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When it comes to buying real estate in Costa Rica, making sure you fully grasp the property sales contract is essential.
Indeed, not fully understanding the document you will sign can lead to financial losses, including the forfeiture of deposits, payment of penalties, unexpected costs, legal expenses, and potential poor investment decisions.
We've heard countless stories of people making costly mistakes when signing their property agreement in Costa Rica. We want to help you avoid the same experience.
We'll give here a very brief overview regarding the property sales contract in Costa Rica ; if you want a full checklist, please check our property pack for Costa Rica.
What is the Contrato de Compra-Venta in Costa Rica?
In Costa Rica, the property purchase agreement is known locally as the "Contrato de Compra-Venta."
This is a formal contract between a buyer and a seller for the purchase of real estate. The agreement is a crucial part of the real estate transaction, laying out the terms and conditions under which the sale will occur.
This contract is legally binding and serves as a guarantee for both the buyer and the seller. It outlines the responsibilities and commitments of each party. For example, it will specify the property details, the agreed purchase price, payment terms, and any other conditions both parties have agreed upon.
For international buyers or non-residents, there are no significant legal restrictions in purchasing property in Costa Rica.
However, it's advisable to be aware of any tax implications and to ensure that the property has clear title. International buyers should also be mindful of the local laws and practices, which may differ from their home country.
The purchase agreement is typically signed once both parties have agreed on the terms and conditions of the sale, usually after an initial offer has been made and accepted. At this stage, a deposit is usually required.
The deposit amount can vary, but it's commonly around 10% of the purchase price. This deposit is often held in a trust or an escrow account until the transaction is completed.
The process in Costa Rica might differ from other countries in terms of legal requirements, taxation, and the way real estate transactions are typically conducted. For instance, in some countries, the involvement of a notary or a lawyer might be optional, but in Costa Rica, a notary (who is also an attorney) is essential to transfer the property.
Additionally, due diligence might be more extensive in Costa Rica, especially in verifying the title and ensuring there are no liens or encumbrances on the property.
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What should be included in the property purchase agreement in Costa Rica?
In Costa Rica, the requirements for a property purchase agreement, known as the "Contrato de Compra-Venta," are governed by Costa Rican property law, primarily under the Civil Code (Código Civil) and the Property Law (Ley sobre Propiedad).
The agreement must contain specific details to be considered valid and legally binding.
The mandatory clauses in a Costa Rican property purchase agreement typically include:
Identification of Parties
Full names, identification numbers, and addresses of both the buyer and seller.
A detailed description of the property, including its location, size, boundaries, and registration details.
The agreed-upon price for the property.
How and when the payment is to be made. This includes the amount of any deposit and the schedule for the remaining payments.
Transfer of Title
The process and timeline for transferring the title from the seller to the buyer.
Legal Status of the Property
A declaration that the property is free of liens, encumbrances, and legal disputes.
Additional clauses may also be included to address specific aspects of the transaction. These could involve:
- Conditions related to the buyer’s right to inspect and investigate the property.
- Consequences for either party failing to fulfill their obligations under the contract.
- Agreement on who bears the closing costs, including legal fees, transfer taxes, and notary fees.
Conditions or contingencies are often included to protect both parties. For example, the agreement may be contingent upon the buyer obtaining financing, the property passing certain inspections, or the seller resolving any legal issues related to the property.
Authentication by a notary is a crucial part of the property purchase process in Costa Rica. The notary public in Costa Rica is a qualified attorney who has additional training in notarial law.
The notary is responsible for drafting the purchase agreement, ensuring that it meets all legal requirements, and formally registering the transfer of property.
The role of the real estate agent is to facilitate the transaction between the buyer and seller. While the agent plays a key role in negotiating terms and helping both parties reach an agreement, they do not have a direct legal role in the formulation or validation of the purchase agreement.
That said, their knowledge and experience can be invaluable, especially in understanding local market conditions and practices.
What's the signing process like?
In Costa Rica, the signing process of a property purchase agreement, or "Contrato de Compra-Venta," involves specific steps and requirements.
The agreement is bilateral, meaning it requires the signatures of both the buyer and the seller.
Either party can be composed of multiple people. For instance, a couple or a group of investors can be the buyers, or the property can be owned by several individuals, all of whom must sign.
Here are the required documents and information:
- Both parties need to provide personal identification, typically a passport for foreigners or a cédula (national ID) for Costa Rican residents.
- The seller needs to provide the property’s legal description and proof of ownership, such as the title.
- Additional documents, like recent utility bills, may be required to prove the property’s address and the seller’s ownership.
Here is the signing process and timeline:
- After negotiation, the parties draft the purchase agreement, including all terms and conditions.
- Once the agreement is ready, both parties review it, usually with the help of their respective legal advisors.
- The signing is overseen by a notary public, who is legally required to authenticate the process.
- The timeline for signing can vary. Once the agreement is drafted and reviewed, the signing can happen relatively quickly, often within a few days to a week.
The possibility of signing the agreement remotely depends on the arrangements with the notary. Some notaries may allow digital signatures or use a power of attorney if one party cannot be physically present.
However, it's more common for both parties to be physically present for the signing, especially given the legal importance of the document.
There's no standard deadline for signing; it's usually determined by the agreement between the buyer and seller.
The duration of the contract’s validity is also set out in the agreement. It typically remains valid until the transfer of the property is completed, unless specific conditions are included that might lead to its earlier termination.
After signing, the notary public is responsible for registering the contract and the transfer of property with the Public Registry of Costa Rica.
This registration is crucial as it legally formalizes the change in ownership.
Once the contract is signed, any amendments typically require the consent of both parties and may need to be formalized in a written addendum. The notary would also be involved in documenting any agreed-upon changes.
The typical timeframe for completing all paperwork and approvals can vary but often takes several weeks to a few months.
This period includes due diligence by the buyer, securing financing if needed, and completing the legal and registration processes.
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How is the payment handled when signing a property purchase contract in Costa Rica?
In Costa Rica, the financial aspects of a property purchase agreement are an important part of the transaction process.
When you sign the sales agreement, you typically need to pay a down payment or deposit.
The typical down payment percentage for a property sale in Costa Rica is around 10% of the purchase price. However, this can vary based on the agreement between the buyer and seller.
There may be upfront fees or costs associated with signing the sales agreement. These could include legal fees for the attorney or notary drafting the agreement and possibly a portion of the real estate agent's commission.
The exact amount of these fees can vary and should be clarified before signing the agreement. Payments are usually made to an escrow account rather than directly to the seller. This ensures that funds are securely held until the transaction is finalized.
The specific payment due date is typically outlined in the sales agreement. It’s not always immediate upon signing but is often due within a short period thereafter.
There are tax implications associated with the transaction. Property transfer taxes in Costa Rica are generally the responsibility of the buyer and are calculated as a percentage of the registered value of the property.
The exact percentage can vary, so it's important to confirm the current rate and factor this into your budget.
You can negotiate the down payment amount with the seller. This is part of the negotiation process and depends on both parties’ willingness to agree on terms.
The down payment may be refundable under certain conditions, such as a failed inspection or if you’re unable to secure financing. These contingencies should be clearly stated in the sales agreement.
If the sale falls through due to reasons covered by these contingencies, the down payment can be returned.
However, if the buyer backs out without such conditions being met, the down payment may be forfeited.
Typically, the down payment should come from your personal funds. It's less common to use a mortgage loan for the down payment, as lenders usually require evidence that you have sufficient liquidity for this initial payment.
An attorney or notary is typically involved in drafting and overseeing the signing of the agreement and can provide advice on the financial aspects.
Real estate agents facilitate the transaction and can assist in negotiations but do not usually handle the payment process directly.
You should definitely request a receipt or confirmation of payment when making the down payment. This is a crucial record of your transaction.
Apart from the property transfer taxes, the buyer should also be aware of other potential taxes, like annual property taxes. For the seller, capital gains tax may be applicable, depending on how long they owned the property and the profit made from the sale.
What are the potentials risks and pitfalls?
You might be interested in reading our article about the common risks and pitfalls surrounding a property transaction in Costa Rica.
In Costa Rica, like in any real estate transaction, there are risks and potential pitfalls in the property purchase agreement process.
Both the buyer and seller can theoretically withdraw from the agreement, but the circumstances and consequences depend on the terms of the contract.
Typically, a valid reason is required to withdraw without penalty, such as failure to meet a contingency stipulated in the agreement (like a failed inspection or inability to secure financing).
If a party withdraws without a valid reason, they may face penalties, often financial, as outlined in the agreement.
Costa Rica does not have a standardized cooling-off period in real estate transactions. If such a period is desired, it needs to be explicitly included in the agreement. The length and terms of any cooling-off period would be negotiated between the buyer and seller.
If a buyer backs out due to an inability to secure financing and this contingency is in the contract, they can usually do so without penalty.
If one party fails to fulfill their obligations without a valid reason, they could lose their deposit or be required to pay damages to the other party.
Penalties for failing to fulfill contractual obligations vary and are specified in the contract. They often involve financial compensation or forfeiture of the deposit. In some countries, cooling-off periods are mandatory, and consumer protection laws might be more stringent.
The role of attorneys and notaries can differ significantly. In some places, their involvement is less integral than in Costa Rica.
Potential risks include misrepresentation of property details, legal issues with the title, and unexpected property defects.
Buyers should be wary of properties with unclear titles, unpaid taxes, or zoning issues.
Disputes are typically resolved through negotiation, mediation, or, as a last resort, litigation. The agreement might stipulate a preferred method for dispute resolution, such as arbitration.
If defects or issues with the property are discovered after signing, the recourse depends on the contract’s terms and whether the seller disclosed these issues.
In some cases, this could lead to renegotiation, compensation, or even nullification of the agreement.
Real-life disputes often arise from misunderstandings about property boundaries, defects not disclosed by the seller, or delays in fulfilling contractual obligations.
These are usually resolved through mediation or, if necessary, legal action, depending on the severity and the contract terms.
It's crucial for both buyers and sellers to thoroughly understand the contract, ensure clear communication, and ideally, seek legal counsel to navigate these complexities. Being aware of these risks and prepared for potential pitfalls can significantly mitigate the chances of disputes and make the transaction process smoother.
This article is for informational purposes only and should not be considered financial advice. Readers are advised to consult with a qualified professional before making any investment decisions. We do not assume any liability for actions taken based on the information provided.