Buying a Property in Costa Rica, basic steps.

Planning to Invest in Costa Rica

Below you will find the legal ABC’s of buying property in Costa Rica.  Many of our foreign clients share similar concerns when we first discuss their investment plans in Costa Rica. Almost everyone we meet wants to know about the legal requirements and possible legal pitfalls of making an investment in Costa Rica. By following just a few basic steps you can make sure your Costa Rican venture is a very successful one.

Incorporating in Costa Rica

The most efficient way to buy property in Costa Rica is to purchase in a corporation’s name.  The typical limited liability company (“Sociedad Anónima” or “S.A”.) must be incorporated by at least two people before a Costa Rican Notary Public. After incorporation, the shares may be transferred, making it legally possible to have a corporation in which one person is the owner of all the shares.

The incorporators must choose an original name that cannot be similar to any existing corporate name.  They must then appoint a Board of Directors, with a minimum of three members: President, Treasurer and Secretary, and also appoint a Comptroller. A different person must occupy each of these positions.  It is possible for the initial incorporators to occupy the positions.

Other crucial issues to be decided are the capital of the corporation (the higher the capital, the more registration taxes that must be paid), the number of shares composing such capital (Shares cannot be divided according to Costa Rican law, thus it is advisable to have a number of shares that would permit future distributions of the company), and the representation of the newly formed company (there must be at least one representative of the company with powers of attorney to act on its behalf.  However, at the time of incorporation, or later on, the powers of the company's representatives may be limited.  For example, to specific actions or amounts).

Costa Rica has what we call a "hybrid" corporate system. The incorporation deed as well as all changes to the company’s by-laws, must be recorded in the Public Registry, where they are accessible to the public. All transfers of the company's shares, however, are recorded in the Shareholders Registry Book, which is kept by the corporation and is only available to company shareholders and officials; other parties can only review it with a court order.

When you are buying real estate, it is advisable to do it in a corporation's name. Doing so simplifies the transfer process.  The corporate structure may also be more flexible for other transactions and organizational matters.  

Buying Real Estate

Most properties in Costa Rica are registered in a computer system called "Folio Real." This system is centralized at the offices of the Public Registry in San José. Before buying land, or even before seriously considering an offer to buy land, a title search in Folio Real should be performed.  Such a title search will show all data on the property, including area, ownership, boundaries, location, mortgages and other liens.

A few properties have not yet been incorporated to the "Folio Real" system.  These properties are still registered in special books kept in the Public Register and may also be accurately title searched in the Public Registry.

When considering buying land, the first question to be asked is if you are being offered ownership rights (“derecho de propiedad”) or occupation rights (“derechos de ocupación”). In the case of occupation rights, you would be dealing with land that has not been registered, cannot be title-searched and must go through a long process in order to be registered. Ownership rights, on the other hand, are registered and are equal to the concept of land ownership in the United States or Canada.

Another situation one may encounter regarding land, especially in in relation to beaches, is the concession. In this case, the government gives a private party the right to use the land for a specific period of time. In general terms, the concession may be considered similar to a lease. The concessions registration system is different than the one for regular land, and has particular requirements regarding zoning, terms, and occupation.  

Before buying, making an offer or even before seriously considering a piece of land, enquire about its status and perform a title search.  These simple steps could save you a lot of money and effort, and will definitely make your Costa Rican investment worthwhile. 

The following guide is a detailed description of the real estate system in Costa Rica and the purchasing process.  We recommend you review this to fully understand your property rights as well as the legal requirements from the moment you’re ready to place an offer on a property to after closing.

A Detailed Guide to Understanding the Real Estate System and Buying Process

The acquisition of real estate is one of the most significant investments a person makes during his or her lifetime. It can also be one of the most stressful. In foreign countries such as Costa Rica, the normal stress of the purchasing process can be compounded with other risk factors, such as language barriers and unfamiliarity with local laws and procedures. That said, foreigners can and legally and successfully purchase property in Costa Rica. In fact, Costa Rica offers potential buyers many types of real estate products including houses, condominiums, time-shares, farms, finished lots and beachfront property. The following guide is designed to help buyers navigate their way through the real estate buying process for all types of purchases. The guide is divided into three main sections covering:

I. Property Types and Property Rights

II. Purchase Process

III. Investment Protection: strategies and tools to protect your investment

I. Property Ownership and other common forms of possession

Just like in the US, Canada, and Europe, there are different types of property available to buyers. Understanding the various types that are available for purchase is critical in the evaluation process. This section highlights the property types that can be purchased in Costa Rica and the implications of each type of ownership for the buyer.

a. Fee Simple:

The most comprehensive form of property ownership in Costa Rica is fee simple ownership. Fortunately for foreigners, the conditions for this type of ownership are the same for foreigners as they are for Costa Rican nationals. The concept of fee simple ownership is the same in Costa Rica as in the US. Basically, fee simple ownership gives the owner of the property the absolute right to materially own the property, use it, enjoy it (i.e. usufruct), sell it, lease it, improve it (i.e. transformation), subject only to conditions outlined in Costa Rican Law. Fee simple also means that if the owner is obstructed from enjoying any of his/her rights to the property, he/she has the right to be made whole. In other words, to have the property restored in its original condition. Buyers who purchase fee simple title have the most rights under the law to enjoy and use the property as they see fit.

b. Concession Property and the Maritime Zone Law:

Concession property is more commonly known as beachfront property. In Costa Rica, 95% of beachfront property is considered concession property and is governed by the Maritime Zone Law and other specific regulations including but not limited to special dispositions stated by municipalities and the ICT (Costa Rican Institute of Tourism). These legal dispositions set forth the conditions under which foreigners and local residents can own concession property. A concession in Costa Rica is defined as the right to use and enjoy a specific property located on the maritime zone for a pre-determined period of time. The state, through its respective municipality, grants this right. Note that the first 200 meters measured horizontally from the high tide line defines the boundary of the maritime zone. This zone also includes islands, pinnacles of rock, mangroves, estuaries, small islands and any small natural formation that overcome the level of the ocean. This 200-meter zone is divided into two areas:

1. Public Area: The first 50 meters measured horizontally from the high tide line. This zone is not available for ownership of any kind. No kind of development is allowed except for constructions approved by governmental entities. Further, this area is deemed a public area and any individual wishing to utilize this area for enjoyment has the right to do so. In other words, there are no truly private beaches in the Maritime Zone.

2. Restricted/Concession Area: The next 150 meters. This area is available for Concessions to be granted. A concession is in essence a “lease” on the property granted to the lessee for a specific period of time. Normally the concession period is granted for 20 years. An owner of a concession may build on that concession, subdivide the concession and perform other acts to the property. However, appropriate permits from the local municipality must be obtained.

Ownership Limitations: Unlike fee simple property, foreigners do not have the same rights as citizens when it comes to purchasing concession property. The law establishes that foreigners cannot be majority owners of a concession property. A foreigner can, however, enter into a partnership with a Costa Rican citizen where the ownership is divided 49% / 51% between the foreigner and Costa Rican respectively. One exception is if a foreigner has resided in Costa Rica for at least five years.  In such a case they may be majority owners of a concession. Both foreigners and Costa Ricans alike are required to purchase all Maritime Zone property through concession.

c. Properties in Condominium:

When US citizens think of Condominiums, they normally think of large apartments or townhouses. In Costa Rica, however, there is a specific law called “Condominium Law” that provides certain benefits to developers of many different types of properties, including single family residence projects, finished lot projects, condos, etc. This set of laws allows a developer to restrict and regulate certain aspects of the development. Each Condominium development has its own by-laws containing all of the restrictions, limitations and privileges that can be enjoyed by individuals who purchase property in such a development. Ownership of property “in condominium” is fee simple ownership, but usually carries with it a few additional restrictions set forth by the developer. It is advised that you require the owner of the property to give you a copy of the by-laws to check for architectural guidelines, land use restrictions, and other limitations that may be placed on your property. Most often, developers use the condominium laws to allow them to build private roads in a development and set architectural guidelines. For the most part, condominium laws are designed to protect the integrity of a development and maintain the “look and feel” of the project.

d. Untitled property

There are properties in Costa Rica that are not recorded at the Public Registry of Properties. Families have inhabited some properties of this type for generations while others have never been occupied. In either case, it is possible that someone claims “ownership” of the property and may put it up for sale. They may even have fence lines or other boundary markers that separate “their” property from a neighbor’s. Regardless of the time that an inhabitant has lived on the property or to what extent they have demonstrated ownership, unless that property is registered at the Public Registry, there is no official owner. i.e. the title is unclear. It is strongly recommended that this type of property be avoided at all costs because there is no way to prove that the “owner” has the right to transfer the property, or even worse, what the dimensions of the property really are.

e. Time Share:

This option allows an owner the right to use a property for certain weeks of the year. In most cases the time-share ownership grants similar rights as implied in the condominium regulation except that in the time-share it is limited to certain weeks during the year. In this manner one single unit is subdivided into parts and sold individually. Time-share resorts are not common in Costa Rica.

II. The Purchase Process

A. Basic Terminology

Feeling comfortable with the purchase process starts with understanding the most common terminology. While the purchase process may seem very simple, there are some keys ideas with which a buyer should be familiar. The following defines the most common vocabulary used in real estate transactions in Costa Rica.

a) Folio Real: This is the “social security” number of properties. It is the unique number assigned to each property to identify it and distinguish it from other properties. This number is comprised of three parts: the first number indicates the province, the second group of six numbers is the number of the property itself and the last group of numbers indicates how many co-owners the property has. All titled properties MUST have this number in order for clear title to be obtained.

b) Transfer or Conveyance Deed: (escritura de traspaso): This document contains all of the stipulations regarding the transfer of real estate including basic information about the buyer, seller, the property, and any special terms of sale, such as easements or mortgages. An attorney who is also a Public Notary must prepare this document and the deed must be recorded in his/her Notary Book as well as at the Public Registry of Property. Once the deed has been prepared and signed at the closing, it is the attorney’s responsibility to record the deed immediately at the Public Registry. The recording process consists of two phases. In the first phase, the notary presents the deed to the public registry for its annotation; from this moment the property is protected against any third party interest. After the registry verifies the deed is structurally correct, the second phase of registration begins and the property is recorded in the name of the new owner. Because Costa Rica operates on a “first in time, first in right” system, registering the deed immediately is critical to ensuring that the new buyer’s rights to the property are ahead of any other claims by third parties.

c) Public Registry of Properties

d) Notary Public: Attorney licensed by law to perform legal acts with public faith. All transactions performed by a notary are recorded in his/her notary book. A public notary is necessary in order to purchase a property. Most attorneys in Costa Rica are also public notaries.

e) Power of Attorney: (Poder)

(1) This document authorizes a person to act on behalf of another to perform specific actions such as the purchase of a property. This tool is especially useful for clients that wish to close on their property without returning to Costa Rica. It is best to sign the power of attorney before leaving the country because the law requires that the power of attorney be signed in the presence of a Costa Rican notary. Thus, a visit to a Costa Rican consulate in the US is necessary. One exception to this rule, however, is if the property is being purchased through a corporation. In this case, a signed proxy letter will suffice and there is no need to visit a consulate.

(2) Powers of Attorney come in two forms, general and special. General power of attorney allows a representative to sign on behalf of an individual for multiple transactions and must be recorded at the Public Registry. A specific or special power of attorney allows the representative to sign ONLY for the item specified in the power of attorney contract and under the conditions specified there. It is highly recommended that only a specific power of attorney be granted for property purchases to limit the rights of the representative to sign only for the property in question and nothing else. Additionally, The specific power of attorney does not have to be recorded at the Public Registry, however it should be granted before a Notary Public.

f) Survey Plan (Cadastral Department): In addition to the Public Registry of Properties, which holds all property deeds, Costa Rica also has a Cadastral Office that holds all of the property surveys. In order to transfer, mortgage or acquire a property, a survey must be recorded at the Public Registry. When dealing with property segregations, a municipality authorization is also required on the survey. The official drawing of the property is validated through an approval process by the Public Registry of Properties as well as by the municipality in which the property is located. Because the Public Registry and Cadastral Office are separate entities, it is not uncommon for old property surveys to be on file at the Cadastral Office. If this is the case, it is recommended that a new survey plan be registered with the Cadastral Office so that there can be no dispute over boundary lines.

B. Purchasing Methodologies

1. Acquiring Properties through direct transfer: A purchase process whereby one or more physical individuals acquire a property in their personal name.

2. Acquiring Properties through corporations: A common practice in Costa Rica is to acquire properties through a new corporation or through an existing corporation that currently owns the property of interest. The process of setting up a corporation is not complicated, but does require a knowledgeable attorney who understands the exact protocols and procedures necessary to properly set up the corporation. The advantage of this system is that it allows a buyer to protect their asset anonymously. Further, if a purchaser acquires a property through an existing corporation that already owns the property, there are no government transfer taxes and stamps to pay. The reason is that transfer taxes and stamps must be paid anytime there is a change in the ownership of the property. If a buyer acquires the shares of an existing corporation, technically there is no change in the recorded owner of the property (the corporation still owns the property). However, if a property is acquired through forming a new corporation to buy the property, the transfer taxes and stamps must be paid because the name of the property owner has changed. The risk for the buyer in acquiring an existing corporation is that the corporation might have other liabilities and there is no way to verify 100% that the corporation is clean. When buying a Costa Rican corporation, it is important to keep in mind that there are other obligations and responsibilities that must be addressed. Examples include yearly tax declarations (even if the corporation is inactive), payment of income taxes if any, and keeping the legal books of the corporation up to date and in order.

C. Step-by-Step through the purchase process:

1. Once a buyer has seen a property of interest, the next step is to understand what the process of acquiring the property may entail. The following are the basic steps that a purchaser follows when buying a property.

• Step 1: Sign an Option to Purchase/Sale with seller.
• Step 2: Deposit funds into escrow (if available).
• Step 3: Title research performed by the Notary Public / Lawyer (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

D. Fee Structure

1. Transfer taxes, stamps and other charges: In order to record the transfer of the property, the government charges 1.5% of the purchase price.  An additional 1% is charged for other stamps at the Public Registry.

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. Pricing depends on the location and size of the property.

4. Mortgage registration fees: The government charges 0.6% of the mortgage value to register the mortgage deed on the property.

5. Escrow Fees: Fees are dependent on the escrow provider.

6. Incorporation: Fees for purchasing a corporation typically run between $500-$1000 or more.

III. Protecting the real estate investment:

One of the greatest concerns of foreigners purchasing real estate in a foreign country is to ensure that the transaction will be executed legally and that the system can ensure a lifetime of enjoyment of the property. The Costa Rican legal system, if followed correctly, does give ample protection to investors, but if the transaction is not executed properly, loss can and does occur. To guarantee the security of any real estate investment, there are three things that should be present in any real estate transaction.

a. Adequate legal representation and experienced Notary - While a notary’s primary duty is to provide Public Faith to a transaction, his/her job is also to act as the legal representative of the buyer, providing legal advice and representation throughout the process.  

b. Escrow - Most buyers from the US understand Escrow service to include not only the managing of funds for a property purchase, but all of the administrative work required to execute a closing. In fact, in states where an attorney is not required for a real estate purchase, the escrow agent becomes the central party responsible for ensuring that all documentation is in order before the close. In Costa Rica, the escrow agent performs many of the same duties. The primary function is as a financial service to prevent manipulation or mishandling of funds prior to closing. The escrow agent is a neutral third party responsible for issuing checks and executing payments. This system provides confidence and security 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.

c. Title Guaranty: Why a Title Guaranty?

When you decide to buy a property, you must be certain that after the sale has been completed you will be the true owner of the property. You need to be confident that no liens, encumbrances or other impediments will prevent your free use and enjoyment of the property.

Guaranty for the property owner

The same way you purchase life insurance to protect your interests, a Title Guaranty should be purchased to protect your property title interests. Your real estate investment will probably be the biggest investment you will ever make and loss of this investment can be financially devastating. You need to be certain that you are financially protected from potential losses.

What does a title guaranty provide?

• Protection against monetary losses, brought about by hidden ownership claims that may be made against the property title;

• Payment of legal expenses if the company must defend your property title against a claim covered by the Title Guaranty in the local courts;

• Payment of valid claims against your property title, up to the amount of the Title Guaranty.

Some of the risks covered by a Title Guaranty

• Invalid documents executed under expired or non- existent power
• False assumption of identity of legitimate property owner
• Falsification of documents, legal power, and other papers related to the transfer of property title.
• Liens or other financial burdens charged to the previous property owner.
• Non-registered property easements
• Hidden heirs of previous property owners
• Documents executed by minors of age
• Invalid Documents delivered after death of previous owner

Peace of mind

Once acquired, a Title Guaranty remains in place as long as you own the property, giving you a lifetime of security and peace of mind backed not by a promise but by a company with financial stability. Because only one payment is required, a Title Guaranty is a cost-effective method of protecting your real estate investment and enhancing the value of your property.

Conclusion

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

4. Calculation table for transfer of real estate

Example value - US$100,000.00

** Over the first ¢ 100,000.00 a fixed rate of ¢ 75.00 has to be cancelled.
* According to specific table rates, shown maximum payment in colones.
Up to ¢1,000,000.00 you pay 1.50% in legal fees, and 1.25% above that.

If you have more questions, feel free to send us an e-mail: Law@propertiesincostarica.com

We hope this information has been helpful by providing a clear basic understanding of the steps to be taken when purchasing Real Estate in Costa Rica. We will help you find your dreamed property in Costa Rica and we will make sure you go through a smooth, 100% secure, and easy purchasing process. Relax you are working with professionals!(*)

(*)Note: Working with professionals will save you time and money ! Contact Properties in Costa Rica the real Costa Rican professionals.

By Attorney F. Molinero