March 22, 2024 in Tips for Sellers, Selling Process

In the lush and vibrant real estate landscape of Costa Rica, selling property is both an opportunity and a complex process that requires thorough preparation. Alberto Sáenz, a renowned expert from Invicta Legal, has meticulously compiled a Sellers’ Due Diligence Checklist, an essential tool for sellers aiming for a seamless transaction.

October 31, 2023

Embarking on a property investment journey in the lush landscapes of Costa Rica is an exciting endeavor, but the importance of due diligence in Costa Rica cannot be overstated. It’s the delicate thread that weaves together the dream of owning property in paradise with the tangible realities of legal procedures, cultural nuances, and financial considerations.

In this comprehensive article, we will unfold a 9-point guide that breaks down the essence of due diligence in Costa Rica, painting a lucid picture of what it means to buy or sell property in this tropical haven. This panoramic view is neither superficial nor overwhelmingly detailed, but an astute blend of both, diving deeply into some topics while providing a sweeping glance at others.

Due Diligence Process in Costa Rica

1. Choose the Right Property

Understand your goals and select a property that meets your needs. Research the area, including local amenities, weather, and potential for growth or return on investment. Available property types in Costa Rica real estate include:

• Single-Family Homes: These are standalone houses, ranging from modest homes to luxurious estates, often found in suburban and rural areas.
• Condominiums: These are popular in urban and tourist areas. Condos often come with shared amenities like pools, gyms, and security services.
• Villas: Typically found in resort areas, villas are upscale homes that may be part of a managed community with resort-like amenities.
• Eco-Friendly Properties: Costa Rica is known for its focus on sustainability, and you can find properties built with environmentally friendly materials and designed to minimize their impact on the environment.
• Beachfront Properties: Costa Rica’s coasts offer stunning beachfront properties. However, it’s essential to understand the Maritime Zone Law, which regulates property ownership within 200 meters of the high-tide line.
• Mountain Homes: For those looking for cooler climates and scenic views, mountain properties are available in regions.
• Farms and Ranches: Agriculture is an essential part of Costa Rica’s economy, and there are opportunities to purchase working farms or ranches, including coffee farms.
• Commercial Properties: This category includes office buildings, retail spaces, hotels, and other business-oriented real estate.
• Gated Communities: These are prevalent in Costa Rica, offering increased security and often providing shared amenities like pools and tennis courts.
• Vacation Rentals and Timeshares: These types of properties are common in tourist hotspots. They offer ownership for a fraction of the time, usually through a time-share arrangement, or they may be bought specifically for short-term rental income. Timeshares are not common in Costa Ballena.
• Building Lots and Land: For those who wish to build a custom home or development, vacant lots and raw land are available. Again, understanding zoning laws and restrictions is crucial here.
• Historical Properties: Some buyers might be interested in properties with historical significance or traditional architectural styles, particularly in cities like Cartago or San José.
• Luxury Properties: High-end luxury homes and apartments are available in exclusive neighborhoods and come with premium finishes and amenities.
• Retirement Communities: Specifically designed for retirees, these communities offer amenities and services tailored to the needs and interests of older adults.
• Mixed-Use Developments: These developments combine residential, commercial, and sometimes even industrial spaces, reflecting a growing trend towards urban living where various functions are closely integrated.

2. Hire a Local Attorney

Unlike in the U.S., where real estate agents handle much of the process, in Costa Rica, a local attorney is typically responsible for conducting due diligence. Ensure that your attorney is experienced and specializes in real estate law. They will perform important duties that include that the buyer receives water and electricity letters consigning permission for the use of utilities.

3. Title Search

Your attorney will investigate the property’s title to ensure it’s free from any liens or encumbrances. Costa Rica’s National Registry allows for relatively transparent access to ownership and lien information.

4. Survey Check

Obtain a survey of the property to verify boundaries. 

• Check Existing Surveys: First, you may wish to ask the seller if an updated survey is available. If not, you can consult the National Registry (Registro Nacional) to find the existing recorded survey (plano catastrado).
• Hire a Licensed Surveyor: If a new survey is required or if you want to verify the existing one, you should hire a licensed and qualified surveyor in Costa Rica. They will conduct a physical survey of the property and prepare an official survey plan.
• Register the Survey: If changes are made or if it’s a new survey, it should be registered with the National Registry and the local municipality. Your local attorney can assist with this process.
• Check for Encroachments: A survey will also help you verify if there are any encroachments on the property that could lead to legal issues.

5. Zoning Check

Check with the local municipality regarding zoning laws to ensure the property can be used for your intended purpose.

Zoning in Costa Rica is governed by municipal regulations and can vary widely depending on the location and the specific goals of the local government. Here’s an overview of some general zoning types you might encounter:

• Residential Zoning: These zones are designated for homes and may have subcategories that dictate the type of housing, such as single-family homes, multi-family units, or condos.
• Commercial Zoning: This zone allows for businesses like shops, restaurants, hotels, etc.
• Industrial Zoning: These areas are designated for manufacturing, warehousing, and other industrial activities.
• Agricultural Zoning: These zones are reserved for farming and may include specific regulations related to types of crops, livestock, and land use practices.
• Mixed-Use Zoning: Combining residential, commercial, and sometimes industrial purposes, these zones are often found in urban areas where a variety of activities coexist.
• Touristic Zoning: In tourist-heavy areas, this zoning may allow for hotels, resorts, and other vacation-related businesses.
• Protected or Conservation Areas: Certain areas are designated as protected due to their ecological importance. Building and land use in these zones are highly restricted.
• Maritime Zone: This specific zone governs the first 200 meters from the high-tide line on coastal properties. The first 50 meters are public, and the next 150 meters are subject to concessions and specific regulations.
• Special Regulation Zones: These can include historical or cultural zones where regulations are in place to preserve the heritage.

6. Environmental Regulations

Certain areas in Costa Rica have specific environmental regulations. Check whether the property is in a protected zone and whether this affects your plans. This can require an INVU study to assess if there are any environmental concerns that would impede building permits being issued.

Various environmental regulations might affect property ownership and development, including:

• Protected Areas and National Parks
• Maritime Zone Law
• Water Protection (Rivers, streams, wetlands, springs)
• Wildlife Conservation
• Indigenous Lands

7. Inspection

Hire a professional to inspect the property for structural issues, pests, etc. This is common in the U.S. but might be overlooked in Costa Rica.

Here’s an overview of some concerns that a building inspector in Costa Rica will assess for:

• Earthquake Damage
• Water Damage
• Roofing Issues
• Poor Drainage
• Electrical Problems
• Plumbing Concerns
• Substandard Construction
• Termites
• Carpenter Ants
• Mosquitoes
• Rodents
• Fungus and Mold

8. Purchasing Title Insurance

Title insurance is standard in the U.S. but is less common in Costa Rica. It can still be obtained and may be a wise investment for peace of mind.

Title insurance in Costa Rica is a form of indemnity insurance that protects the holder from financial loss sustained from defects in a title to a property. It’s different from traditional insurance policies that cover future events, as title insurance covers past events relating to the property’s title.

Typical coverage includes:

• Title Defects: Protects against undisclosed liens, encumbrances, legal judgments, or claims attached to the property.
• Ownership Issues: Protects against problems like fraud, forgery, undisclosed heirs, or mistakes in the public record that might affect ownership.
• Survey and Boundary Issues: Covers disputes related to the property’s boundaries and survey inaccuracies.
• Legal Defense Costs: Provides for the legal costs associated with defending the property title, should it be challenged.

Title insurance is typically optional in Costa Rica and is often considered by foreign buyers as an additional layer of security. Some lenders may require it if you are financing the property purchase.

Several international and local insurance companies offer title insurance in Costa Rica. It’s wise to work with a reputable provider familiar with Costa Rican real estate law.

9. Paying Closing Costs

Closing costs in a real estate transaction in Costa Rica can vary based on several factors, including the property’s value and the specific terms of the agreement. Generally, closing costs are divided between the buyer and the seller, though this can be negotiated. Here’s an overview of the typical closing costs:

Transfer Tax:

• Rate: 1.5% of the registered property value.
• Responsibility: Usually paid by the buyer.

Notary Fees:

• Rate: Typically ranges from 1.25% to 2% of the purchase price, although the rates are regulated by the Costa Rican government.
• Responsibility: Customarily paid by the buyer, but negotiable.

Registration Fees:

• Rate: Approximately 0.5% of the purchase price.
• Responsibility: Typically the buyer’s responsibility.

Stamp Duties:

• Rate: Various stamps are required, totaling around 0.05% of the purchase price.
• Responsibility: Usually paid by the buyer.

Legal Fees:

• Rate: May vary widely based on the complexity of the transaction, but typically ranges from 1% to 2% of the purchase price.
• Responsibility: Generally the buyer’s responsibility, but this can be negotiated.

Municipal Taxes:

• Rate: Pro-rated for the time the seller owned the property during the fiscal period.
• Responsibility: Usually the seller’s responsibility.

Real Estate Commission:

• Rate: Varies by agreement, typically around 8% of the purchase price.
• Responsibility: Generally paid by the seller.

Title Insurance:

• Rate: If applicable, depends on the policy and provider, but may range from 0.5% to 1% of the purchase price.
• Responsibility: Usually the buyer’s responsibility if opted.

Survey Costs:

• Rate: Varies based on the property.
• Responsibility: Often the buyer’s responsibility.

Bank Fees:

• Rate: If financing the purchase, bank fees may include appraisal costs, administrative fees, etc., and can vary widely.
• Responsibility: Typically the buyer’s responsibility.

Escrow Fees:

• Rate: If using an escrow service, fees vary depending on the provider.
• Responsibility: Often shared between the buyer and the seller or as negotiated.

Tips:

• Negotiation: Many of these costs are subject to negotiation between the buyer and the seller.
• Get an Estimate: Your real estate attorney or agent should be able to provide an accurate estimate of closing costs specific to your transaction.

Closing costs in Costa Rica can amount to approximately 4% to 5% of the purchase price for the buyer, excluding any financing-related fees. It’s essential to work with an experienced local real estate attorney who can guide you through the specific costs and responsibilities related to your transaction.

Whether you are a buyer enchanted by the serene vistas or a seller keen to unlock the potential value in your property, these nine points are your road map, and your realtor is your trusted guide. Together, they form a harmony that translates the complexities of property transactions into a harmonious melody.