Planning to Invest in Costa Rica
Anyone interested in doing business or buying property in Costa Rica will need to follow a certain set of basic steps. Foreign investors typically have two main concerns: how to buy property, and if incorporating will help with the process.
By reading and following the suggestions written here, anyone interested can formulate an informed decision and answer questions about the purchasing process, thus making the Costa Rican venture much simpler and more successful.
1. Purchasing Property in Costa Rica
When considering a land or property purchase in Costa Rica, there are a few specific steps to follow to get the best results.
Before buying, before offering or even before seriously considering a piece of land, you need to inquire about its status and perform a title search in the Public Registry system located in San José called the “Folio Real”.
Much like the United States assigns social security numbers to people, this system assigns numbers to all titled properties, simplifying the search. A title search in the Public Registry will show all data regarding that specific property: ownership, boundaries, mortgages and liens, measurements, and location area.
Also, a Public Notary will need to be hired in order to process any legal documents or to make certain inquiries. The Public Notary must be an Attorney and she or he may draft and interpret legal documents, as well as to authenticate and certify the authenticity of documents; keep in mind that not all attorneys are Public Notaries.
This person will be integral in helping you with your purchase and making sure everything is done according to the law so that the process will not be lengthy, and you will own your dream property as soon as possible.
When the best property has been selected, the title inquiry will show if you are being offered ownership rights (derecho de Propiedad) or occupation rights (Derechos de ocupación).
Occupation rights refer to 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, refer to registered land and are equal to the concept of owning land in the United States or Canada. You should not, under any circumstances, purchase land with occupation rights, since it may cost you a lot more than you bargained for.
A case where you may be interested in the beachfront property will meet with different conditions and more risks. It is called a concession, meaning that the government gives the buyer a period of time to lease the land.
There are more regulations and stipulations concerning any changes that can be made to the property or to the land than the purchases made inland (201+ meters inland). The concessions registration system differs from regular land purchases by having particular requirements when it comes to zoning, terms, occupation and other nuances.
Combined with the knowledge above, the following information could save you a lot of money and effort, and will definitely make your Costa Rican investment worthwhile:
Understanding the Real Estate System and the Buying Process
One of the most difficult and most significant decisions a person makes in their lifetime is the acquisition of real estate. Making a regular home purchase or investing in a property in Costa Rica requires the same due diligence as it would in your country of origin.
If you are not fluent in Spanish it would be in your best interest to deal with a reputable bilingual attorney who specializes in real estate transaction. Still, foreigners can legally and successfully purchase property in Costa Rica, which offers prospective buyers many types of real estate products including houses, condominiums, some timeshares, farms, and beachfront property.
The guide is designed to help any potential buyer find their way through the many types of real estate buying processes for all kinds of purchases; its three main sections cover:
I. Property Types and Property Rights
A. Fee Simple Ownership
B. Evicting Squatters or Tenants
C. Concessions in the Maritime Zone
D. Properties in Condominium
E. Untitled Property
II. Purchase Processes
A. Basic Terminology
B. Methods of Purchase
C. Step-by-Step Buying Process
D. Fee Structure
III. Investment Protection
A. Adequate Legal Representation
C. Title Guaranty
I. Property Types and Property Rights: Property Ownership and Other Common Forms of Possession
Just like in the United States, 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.
A. Fee Simple Ownership
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 Costa Rican nationals as they are for foreigners.
The concept of fee simple ownership is the same in Costa Rica as in the United States. Basically, fee simple ownership gives the owner of the property the absolute right to materially own the property, use it, enjoy it, sell it, lease it, improve it, etc., subject only to conditions outlined in the Costa Rican law.
Fee simple also means that if the owner is obstructed from enjoying any of her or his rights to the property, he or she has the right to be made whole, in other words, have the property restored in its original condition. Buyers who purchase a fee simple title have the most rights under to law to enjoy and use the property as they see fit.
If you would like to keep the property to yourself, and would like to enjoy it for many years to come, but are also an absentee owner, you will want to contract a property caretaker to oversee the land and property. Ensuring that no claims can be laid against your property by another will offer you the biggest peace of mind.
B. Evicting Squatters or Tenants
Before actually buying a property you like, you need to check if any squatters currently occupy the land or the property. According to Costa Rican law, which allows for the peaceful occupation of “unattended and untitled land” unless objected to by the titled owner, a squatter can gain some rights to the property after just three months of living there.
If you happen to purchase a property without checking for either tenants or squatters, you may find yourself dragged through the court system for many years and not being able to live on your own land, as well as possibly having to pay the squatters for any “improvements” to the property.
1. The first step to avoiding any unlawful tenants on the land you are looking to purchase is to arrange for a representative to oversee the land and check it at least once every three months. This will ensure that no one can lay claim to the land. If someone has lived on the premises for less than three months, which at this point is not a problem, a sheriff can escort that squatter off the land.
2. If squatters or tenants have been visibly occupying the property between three and 12 months, a process of eviction called “desalojar” or “desalojo” has to take place to remove them from the property. Luckily, this method still gives leeway to the owner or potential owner, but they will need to go to court.
3. Now, if the squatter openly occupied the property for more than one year but less than ten years, you may still be able to claim the land, but may want to settle out of court; the system might drag out the case for years.
Unfortunately, in this situation, you will be required to agree on a settlement for any “improvements” made by the current occupants. “Improvements” would include any changes made, such as shacks that have been built, and planting of crops, or even cutting of trees to clear the property. Since “improvements” and compensation are established by the courts, it is in your best interests to negotiate a settlement outside of the court system; it will be less costly.
4. Finally, after ten years, the squatter can obtain clear and legal title to what used to be your land and you are no longer the owner of said property.
Due to the instances described above, it is crucial to know the history of possession and follow the rules. It also imperative that at least one of the following is done to ensure your rights to the property:
1. Contract a caretaker to oversee the land
2. Make sure the land is inspected at least once every three months
3. Have an official mortgage on the land (if the land is not paid off yet, you
obviously own it)
C. Concessions in the Maritime Zone
1. 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 define 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.
Note on 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, then they may be majority owners of a concession. Both foreigners and Costa Ricans alike are required to purchase all Maritime Zone property through concession.
D. Properties in Condominium
When U.S. 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 a 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 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.
E. 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 that they “own” the property and may put it up for sale. They may even have fence lines or other boundary markers that separate “their” property from neighbors. 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.
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
Understanding the purchase process starts with understanding the terminology. It may seem simple enough, but you will be much more comfortable if you are familiar with the most common vocabulary used for real estate transactions in Costa Rica.
1. 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 a clear title to be obtained.
2. 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 or her Notary Book as well as at the Public Registry of Property. Once the deed has been prepared and signed at the close, 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. Obviously, every situation differs and in some cases, a review of the Public Registry record will not be enough to uncover all encumbrances. That is why it is important that the buyer has his or her own attorney conduct an independent title search and investigation rather than rely on the seller’s attorney.
3. Public Registry of Properties: This safe form of title registration protects buyers from hidden claims. It holds property surveys and all registered property deeds that have titled registration numbers known as folio real. Records are kept in a central computer system, on microfilm, and in original form. Duplicates are updated daily and sent to separate locations for safekeeping. The records database can either be searched through the folio real number or by its name index. There are two steps to register the property with the Public Registry:
Step 1. Firstly, the notary presents the deed to the public registry for its annotation; from this moment the property is protected against any third-party interest.
Step 2. After the registry verifies the deed is structurally correct and all taxes and fees associated with the purchase have been paid, the second step of registration begins and the property is recorded in the name of the new owner. (Make sure to follow up with attorney/notary that registration was completed or you may run into problems later if when trying to sell.)
4. Public Notary: Unlike common law countries, such as the United States and Canada, where the role of the Notary is limited to authenticating signatures, in Costa Rica, the Public Notary has extensive powers to act WITH Public Faith on behalf of the state. The Public Notary must be an attorney and she or he may draft and interpret legal documents, as well as to authenticate and certify the authenticity of documents; keep in mind that not all attorneys are Public Notaries. All transactions performed by a Notary are recorded in his or her Notary Book. A Public Notary is necessary in order to purchase a property, and they are the ones responsible for immediately recording the deed at the Public Registry, thus protecting it from third party interests. There are generally three conditions that determine the selection of the Public Notary/Attorney:
1. If a large percentage of the purchase price is being financed by the seller and a mortgage needs to be drafted to guarantee payment, then the seller may request that her or his notary/attorney will draft the transfer deed.
2. If a property is purchased 50 percent cash and 50 percent financed, it is common for the buyer’s attorney and sellers attorney to jointly draft the transfer deed and mortgage in a single document. This is known as co-notarial.
3. Finally, the buyer may insist that her or his notary/attorney draft the transfer deed and let the seller’s notary/attorney draft a separate mortgage instrument. Usually, a higher registration fee is charged for the mortgage to be drafted separately by each party’s representatives.
You have an option to purchase the property in an individuals name, jointly with other persons, or in the name of a corporation. The decision as to ownership should be based on your particular situation and after consultation with your attorney.
5. Power of Attorney (Poder): 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 who 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 United States 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. Powers of Attorney come in two forms: general and special.
a. A 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.
b. 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 Public Notary.
6. 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. Methods of Purchase
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 any time that 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 (i.e., 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 Buying Process:
1. Once a buyer has found a property of interest, the next step is to understand what the property-acquiring process may entail. The following are the basic steps that a purchaser follows when buying a property:
Step 1. Signing an Option to Purchase/Sale with the seller.
Step 2. Depositing funds into escrow (if available).
Step 3. Title research needs to be performed by the Public Notary / Attorney
(review if the property is free and clear of defects, such as a record of
registered title in the Public Registry and a presence of any squatters or
tenants on the property)
Step 4. Closing – Execution of Transfer Deed, Endorsement of Shares and/or
Mortgage Deed and disburse funds
Step 5. Registering new owner with the Public Registry
D. Fee Structure
1. Transfer Taxes (impuesto de traspaso) stamps and other charges: In order to record the transfer of the property, the government charges 1.5% (0.75%-0.75% / buyer-seller) of the purchase price and an additional 1% is charged for other stamps at the Public Registry.
2. Notary Fees: Notaries are required by law to charge 1.5% (0.75%-0.75% / buyer-seller) of the first one million colones and 1.25% (0.75%-0.75% / buyer-seller) of any remaining balance as their legal fees.
3. Real Estate Agent Fee: 2.50% to 5.00% from buyer and 2.50% to 5.00% from the seller.
4. 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.
5. Mortgage Registration Fees: The government charges 0.6% of the mortgage value to register the mortgage deed on the property.
6. Escrow Fees: Fees are dependent on the escrow provider.
7. Incorporating: Fees for purchasing a corporation typically run between $500 – $1,000, and more.
The average cost of the process for the buyer: 4.29% to 6.79%
The average cost of the process for the seller: 4.29% to 6.79%
Overall transaction costs: 8.58% to 13.58%
III. Investment Protection
Whenever a person makes a real estate purchase in a foreign country, one of the biggest concerns is whether that transaction will be executed legally and if the system is designed to offer all the appropriate property rights to be able to enjoy that property for as long as the investor wants. The Costa Rican legal system, if followed correctly, does give ample protection to investors; however, if the transaction is not executed properly, the loss can and does occur. To guarantee the security of any real estate venture, there are three tools that should be present in any real estate transaction:
A. Adequate legal representation and experienced Public Notary:
While a Public Notary’s primary duty is to provide Public Faith to a transaction, his or her job is also to act as the legal representative of the buyer, providing legal advice and representation throughout the process.
Most buyers from the United States 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 the financial service to prevent manipulation or mishandling of funds prior to closing. The escrow agent is a neutral third party with responsibility for issuing checks and executing payments. This system gives confidence to all interested parties (e.g., attorneys, brokers, sellers, buyers) 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?
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.
1. Title 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.
2. What does a Title Guaranty provide?
a. Protection against monetary losses brought about by hidden ownership claims that may be made against the property title;
b. Payment of legal expenses if the company must defend your property title against a claim covered by the Title Guaranty in the local courts;
c. Payment of valid claims against your property title, up to the amount of the Title Guaranty.
3. Some of the risks covered by a Title Guaranty:
a. Invalid documents executed under expired or no existent power
b. False assumption of the identity of legitimate property owner
c. Falsification of documents, legal power, and other papers related to the transfer of property titled. Liens or other financial burdens charged to the previous property owner
e. Non-registered property easements
f. Hidden heirs of previous property owners
g. Documents executed by minors of age
h. Invalid Documents delivered after death of the previous owner
4. 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’s 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.
In Conclusion (Plus a Note on Incorporation)
Buying property in Costa Rica does not need to be intimidating or confusing. By understanding the process of acquiring property and knowing which pitfalls to avoid, a buyer can confidently invest in and enjoy their property for years to come.
Incorporating in Costa Rica
Take this advice. Buying Costa Rican real estate under a corporations name will simplify certain steps of the process as well as give you additional benefits: such as additional tax breaks, easier property transfers, and possibly a more flexible structure for other transactions and organizational matters.
There are two most common types of business structures in Costa Rica. A typical corporate company (“Sociedad Anónima” or “S.A.”) must be incorporated by at least two people before a Costa Rican Public Notary; and a Limited Liability Corporation (Sociedad de Responsibilidad Limitada) typically have multiple partners and can have more than one manager who all have to unanimously agree to sell any stock.
In a S.A., after incorporating, shares may be transferred between parties making it legally feasible to have a corporation in which one person is the owner of all shares (the president). Also, a Board of Directors needs to be appointed, which by law must have a minimum of three members: President, Treasurer, and Secretary, as well as a Comptroller.
Each one of these positions must be occupied by a different person; however, the initial incorporators may occupy them as well. A name for the new corporation cannot be the same as an existing corporate name.
Other crucial issues to be decided are: the capital of the corporation where the higher the capital, the more registration taxes are to be paid; the number of shares composing such capital where a share cannot be divided according to Costa Rican Law (fractions of shares are not acceptable), thus it is advisable to have a number of shares that would permit future distributions of shares; and representation of the newly formed company where at least one representative of the company must have 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 a “hybrid” corporate system. The incorporation deeds, as well as all changes to the company’s bylaws, are to be recorded in the Public Registry, where any person has access to them. However, all transfers of the company’s shares are recorded in the Shareholders Registry Book, which is kept by the corporation and is only available to company’s shareholders and officials; all other parties can only review it with a Court order.
3. Calculation Table for Transfer of Real Estate
Example value – $ 100,000.00
Registry 0.005 $ 500.00
Agrarian 0.001 $ 100.00
Law 7535 0.002 $ 200.00
Municipality 0.002 $ 200.00
Lawyer Board* 0.00025 ¢ 75.00 $ 25.00
Treasury Department C.R.* ¢ 625.00 less than $ 2.00
National archive** ¢ 20.00 less than $ 1.00
Transfer taxes 0.0151 $ 1,510.00
Legal fees 0.0125 $ 1,250.00
Total about 3.8% 0.03758 $ 3,788.00
plus fixed costs above**
** Over the first ¢ 100,000.00 a fixed rate of ¢ 75.00 has to be canceled.
* According to specific table rates, shown maximum payment is 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: email@example.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!*
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