Panama's strategic location and economic stability make it an appealing destination for foreign investors in the real estate sector.
Navigating the property market in this area can be quite challenging, especially for non-local residents. There are various obstacles and unexpected problems that you might encounter if you're not cautious.
Our group of property buyers and local associates have voiced multiple issues to us. We've listed them all in our Panama Property Pack.
This article provides a brief overview of potential pitfalls that may arise during the property buying process in this country.
Is it safe or risky to invest in real estate in Panama?
While Panama isn’t inherently a hotspot for scams, it isn't immune either.
A particularly notorious scam that gained attention was one where beachfront properties were being sold to multiple buyers simultaneously. This was orchestrated by manipulating the public registry system.
In another instance, a developer in Bocas del Toro defrauded multiple foreign investors by selling them plots of land he didn’t own. These scams underline the importance of thorough background checks on developers and intermediaries.
Panama's laws, on paper, are designed to provide substantial protection for property buyers, with foreigners having almost similar rights as locals. Yet, the real challenge lies in the interpretation and enforcement of these laws.
For instance, Panama’s Maritime Law has led to conflicts where beachfront property rights are contested between the government and private owners, leading to prolonged legal battles.
Transparency in Panama’s property buying process is considerably better than many of its Latin American counterparts.
However, the concept of 'Right of Possession' (ROP) land in Panama can be a minefield. ROP land isn't titled and is technically owned by the government, but rights can be bought, sold, or transferred.
This can often lead to disputes and confusion, especially for foreign buyers unfamiliar with this concept.
The Panamanian legal system, while functional, often leans towards being sluggish. A poignant example is the case of a group of American retirees in the coastal town of Gorgona who got embroiled in a decade-long legal battle over a land title dispute.
Such cases emphasize the importance of having all legal documents thoroughly vetted.
When considering property in Panama, the key is exhaustive due diligence. We have included a guide to conduct a proper due diligence in our Panama Property Pack.
In addition to the standard checks, it's pivotal to understand the type of land being dealt with – titled vs. ROP, ensure that there are no ancestral land claims, especially in regions populated by indigenous communities, and seek testimonials from previous buyers if purchasing from a developer.
Panama's government, in recent years, has taken proactive steps to boost its property market. The Friendly Nations Visa, which allows citizens of certain countries to attain residency if they own property in Panama, is a testament to this.
However, there have been concerns about rapidly changing immigration laws affecting property ownership rights.
Many foreign buyers rave about the ease of buying property in Panama's prime areas like Panama City or Coronado.
However, delve deeper into forums and communities, and tales emerge of unexpected construction halts, land title disputes, or issues with unscrupulous agents.
Everything you need to know is included in our Panama Property Pack
Potential real estate buying mistakes in Panama
The concept of "Finca"
When buying residential property in Panama, a specific pitfall you should be aware of, especially as a foreigner, is underestimating the importance of a "Finca" number in the public registry.
In Panama, every registered piece of real estate is assigned a unique Finca number. This number is crucial because it's used to verify the property's legal status, including ownership history, liens, and encumbrances.
Here's the context in which this mistake might occur. When you're reviewing property documents, you might focus primarily on the location, size, and price, assuming that if these aspects are in order, everything else will follow suit.
However, failing to check the Finca number can lead to significant legal troubles down the line. The property might have unresolved legal issues, or worse, it might not even be legally owned by the seller.
This issue is particularly prevalent in transactions involving rural or less developed areas where property documentation might not be as rigorously maintained.
In more urban areas like Panama City, the real estate market is generally more regulated, but caution is still advised.
To avoid this pitfall, you should always verify the Finca number through a thorough search in the public registry. Consider hiring a local attorney or a real estate agent experienced in dealing with foreign buyers to help navigate this process.
The risk related to "Right of Possession"
Another specific pitfall to be aware of when buying residential property in Panama, particularly as a foreigner, is overlooking the importance of understanding "Right of Possession" (ROP) properties.
Unlike titled properties, ROP properties in Panama are based on a traditional system where the land is not officially owned but rather possessed. This concept is unique and can be quite different from property norms in other countries.
In Panama, especially in coastal and island areas, many properties are sold under Right of Possession. While these properties can be significantly cheaper, they come with higher risks. The key issue with ROP properties is that they lack the formal title, making the legal security of your investment more precarious.
There have been instances where foreign buyers thought they were getting a great deal, only to find out later that their claim to the property was weak or disputed.
The context in which this mistake might occur is when you, as a foreign investor, are attracted by the lower prices of ROP properties compared to titled ones.
You might be under the impression that the process of converting an ROP property to a titled property is straightforward, but it is often fraught with bureaucratic challenges and uncertainties.
To navigate this issue, you should conduct thorough due diligence (check our Panama Property Pack so you don't forget anything).
Hire a knowledgeable local lawyer who can help you understand the intricacies of ROP properties in Panama. They can conduct a detailed investigation into the property's history, current possession status, and any potential claims or disputes.
Additionally, be prepared for a potentially lengthy and uncertain process if you decide to convert an ROP property into a titled one.
The awareness of the "Idoneidad" risk
A less commonly known but significant pitfall when buying residential property in Panama, especially as a foreigner, is the potential misunderstanding or mismanagement of the "Idoneidad" requirement.
Idoneidad, in the context of Panamanian real estate, refers to the certificate of professional competence or suitability.
It is a requirement for professionals, including real estate agents, in Panama.
The mistake often occurs in the context of dealing with real estate agents or brokers. As a foreigner, you might be inclined to work with an agent who seems proficient in English or comes highly recommended by other expatriates.
However, you should be aware that in Panama, all legitimate real estate agents must possess an Idoneidad certificate.
This certificate is issued by the Technical Board of Real Estate of the Ministry of Commerce and Industries and ensures that the agent is legally authorized and qualified to practice in Panama.
The issue is that some individuals may operate without this certification, especially in areas highly populated by expats or in less regulated markets.
Working with an uncertified agent can put you at risk of misinformation, fraud, and legal complications. Their lack of official recognition means they are not bound by the same legal and ethical standards as certified agents.
To avoid this pitfall, you should always verify the Idoneidad of any real estate agent or broker you plan to work with in Panama. Ask to see their certification and check its validity with the relevant authorities.
Additionally, seek recommendations from reliable sources, and consider working with well-established real estate firms known for their professionalism and adherence to legal standards.
Everything you need to know is included in our Panama Property Pack
The "Corregimientos" system
Another specific pitfall you should be aware of when buying residential property in Panama, particularly as a foreigner, is the complexity surrounding zoning laws and regulations, especially those pertaining to the "Corregimientos" system.
In Panama, "Corregimientos" are administrative subdivisions within districts, similar to boroughs or neighborhoods in other countries.
Each Corregimiento has its own set of zoning laws and regulations, which can significantly impact what you can and cannot do with your property.
The mistake often occurs when foreign buyers assume that zoning laws and regulations are uniform across the country or similar to those in their home countries.
This assumption can lead to purchasing property in a Corregimiento with restrictive zoning laws that may not align with your intended use. For instance, you might buy a property intending to develop it commercially or modify it significantly, only to find out that the local zoning laws prohibit such developments.
This issue is particularly relevant in areas undergoing rapid development or in regions with a mix of urban and rural characteristics.
Zoning laws in these areas can be very specific and subject to change, impacting property values and usage rights.
To navigate this pitfall, it's crucial to conduct thorough due diligence regarding the zoning laws of the specific Corregimiento where you're considering purchasing property. Engage with a knowledgeable local lawyer and possibly a town planner or architect who is familiar with the local zoning regulations.
They can provide you with detailed information about what is permissible on the property you are interested in and any future plans that might affect it.
The implications of "Bienes Raíces Retasa"
A unique and often overlooked pitfall when buying residential property in Panama as a foreigner is navigating the implications of "Bienes Raíces Retasa," which refers to the reassessment of property value for tax purposes.
In Panama, property taxes are based on the registered value of the property, and this value can be subject to reassessment, potentially leading to unexpected tax liabilities.
The context in which this mistake might occur is when you purchase a property without fully understanding the potential for a significant increase in property taxes due to a reassessment of the property's value.
This reassessment can happen for various reasons, such as significant improvements to the property or changes in the surrounding area that increase its market value.
The issue becomes particularly pertinent if the property you're purchasing has been undervalued in the tax records for a long time, which is not uncommon in Panama. Upon transfer of ownership, the authorities may reassess the property at a higher market value, leading to a substantial increase in annual property taxes.
This increase can be a surprise for foreign buyers who may not have factored such a potential hike into their budget.
To avoid this pitfall, it's important to inquire about the current assessed value of the property and understand the likelihood and potential impact of a reassessment. You should work with a local real estate attorney and a tax consultant who can provide detailed insights into the Bienes Raíces Retasa process.
They can help you estimate the potential future tax liability and assess whether the property remains a viable investment considering the possible increase in taxes.
"Derechos de Agua" or water rights
When buying property in Panama, especially as a foreigner, one crucial aspect to consider is whether the property comes with "Derechos de Agua" or water rights.
This consideration is particularly important in rural or coastal areas where access to nearby water sources is essential for the property's intended use.
"Derechos de Agua" refers to the legal rights to use and access water resources like rivers, lakes, and underground water sources.
In Panama, these rights don't always automatically accompany land ownership and may require a separate process to acquire.
The process to secure "Derechos de Agua" is overseen by specific regulatory bodies, such as the National Environmental Authority (ANAM) and the Ministry of Agricultural Development (MIDA).
It involves a series of steps including applying for concessions and complying with environmental regulations. This process might also entail negotiations with local communities or other stakeholders.
To navigate this aspect effectively, it's advisable to work with a local attorney well-versed in environmental and land law.
Everything you need to know is included in our Panama Property Pack
The risk potential of "Patrimonio Familiar Tributario"
Another specific pitfall to be aware of when purchasing residential property in Panama, especially as a foreigner, is the intricacy of dealing with "Patrimonio Familiar Tributario," a tax benefit system designed to protect family homes.
Under this system, a property designated as a "Patrimonio Familiar" (Family Patrimony) enjoys certain tax benefits, including reduced property taxes. However, this status comes with specific conditions and limitations that can be overlooked by foreign buyers.
The mistake often occurs in situations where you buy a property that is registered as a "Patrimonio Familiar."
You might assume that the property's tax benefits and status will automatically transfer to you, but this is not always the case.
The Patrimonio Familiar status is tied to the individual or family that registered it and may not apply to new owners, especially foreigners.
Moreover, properties under this status have certain restrictions. For example, they cannot be sold or rented out without losing the tax benefits, and any change in the use of the property can lead to a reassessment of its tax status.
This can be particularly challenging if you plan to use the property for purposes other than a primary residence.
To avoid this pitfall, it's essential to clarify whether the property you're interested in is registered as a Patrimonio Familiar and understand the implications of this status. You should engage a local real estate attorney to help you navigate these complexities.
They can provide detailed advice on the tax implications, restrictions, and potential changes in status associated with buying a Patrimonio Familiar property.
"Ejido" land concept
Another nuanced pitfall for foreigners buying residential property in Panama is the potential for complications related to "Ejido" land.
Ejido land refers to communal land originally owned by the government and later granted to communities or individuals, often in rural areas or small towns. While some of this land has been privatized and titled, a significant portion remains as Ejido, which can lead to complex legal scenarios for potential buyers, especially foreigners.
The issue typically arises when you, as a foreign buyer, find a property situated on Ejido land that seems perfect and is offered at an attractive price.
However, purchasing Ejido land involves navigating a labyrinth of legal processes and restrictions.
Unlike fully titled land, Ejido property often comes with limitations on usage, transfer, and development. There's also the risk of unclear ownership history or disputes over land rights, which can complicate the transfer process.
This situation is more prevalent in less urbanized areas of Panama, where land records may be less formalized and the history of land ownership less clear.
The challenge lies in ensuring that the property you're interested in has been properly privatized and titled, a process that can be both time-consuming and uncertain.
To navigate this pitfall, it's crucial to conduct a thorough due diligence process. This involves verifying the property's status as either fully titled or still under Ejido classification. Hiring a local attorney experienced in Panamanian land rights, particularly with Ejido land, is essential.
They can assist in investigating the property's legal status, history, and any potential claims or disputes that might affect your ownership.
"Impuesto de Inmuebles" or property tax system
Another specific and often overlooked challenge for foreigners buying residential property in Panama is understanding and dealing with the "Impuesto de Inmuebles" or property tax system, particularly the recent changes that have been implemented.
While property taxes exist in many countries, the Panamanian system has unique aspects that can catch foreign buyers unaware.
One key area where misunderstandings arise is in the calculation of property taxes. Panama revised its property tax laws a few years ago, resulting in a new structure for tax rates and exemptions.
These changes can significantly affect the amount of tax due on a property, depending on its value and usage.
For example, primary residences are taxed at a different rate than secondary homes or investment properties.
As a foreign buyer, you might not be fully aware of these nuances and how they apply to your property purchase. You might estimate your tax liability based on outdated information or misunderstand how tax exemptions and rates apply to your specific situation.
This can lead to unexpected financial burdens or compliance issues.
It's also important to note that property tax in Panama is calculated based on the registered value of the property, which may differ from the market value.
There have been instances where properties were undervalued in the registry, leading to lower taxes. However, a reassessment can significantly increase the tax liability.
To avoid this pitfall, it's advisable to consult with a local tax advisor or attorney who is well-versed in the current Panamanian property tax laws. They can provide accurate information on how these taxes will affect your property purchase and ongoing ownership costs.
Everything you need to know is included in our Panama Property Pack
"Horizontal Property Regime" or multi-unit buildings
A particular pitfall for foreigners buying residential property in Panama is the complexity of dealing with "Horizontal Property Regime" (Régimen de Propiedad Horizontal), especially in condominiums or multi-unit buildings.
This regime is governed by a set of laws and regulations that dictate how these types of properties are managed, the rights and obligations of unit owners, and the administration of common areas and facilities.
The challenge often arises when you, as a foreign buyer, purchase a condominium or an apartment in a building governed by this regime without fully understanding the rules and regulations that apply.
For instance, there might be strict rules regarding renovations, renting out the property, or the use of common areas. Additionally, there are typically monthly maintenance fees or HOA (Homeowner Association) fees, which can vary significantly and might be higher than you anticipate.
Another aspect of this regime is the management of the building or complex, which can have a significant impact on your property's value and your quality of life.
Issues such as poor management, underfunded reserves for repairs and maintenance, or disputes among unit owners can lead to complications.
As a foreigner, it's crucial to thoroughly understand the Horizontal Property Regime applicable to the property you are interested in. This includes reviewing the bylaws of the condominium or building, understanding the fee structure, and getting a sense of the management and community dynamics.
To navigate this, you should consider hiring a local real estate attorney who can explain the nuances of Panama's Horizontal Property Regime.
They can review the property's documents with you, help you understand your rights and obligations as a property owner, and advise you on the financial and legal implications of your purchase.