Purchasing property in Costa Rica

Making investments is not as easy as it sounds. In fact it can be quite stressful if your investment is meant for the acquisition of real estate. In countries like Costa Rica the process of acquiring a piece of real estate can be quite difficult especially because there are a number of risk factors, like language barriers and lack of familiarity with local laws that are involved. But this should not be a hurdle for foreigners who want to purchase property here because the country of Costa Rica offers them with a wide variety of real estate options that include houses, condominiums, time shares, farms finished lots and beachfront property. This guide has been created keeping in mind the requirements of real estate buyers before, during and after the purchase of property. It has three main sections covering:

1.    Property Types and Property Rights

2.    Purchase Process (This section further includes the following subsections)-

a.    Legal vocabulary used during the time of property purchase

b.    Methods of purchase

c.    A step- by- step description of the buying process

d.    Fees required to go complete the entire procedure

3.    Investment Protection- strategies and tools to protect property investment.

I. Property Ownership and other forms of possession

Just as it is in the case of US, Canada and Europe, Costa Rica also offers an extensive range of property to buyers. Understanding the process of purchasing such varied kinds of property can be rather difficult for buyers and the section below would help all prospective Costa Rican property buyers to come to a conclusive decision.

a. Fee Simple

The most comprehensive kind of property ownership in Costa Rica is fee simple. This perhaps is the best property investment option for foreigners since in this case the conditions are the same for foreigners as they are for Costa Rican nationals. Costa Rican fee simple ownership is more or less similar to that which exists in the US. The fee simple ownership here lets the owner have absolute right over his property materially. The owner can use his property, modify it, lease it and even sell it the only consideration here being the property laws of Costa Rica. A fee simple ownership also means that the original rights of the owner will be restored to him if it so happens that he is obstructed from enjoying the piece of property completely.

b. Concessions in the Maritime Zone

What we know as concession property is also called beachfront property. 95% of all beachfront property is considered as concession property and all properties are under the Maritime Zone Law and other regulations like those stated by municipalities and the ICT (Costa Rican Institute of Tourism). These regulations put forth conditions that need to be followed by nationals and foreigners while owning concession property. In Costa Rica, the term ‘concession’ is used in terms of property to define the right to use a property located in the maritime zone for a pre- determined period of time. This right is granted by the state municipality in charge. It must be noted that the first 200 metres measured horizontally from the high tide line is considered to be the boundary of the maritime zone. Islands, mangroves, estuaries and other small natural formation are meant to be part of the maritime zone. This 200 meter zone is divided into two areas:

1. Public Area:

The initial 50 meters calculated horizontally from the high tide line is considered to be the Public Area. No part of this region is meant for private ownership and even development is not possible unless such constructions are given the green signal by Government entities. But since the area is under the Government, any person wanting to use the area solely for enjoyment can do so freely. This means that no beach is meant for private usage in the maritime zone.

2. Restricted/Concession Area:

The point where the Public area ends, begins the restricted/concession area. This zone is around 150 meters. To build property in this area one needs to obtain a concession. This in fact is very similar to a lease where the property is granted to the lessee for a certain period of time. In most cases this time frame is around 20 years. Once a concession is granted, the person owning can make developments to it, subdivide it and do as they please. Before doing the these, an owner of a concession needs to acquire specific required permits from the local municipality.

3. Ownership Limitations:

There are several ownership limitations attached with the ownership of concession property by foreigners in Costa Rica. While purchasing fee simple property foreigners get the same rights as that of citizens, but when it comes to the purchase of concession property the situation is far different. The law regarding concession property states that foreigners cannot be the majority owners of this kind of real estate. But if a foreigner so wishes he can enter into a partnership with a Costa Rican citizen where the property is divided between the foreigner and the Costa Rican citizen in shares of 49% and 51% respectively. There is a single exception to foreigners owning concession property and it is that they can be majority owners only if they have lived in Costa Rica for five years at a time. But whether it is foreigners or Costa Rican citizens, all have to acquire maritime zone property through concession.

c. Properties in Condominium:

While most US citizens are of the opinion that condominiums refer to only large apartments or town houses, a specific Costa Rican law by the name of “Condominium Law” states that benefits are to be offered to developers of different kinds of properties ranging from single family residence projects and finished lot projects to condominiums and more.  This law lets developers retain powers over certain development aspects of the property. Each step in the developmental process has its own set of by-laws that are all encompassing containing regulations and benefits. Condominium ownership is much like fee simple ownership, the only difference being the former has certain additional restrictions. Developers are advised to acquire a copy of the by-laws stating architectural guidelines, land use restrictions, and other aspects, from the owner of the property. These laws were originally designed to retain the integrity of a project, paying ample attention to its look and feel.

 

d. Untitled Property

As is the case in other places, in Costa Rica, too, there are certain properties that are not recorded at the Public Registry of Properties. While in some cases families have inhabited such properties for generations on end, in others these properties remain unoccupied. In both cases, the possibility is there that someone can claim that the property in question is his and he can put it up for sale. What is common to all kinds of property is that official ownership is established only if the property is registered with the Public Registry. It is recommended that this kind of property is not invested upon because there is no way that the owner can give proof of his ownership and transfer the property.

e. Time Share

The property option of time shares is suitable for people who want to enjoy the advantages of a property only for sometime during a certain year. The owners of a time share can reap similar benefits as that of the owners of a condominium, only that in the first case they can individually enjoy the rights for a specified time period, that is, a few weeks. This kind of property is not too common in Costa Rica.

II. The Purchase Process

A. Basic Terminology:

Feeling a sense of comfort with the buying and selling of real estate can happen only if an individual is conversant with terminologies related to real estate processes specific to a certain region. The following terminologies are the most commonly used in the Costa Rican real estate market:

a) Folio Real:

Folio Real refers to the social security number of a property. This is applicable to all properties and the individualistic number of each property distinguishes it from the rest. There are three numbers contained in a single folio real where the first number suggests the province in which the property is located, the second six digit number is the number of the property itself and the last among the three indicates the number of co- owners there are. In Costa Rica all titled properties are required to have a folio real.

b) Transfer or Conveyance Deed (escritura de traspaso): This is a document that states all stipulations with regards to the transfer of real estate. It includes basic property information that involves a description of the buyer, seller, the property itself and even special terms of sale, if any. This document must be prepared by an attorney and he must make a record of it not only in his Notary Book but also Public Registry of Property. Stewart Title can provide this service through their underwriters who double as attorneys. The recording process essentially consists of two phases where the first phase includes the presentation of the deed to the Public Registry by the attorney and from this moment on the property is protected against third party interests. After the verification of the deed is done by the Registry, the second phase of recording begins where the property is registered in the name of the new owner. This process of legal registration is essential in a country like Costa Rica where everything is done a first come first serve basis.

c) Public Registry of Properties:

d) Public Notary: This refers to the attorney who is legally licensed to perform lawful acts with public faith. A public notary is a requirement every time a person wants to purchase property. All the transactions that he performs are recorded in his Notary Book. The majority of attorneys in Costa Rica are also Public Notaries.

e) Power of Attorney: (1) This is a document that enables a person to act on behalf of another when it comes to property related matters. This is a legal tool that mostly comes to the use of those that want to bring a closure over their property without physically being present in Costa Rica. The power of attorney papers must be signed on while the owner is in the country because Costa Rican property laws state that the signing should be done in the presence of a notary based in the country. This entails that property owners residing in the US must make it to the Costa Rican Consulate in the country. However, if the acquisition is being made through a corporation then a signed proxy letter is sufficient to get on with the procedure. 

(2) There are two forms of power of attorney, a general one and a special one. A general power of attorney enables the signing representative powerful enough to sign on behalf of an individual for more than one transaction and these need to be recorded with the Public Registry. A special power of attorney lets the representative sign on behalf of the owner only for what is specified in the document and under specific guidelines. It is advised that only a special power of attorney should be used for assistance because this ascertains that the representative cannot go beyond a certain level and that his rights are limited. The best part about a special power of attorney is that it need not be recorded at the Public Registry and the only condition to be maintained is getting a grant from the public notary.

(f) Survey Plan (Cadastral Department):

Just as the Public Registry of Properties holds all property deeds in Costa Rica, there is a Cadastral Department which is in charge of all property surveys. A survey in itself is insufficient, that is, for the transfer of mortgage of property the survey relating to that certain property must be recorded with the Public Registry. The official drawing of the property can be made only when it has been approved by the Public Registry of Properties and also by the municipality where the property is located. The Public Registry and the Cadastral Office are separate entities and as a result often old survey plans are found to exist at the Cadastral Office. To avoid disputes over aspects like boundary lines, the Cadastral Office must get a new survey plan registered with itself.

B. Purchasing Methodologies

1. Acquiring Properties through direct transfer:

By this process one or more individuals can acquire property in their own name.

2. Acquiring Properties through Corporations:

A common practice existing in Costa Rica is that of acquiring property through a corporation that is already operating in the country. Though setting up a corporation is not a problem in itself, the main complication lies in whether the individual is knowledgeable enough about the entire procedure. The biggest advantage of acquiring a property through a corporation is that an individual is able to care for his assets anonymously. Acquisition of property in this way also ensures that the owner does not need to pay Government transfer taxes. This is because transfer taxes need to be paid only when there is a recorded change of ownership and when property is acquired through a corporation no change gets recorded and consequently no transfer tax is charged. But if the property has been acquired through the formation of a new corporation transfer taxes will be charged because then the owner name will have changed. Acquiring real estate through an existing corporation becomes problematic because there is no way of ensuring that the corporation does not have other liabilities. If you want to obtain property through a Costa Rican corporation you might need to address various other issues like yearly tax declarations, income tax payments and the upkeep of legal books.

C. Step- by- Step through the purchase process (Using Title Guaranty &Escrow Services)

Once a buyer is sure that he wants to buy a property and he has zeroed in on a property of interest he must understand that there are a few steps involved in the entire process entailing the acquisition of property-

Step 1: Sign an Option to Purchase/Sale with seller
Step 2: Deposit funds into escrow
Step 3: Title research performed and Title Commitment issued
(review if property is free and clear of defects)
Step 4: Closing – Execution of Transfer Deed, Endorsement of Shares and/or Mortgage Deed and disburse funds
Step 5: Register new owner with Public Registry
Step 6: Receive official Title Guaranty

d. Fee Structure

1. Transfer taxes, stamps and other charges: To make a record of the transfer that is being made the Government charges transfer taxes that comprise 1.5% of the purchase price and another additional 1% that is charged for other stamps.

2. Notary Fees: Notaries are required by law to charge 1.25% as their legal fees.

3. Survey fees: If you require or demand a new survey for your property, there are qualified surveyors available to perform this function. The price of this service is solely dependant upon the location and size of the property.

4. Mortgage registration fees: The government charges .6% of the mortgage value to register the mortgage deed on the property

5. Title Guaranty fees: Guaranty fees are typically based on a sliding scale depending on the purchase price.

6. Escrow Fees: Fees are dependant on the escrow provider.

7. Incorporation: Fees for purchasing a corporation typically run between $500 and $1000.

 

III. Protecting the Real Estate Investment

 

When people purchase real estate in a foreign country they are perpetually plagued by the fear of whether the transactions will be done legally and if yes, in what amounts can the benefits be enjoyed. The Costa Rican legal system is great for foreigners whose property transactions are executed properly but for those who do not pay heed to the part of execution the system can seem to be rather harsh. To guarantee the security of his real estate investment in this country, the individual should be aware of the existence of the following tools:

 

a. Adequate legal representation and assistance from experienced Notary:

 

A notary’s primary duty is to handle the transaction in away so as to instill the faith of the public in him. Apart from this he is also required to provide valuable legal guidance to the buyer at every step of the process.

 

b. Title Guaranty:

Like the concept that is prevalent in the US, title guaranty in Costa Rica suggests a contract in which a third party states that it will cover losses if any occur. These losses generally occur due to legal situations and if a third party is there to provide adequate coverage then the buyer can have his peace of mind. In order for a Title Guaranty to be issued a Title Commitment needs to be issued too. This assists the buyer to assess the legal status of the property before he purchases it. The final title guaranty is completely dependant upon the Title Commitment. The concept of Title Guaranty is comparatively new in Costa Rica but it has already become popular since it has added more transparency into the legal procedure of property purchase.

 

c. Escrow:

In the United States when Escrow services are spoken about two aspects are highlighted. Firstly the services include the managing of funds for a property purchase and secondly that the management of administrative work done before a closing is also considered. In case an attorney is not required during the purchase of real estate, an escrow agent takes the responsibility of ensuring that all documents are in place before the purchase. But the primary function of the escrow agent is essentially financial in nature and he is actually responsible for issuing checks and executing payments. This system gives confidence to all interested parties (e.g. attorneys, brokers, seller, buyer) that funds are protected during the buying process and that all funds will be disbursed appropriately to all parties at closing.

 

The real estate buying process in Costa Rica need not be intimidating or confusing. By understanding the steps in the process and pitfalls that may be avoided, a buyer can confidently invest in and enjoy his property for years to come.