and Escrow agreement, (which outlines the disbursement of funds, attorneys fees, taxes, commissions, mortgages, Escrow and title fees, and all other fees that must be paid out of the sellers proceeds prior to the seller receiving funds (a separate closing statement will be issued to the buyer and the seller with their respective closing fees)), Final Purchase agreement, and a Share transfer (in the case a corporation is purchased which holds the title). The appointed Escrow Company will be responsible for issuing payments to all respective parties and ensure payments are completed.
- Register final title or corporation transfer in the National Registry. You attorney will be responsible for the final registration in the National registry to show you as the new title holder and or manager of the holding corporation. We will always advise that in any case, you follow up with your attorney as well as request your real estate agent to follow up with your attorney until the registration is completed 100 percent (this process can take between 2-4 week to reflect in the national registry, however all documents are legally signed and you are officially the owner and title holder).
Enjoy your new purchase in Paradise! Property Taxes
Here’s one of the real perks: real estate taxes in Costa Rica are very little, one-fourth of the total value. Taxes on a $100,000.00 home are about $250.00 per year.
The Costa Rica government collects a 2.5% transfer tax on all real estate transfers. The total taxes levied on a purchase are about 3.8% of the declared value. Nevertheless, a lot of homes are held as a corporation, so simply buying the corporation includes the real estate as an asset and no transfer tax is required, just a small attorney (notary) fee of 1-1.25% of the declared value. The cost for setting up a new corporation, called a Sociedad Anonima, is about $400.00. Title insurance is also available here through Chicago Title and Stewart Title Latin America, your attorney or realtor can advise on this option.
In most cases an Escrow service is recommended as a third party holding for deposits and final balance transfer to the seller at closing. An Escrow service such as Chicago Title and/or Stewart Title will act as a neutral third party and only do as stated in the mutually signed sales contract. We highly recommended this, and the service is typically paid for by the buyer at a minimal cost.
Financing real estate in Costa Rica is not always an easy task, but possible.
Bank financing is similar to that found in other countries. The down side to bank financing are the interest rates. Current interest rates on real estate loans are very high, 8% to 15% per year. An option used here is to obtain an interest-only loan for 3 to 5 years. The interest is paid and a final payment is made for the principal amount. Many United States and Canadian Banks have branch banks here. The possibility exists to arrange for a secured loan in the US or Canada and use the funds to make a “cash deal” here in Costa Rica.
One viable option, and one of the better ones, is to arrange for the seller to carry the mortgage on the property. Many sellers will, some will not. Your attorney or realtor can offer advice during the pre-search, qualifying process. One recommendation: Do not look for 25- or 30-year loan terms. The normal is 5 to 10 years. Good news: The interest rates can be much lower.
Many foreign individuals starting a business or purchasing real estate for investment purposes in Costa Rica, decide to use a corporate entity as the owners. Whether investing in commercial real estate or personal, this decision is a very wise one, and it is what we highly recommend to our clients as the first choice.
Ownership through a corporation allows one to have flexibility and more predictability in areas ranging from estate planning (if shared ownership is properly structured the investor can spare his heirs a painful and lengthy long-distance, probate procedure), tax management (as an example, rules on corporate expenses are more flexible than the ones on personal ones), and representation (shareholders’ meetings can facilitate granting special powers of attorney or other types of authorizations for many actions, thus not requiring local presence in the country).
The first question often asked by our clients is whether to use (or form) a Costa Rican corporate entity or use one already existing and controlled by such individuals abroad. Our advice, in most cases, is to use a local entity. Although foreign corporate entities can own land and engage in business activities in the country, registration procedures (both at the Public Register and with government entities, as well as negotiation of contracts with private parties) can get complicated, delayed and/or run into obstacles when they are involved.
In any event, if a foreign entity will be used, take note that we normally recommend registering the foreign entity as a branch in the Costa Rican Commercial Register, or at least the specific powers of attorney. Both cases require a special and formal procedure that may take several weeks.
As mentioned before, in the majority of cases, we recommend the use of a local corporate entity. Although Costa Rican commercial law contemplates many types of corporate forms, only two of them offer the investor the comfort of having structures similar to the limited liability companies to which he or she may be used to in their countries of origin.
Such corporate forms are the “Sociedad de Responsabilidad Limitada” and the “Sociedad Anónima.” In both cases, shareholders are only responsible for their participation on the company’s social capital and their own personal assets are fully protected and out of reach from any potential creditor the company may have.