The Real Estate Closing Process in Costa Rica
The key to a successful real estate closing in Costa Rica, when a real estate agent is involved is constant communication and coordination between the realtor and the closing Attorney during the entire process. The purpose of this article is to highlight the responsibilities of those involved in the real estate closing process.
I.The Responsibility of the Real Estate Agent.
1. Does the Realtor work for the Seller or the Buyer ? Generally the Real Estate Agent is an agent for the SELLER of the property since this is the individual that pays the real estate commission. If the Real Estate Agent has a signed contract with the client that is a Buyer to represent him as a “buyers agent” then the agency relationship changes and the agents fiduciary duty must be to the Buyer. In my view the real estate agent should make it clear from the outset for which party he is acting for.
2. What the Real Estate Agent Should do.
(i) Taking the Property Listing. If the agent is involved in taking a property listing they should receive from the Seller as a very minimum a current property survey map (plano catastrado) and a property title report. (informe registral). This information is available on-line from the National Registry web site (www.registronacional.go.cr). With this information the real estate agent should verify that the property which they are going to list and sell is free of any liens or annotations which would make title un-marketable. Although this appears logical you would be surprised how many times a real estate agent comes to the Attorney ready for closing only to discover that the property has a Lis Pendens or some other defect that foils the sale. If this happens all your valuable efforts in showing the property have been wasted. The best procedure is for you to check the legal status of the property BEFORE you list it and show it. Also the real estate agent should clearly understand the property they are listing for sale. I find a common area of confusion occurs when the Agent takes the title information off of the property survey map and assumes that is the current title number. This might not be the case. If the property owner started out with a large tract of land and then segregated pieces from that property each new segregation would spin off a new title number and a new corresponding survey platt number and the original survey map and title number would be out-dated. Just be sure you have the correct survey map and the correct property title number. With the property title report you also verify the record owner of the property. The most typical forms of ownership are
(a) Personal ownership. This is where the property is owned in the personal name of one individual.
(b) Joint Ownership. This is where one or more individuals own the property jointly and each have an undivided interest in the property. This is locally referred to as “derechos”.
(c) Corporate ownership. This is a property titled in the name of a corporation. In this form of ownership the Real Estate Agent should verify with the Seller that he has the authority to act for the corporation. Ideally the Agent should procure from the Seller a copy of the corporate documents.
(ii) Negotiates Price, Terms and Conditions of the Property Purchase. Generally it is the Real Estate Agent that spends most of the time with the Buyer showing them properties. When that Buyer decides on a purchase it is the Real Estate Agent that negotiates the price between Buyer and Seller and sits down with both to establish the price, terms and conditions of the sale.
(iii) Preparing the Purchase Contract. Many agents use their own particular form to set out the offer made by the Seller. Many forms are short and modeled on a US style purchase agreement. Agents must keep in mind that Costa Rican law is very formal in the execution of documents. Failure to comply with some of these formalities could affect the enforceability of your contract. The two most typical pre-sale contracts in Costa Rica are the Reciprocal Promise to Buy and Sell (Promesa Reciproca de Compra Venta) and the Purchase Agreement (Opcion de Compra). These contracts do not formally pass title of the property from the Seller to the Buyer but set out the terms and conditions that must be satisfied prior to closing and establishes the obligations of both the Buyer and Seller during the due diligence period of the transaction. As previously indicated some agents will use their own form and only contact the Attorney to handle the actual property transfer deed. Other agents prefer to have the Attorney involved from the beginning and have the Attorney prepare a formal Buy Sell Agreement. We recommend that the agent pay special attention to transactions that include an inventory in a house or those transactions that require certain construction or repairs to be done to a dwelling prior to closing. This must be spelled out in very detailed form so that each party is clear on what to expect at closing time. We have seen Purchase Agreements that result in bickering and fighting at the closing table because the Buyer expected more than the Seller thought he had to give.
(iv) Setting the Closing Date. Since the agent is the person that has had most of the contact with the Buyer and Seller of the property it should be the agent that coordinates the closing date with all parties including the Attorney to insure that all goes smoothly.
(v) Pre-Closing Prior to closing the agent should obtain from the Seller all necessary documents that will be required by the Attorney at closing and coordinate with the Buyer to retain the services of those professionals required to complete the due diligence and/or conditions set forth in the Purchase Agreement. i. Utilities. Make sure the Seller is current with the payment of all utilities,Electric, Water, Telephone, Cable TV & Internet. Be sure the Seller will leave a telephone line in the property for the Buyer. There may be areas in the country where getting new phone service installed is difficult or impossible and as such securing at least one telephone line for the Buyer is essential. ii. Property Taxes. Make sure the Seller has paid the property taxes and ask them to produce a receipt and or certificate that the property is current in tax payments. Don’t wait until they are at the closing table for the Seller to tell you that he hasn’t paid the taxes. iii. Condominium Sales. When the sale of a condominium is involved the Condo Association must provide a copy of the CCR’s (Regalmento del Condominio). Also required is a letter from the Condo Association indicating that the condo unit that is being purchase is current with all fees and assessments. I also like to see a copy of the financial statement of the condominium to look at it’s financial situations. After all when you purchase in a condo you are inheriting the association as well and you would not want to inherit their liabilities. iv. Home Inspections. If the Purchase Agreement specifies that a home inspection must be prepared prior to closing then the Real Estate Agent should coordinate the inspection with the inspector and the Seller of the property to insure it is done well in advance of closing. This way, the Seller has ample time to correct any deficiencies that would delay closing.
(v.) Review Home Inventory. If the property being sold includes a home and an inventory list of items it is very important for the Real Estate Agent to properly describe and list each item included in the sale. Prior to closing the Agent and the Buyer should inspect the home once again to insure that the items described in the inventory list are as warranted. You would be surprised how many misunderstanding arise at closing because of a poorly drafted and detailed inventory list.
(vi.) Check Zoning for the Property if Applicable. If the property the agent is selling is raw land that will be used by the Buyer for construction then it is very important to obtain a Zoning Use [Uso de Suelo] from the Municipal Government where the property is located. This will ensure that the Buyer will be able to use the property as they intend. Some properties have use restrictions and construction coverage limitations and the Agent should be aware of these so they can explain it to the Buyer.
II. Establishing Escrow When Possible.
In real estate transactions that we handle we prefer to designate our escrow company as the escrow agent for the earnest money deposit. Some Sellers will accept this while others will insist on holding the earnest money deposit. You will have to treat this on a case by case basis. Regardless, the conditions of escrow and disbursement of the earnest money deposit to either the Seller or the Buyer needs to be fully addressed and understood by all parties to the transaction. On many occasions we find contracts that are vague regarding the disbursement of the earnest money deposit and vague as to what constitutes a breach of the closing terms and conditions of the agreement. II. The Responsibility of the Closing Attorney. We prefer to have agents involved with the closing Attorney throughout the transaction to avoid miscommunications or misunderstandings. Depending on the transaction the closing Attorney if hired by the Buyer to do so will perform the following:
Initial Title Search
Most title searches initiate with and initial computerized title search which is conducted at the National Registry website. Depending on the property and the findings of the initial search the title search can be expanded to include a manual search of the National Registry Archives.
Again, depending on the transaction the amount of due diligence required must be contemplated and proper time allotted for completion.
Preparing the Purchase Agreement
If retained to do so the Attorney will draft the purchase agreement either a Reciprocal Promise to Buy and Sell or a Purchase Option depending on the transaction.
Preparing the Property Transfer Deed
In Costa Rica transfer of property title can only pass by executing a property transfer deed before a Notary Public who in turn pays the applicable transfer taxes and records the property transfer deed. It is the responsibility of the closing Attorney to draft the deed and record it. Once the recording is completed he must deliver the original document to the Buyer.If the sale is being done by way of a stock transfer of the corporation the closing Attorney will prepare all necessary documents to transfer ownership of the property from the Seller to the Buyer.
IV. Post Closing Issues. 1. Dealing with Utilities on the Property.(a) Changing the Name on the Utility Bills Once the property transfer title is recorded it is the responsibility of the property owner to transfer utilities from the name of the Seller to the name of the Buyer. Although this would appear to be a simple task, in Costa Rica it is not. In many cases a telephone line cannot be transferred and the Buyer must use the telephone line and leave it in the name of the Seller. Where possible the Seller should issue a Power of Attorney to the Buyer so that they can issue instructions to the phone company regarding the use of the telephone line. If the Buyer wants the electric and water bills changed to their name they can do so but the Attorney will charge for this service since it is not part of the legal closing service. Ideally the real estate agent should assist the Buyer in completing these processes. (b) Delivery of Utility Bills to the New Owner. The Real Estate Agent should obtain copies of the utilities installed on the property [electric, water, telephone, cable TV, internet] to determine where the bills are being mailed or delivered. Some property owners have the bills sent to the property while others may have it sent to a post office box which the own. If they go to a Post Office Box and the Seller does not need it anymore then try and get them to give the Box to the Buyer as part of closing. This will insure that there are no interruption in services which could be a great inconvenience to your Buyer.2. The Local Municipal Government.Your property deed is recorded in the Property Section of the National Registry which is the official national registry for recording titles to property. However, you pay property taxes at your local Municipal Government. To thisdate the two are not automatically connected. In other words just because a sales deed is recorded in the National Registry does not mean the Municipal government where the property is located knows about it. It is the responsibility of the Buyer once they receive the recorded property transfer deed back from the Attorney to hand carry a copy to the Municipal government to inform them of the transfer so they can collect property taxes from the new owner. When the Buyer approaches the Municipal government to update the ownership information they may be required to fill out a Declaration of Property Value [Declaracion de Bienes Inmuebles]. The property tax law requires that this form be filled out by property owners every five  years. This form is the basis used by the Municipal Government to establish the value of the property which in turn is used to calculate the property tax. At present the property tax rate is 0.25% of the value of the property and it is paid quarterly. Some property owners elect not to fill out the form and by not doing so the Municipal Government has the right to conduct an appraisal of the property and set the property tax.
V. Real Estate Commissions and Attorney Closing Fees. The Real Estate Agent should ensure that the commission agreement is specified within the Buy Sell Agreement signed by the Buyer and the Seller. The agent should include provisions which contemplate a commission split in the even of a default by the Buyer. We also include a clause which authorizes the escrow agent to disburse the commission directly to the real estate agent simultaneously at closing. The Attorney must abide by the minimum Fee Schedule established by the Costa Rican Bar Association (Decreto Ejecutivo No. 32493) Compliance with the minimum fee schedule is mandatory for all Costa Rican Attorney’s / Notaries. For real estate transactions the current minimum fee schedule is:
First 10 Million Colones 2%
Excess of 10 to 15 Million Colones 1.5%
Excess of 15-30 Million Colones 1.3%
Excess of 30 Million Colones 1.0%
Keep in mind that this fee is for drafting and filing the property transfer deed. Any additional services including the drafting of purchase agreements, escrow and the like may carry additional fees. n addition to the Notary Fee, the parties must deliver to the Notary the applicable transfer taxes and registry fees due on the transaction and these typically include: (a) Property Transfer Tax of 1.5% (b) National Registry Fee of .5% (c) Documentary Stamps of Approximately .6%There is a common practice to transfer the stock of a corporation instead of the property itself to avoid the property transfer taxes. From our standpoint it is much cleaner to transfer the property outright since it involves one legal transaction filing. To purchase a corporation involves in addition to the property due diligenceit also involves some degree of corporate due diligence. Since there is no centralized corporate debt filings in Costa Rica there is no way to check for hidden liabilities. As such, when purchasing by way of a corporation the client must be advised and approve it accordingly.
VI. A Smooth Closing. If the Attorney and the Agent follow the guidelines set forth above and work together during the entire closing process the closing should be smooth. We don’t like surprises at closings and neither do the parties to the transaction. By dealing with all issues up front and well in advance of closing we can address any problems that arise so that closing is limited to the exchange funds and execution of the closing documents.
This article is copyrighted to Roger A. Petersen and may not be reproduced without the express written consent of the author.