Who can you count on to help you make the correct decisions in your quest to own property in Costa Rica? You might not get any karma points for this, but the correct answer is: nobody. Whether you are buying a second home, buying real estate as part of an investment portfolio, or moving to Costa Rica to retire, you must always remember that the safety of your investment requires a careful and dispassionate assessment of risk--trust should not enter into the equation.
If, while in the course of your property search, you find yourself asking, "Can I trust this person?", you need change that question to "How can I verify what this person is saying?". Every time you fail to verify a fact or a claim you introduce an unknown into the mix, and investing with too many unknowns is a form of gambling.
This article highlights the essential steps to buying property in Costa Rica and offers some tips to help you verify the information you receive along the way. A list of suggested questions for each step is also provided to help you obtain good information.
Step 1: Defining your objectives
This step may seem obvious, but you would be surprised at how many people decide they’re going to come to Costa Rica to invest in real estate, but arrive here with no clear notion as to what they intend to purchase. Focusing your search forces you to attend to the nitty-gritty, real-world variables that determine the path you will have to take toward closing the deal. This means that your investment calculations will be based on knowable variables and will thus inform and validate your expectations and strengthen your negotiating power. Of course, you should allow yourself the flexibility to reevaluate your objectives, but remember that the less certain you are about what you want, the less focused you will be, and the more susceptible to influence. Here are some things to keep in mind when formulating your objectives:
- Talk to others who have purchased property in Costa Rica (see our section on discussion groups and online communities).
- Identify your "non-negotiables". These may include housing features, price, location, construction plans, acreage of land, etc.
- Make a list of disqualifying characteristics--things that break the deal before negotiation even starts
- Explicitly define all of your expectations and be able to communicate them to your agent.
Questions you should ask other investors:
- What challenges can I expect to encounter in pursuing the specific property investment that I am considering?
- What new challenges exist today that did not exist just a short time ago?
Step 2: Finding a real estate agent
A bilingual agent is indispensible in helping you find property in a specific area. Costa Rican law does not require that real estate agents be licensed, however, so you must be extra cautious when choosing him or her. The solution to this is to always speak to several real estate agencies before deciding on one. Surveys show that more than 70% of buyers purchase real estate from the very first agent they talk to. This is a cardinal sin, especially in an unregulated market like Costa Rica. Speaking to multiple agencies is crucial because it will undoubtedly expose those notorious agents you should avoid, as well as possible scams, and will also serve as an interesting sort of introductory course to buying real estate in Costa Rica. This is because every agent who’s been around a while can relate to you all sorts of scenarios and anecdotes, some of which can be quite educational. Most importantly, however, ask lots of questions.
Questions you should ask your real estate agent:
- Can you show me the property map (plano catastrado) and property title report (informe registral)?
- What are the typical land and construction costs per square meter in this area?
- What can X amount of dollars buy me in Y neighborhood?
- Where do you advertise your listings? (Check these!)
- Who are your competitors? (Talk to them!)
- How can I ensure a clear title? (See corresponding section in this guide for what constitutes a good answer to this question)
- Can you give me some references (Check these!)
The right questions reveal more than the agent may be consciously willing to share. Comparing different answers from different agents is also an illuminating exercise.
Step 3: Exploring financing options
A few years ago, buying real estate in Costa Rica required you to pay in cash or take out a high-interest loan. However, the mortgage market has matured significantly and you can now find loan options comparable to what you would find in the United States. Costa Rican banks generally lend up to 80% of the value of the property at reasonable interest rates. Since every property buyer is different, a mortgage broker such as MDO Mortgage (http://www.mdomortgage.com) is very helpful in matching your particular situation with the right lender. A mortgage broker is also much more likely to understand the expectations of a foreign investor and will do everything possible to make the loan application process as painless as possible.
Questions you should ask your lender:
- Can you give me some references? (Check these!)
- What is the maximum time I can expect to wait to be approved for a loan? (Compare this to what the references say)
- In addition to the initial requirements for the loan, what additional requirements could possibly be demanded by the lender after the process is under way?
- What exactly will happen if I can’t meet my monthly payment?
Step 4: Researching the property
As always when buying real estate, it is essential to check to see if the title is contested or if there are any other outstanding issues regarding the title. Costa Rica has a central registry in San José where all title transfers are recorded. The most straightforward way to check the title is to hire an attorney to do it for you. Make sure you hire an independent attorney and do not rely upon the seller’s attorney who has no incentive to find encumbrances to the sale.
You can also elect to buy title insurance, in which case the company that issues the policy will investigate the title. Title insurance protects you against potential hazards that may occur such as faulty records, ambiguities, negligence, fraud, or a simple mistake. Because these hazards may be impossible to detect, all property buyers should seriously consider title insurance.
One of the first things every buyer should do is take a look at the map of the property. The plano catastrado, as it is called in Spanish, will give you the exact location of the property, its size, whether it lies within a reserve or is affected by one, if it affected by specific laws limiting its use, and other relevant information you will need before deciding to purchase. Make sure the property map is up to date and represents exactly the same property that the seller is advertising.
If you plan to build on the property or run a business, you will need to file with the local municipality for the land use status (zoning) of your property. Authorization is required in order to develop on the property or to use it in specific ways. In many cases there are limitations or restrictions regarding the use of your property. Don’t wait until after you have purchased the property to find out what these are!
Questions to ask your legal advisor:
- What exactly does this title insurance protect me against? What does it not protect me against?
- What limitations and restrictions are associated with this property?
- How do I know the plano catastrado for this property is current?
Step 5: Negotiating price
It is common practice in Costa Rica to negotiate on price. A good real estate agent will be able to help you determine a fair price, but be very aware that some agents do not have your best interests in mind or may simply suggest what he or she thinks you can pay. You can usually determine a fair price for a property by comparing it to other similar properties in the area that have recently sold. If you have any doubts, however, always ask for a second opinion.
- What are some other properties in this area that have recently sold?
- What is the current cost of land and construction in this area?
Step 6: Closing the deal
Before finalizing the purchase of real estate, there are several important steps you should take to ensure that everything proceeds smoothly. First of all, be certain that everything involved in the transaction is spelled out in black and white. This includes any inventory in a house that should be included with the purchase as well as any construction or repairs that the seller must complete prior to closing. You should also verify that the seller has paid all utilities, property taxes, and any other liabilities that may be associated with the property (condominiums often require additional fees, so check its financial records).
The buyer and seller must decide how they want handle escrow. If the seller agrees, it is recommended that you designate the escrow company that holds the earnest money deposit, though some sellers may insist on using their own escrow agent. In any case, the conditions under which the money deposit is given to the seller or refunded to the buyer need to be explicitly defined and communicated to all parties.
Normally, the real estate agent coordinates the date with all parties, including the closing attorney. During closing, the attorney is responsible for drafting the purchase agreement and the transfer deed. The transfer deed, or escritura, must be executed before a public notary so that the transfer of property title is officially recorded and the appropriate taxes are paid.
Questions to ask before closing:
- Is the seller up to date on all utility bills and taxes?
- What exact requirements must the seller fulfill before my deposit is released to him/her from escrow?
Step 7: After the sale
After the title transfer is complete, it is the responsibility of the property owner to transfer the utilities from the name of the seller to the name of the buyer. Also, be sure to find out where the utility bills are sent so that there are no interruptions in service. In Costa Rica, it is often not possible to change the name on the telephone account. Therefore, you will have to request a new line (which can take quite a while) or get a notarized power of attorney from the seller to legally administer the currently installed line.
Property taxes are paid at your local municipality. You must inform them of the transfer of ownership, as their system is not automatically updated from the national registry. Also, a Declaration of Property Value must be completed every five years which determines the amount of property taxes you will have to pay (the property tax rate is 0.25%).
Because of squatter laws and the prevalence of theft, you should make sure that someone is looking after your property at all times. Your neighbors may be of some assistance, but if the property is not located within a gated community and you are not physically residing on your property, it is strongly recommended that you hire security.
Questions to ask after closing:
- In whose name(s) are the utility bills?
- Will you grant me power of attorney to administer your phone line?
- What are some effective steps to ward against crime?
Conclusion
The steps above should give you a good idea of what to expect when buying property in Costa Rica. Having a good real estate agent and a qualified attorney is essential, but at the very least you should be familiar with the entire process before trusting such important financial decisions in the hands of others.
