The Buying Process
Financing
Property Protection
With respect to financing there one key issue that can arise, a fraudulent property transfer. This is when a seller holds your property out to be theirs in a real estate transaction. The consequences of a faulty purchase can result in loosing the real estate and thousands of dollars in legal fees. There are two good ways to avoid this problem.
Freezing the title is a simple way of ensuring that this will not occur. To do this, you file a request to the National Registry for them to freeze your title. This will disallow any recording or filing of transfer documents against your property by the employees of the National Registry. Once you are ready to sell, you file to release the freeze and the real estate can again be transacted.
Having a lien on your property is another great way to discourage scam artists from targeting your property. Most commonly, this is done with a bank mortgage. This is done by the owner of the real estate having their public notary request that the mortgage bond be issued against the title of the property for its full value or an amount you choose. The National Registry will annotate this on the property's files and will send the mortgage bonds to the property owner. This method is deployed between Costa Rican real estate owners and their lenders so that property title-holders can assure the certificate bonds as cash or present them as a guarantee on other loans. Once the loan is completely paid off, the lender returns the bonds to the property owner who can keep on reusing them in the same way.
Due to the fact that bonds are considered a major encumbrance on your property, it makes you an extremely undesirable target for those who would intend to depose you of your property. This is a certified legal tool to used to protect your real estate assets. Creating mortgage bonds on the property costs roughly the same amount as a normal mortgage. About 1.3% of the property value is paid to the state and to your notary when creating this type of mortgage bond.
Costa Rica Real Estate FAQ Index Catalog
The Buying Process
Financing
Using Retirement Fund
Retirement fund contributions within the U.S. can be redirected to an international real estate investment. IRA's allow over $40K annually of contributions to go directly to Costa Rican real estate. The IRS rules for doing this are straight forward and allow for a lot of opportunity. While using common sense will steer you clear of any violations, it is always best to speak to your accountant to ensure that you get the most out of using a retirement fund to purchase Costa Rican real estate. Within your IRA, one can buy, sell or trade real estate. You can form partnerships with friends, family or associates as well. One can roll property from one plan to another or take property from your plan as a distribution.
Sometimes people form investment groups that will combine IRA and non-IRA funds to buy real estate in Costa Rica. Your IRA can also be invested in private stock offerings, LLCs, loans, purchase options, joint ventures and tax liens certificates. Buying your property with the IRA can allow you to improve the diversification and security of your retirement money, significantly reduce the tax burden on your gains, and free up resources to be invested.
To purchase property in your IRA:
- Create a purchasing contract with your IRA named as the legal owner of the property which you are choosing to buy.
- Contact your IRA administrator and make the initial deposit on the property with IRA money, or set up to pay cash yourself and get reimbursed by your IRA.
- There are several forms needed to close the deal, make sure your real estate lawyer, the broker, the escrow company and any other who is involved with the purchase can be in direct contact with the IRA administrator.
- Have your lawyer send a Buy Direction Letter to the administrator with a list of directives for acquiring the real estate.
- Once all forms requested by the administrator to be completed are finished, send a copy of the contract along with the paperwork.
- The contracts for purchasing Costa Rican real estate will then be signed by the administrator as he or she is acting as an official for the IRA. Before signing, the administrator will check contract terms against the Buy Direction Letter for consistency.
- By wire transfer or printed check, the deposit will be sent to the seller or their attorney.
- Then the IRA administrator sets up a wire transfer into the escrow account that will buy the real estate.
- From here on out, any profits are usable as cash in your IRA. They will be invested in the manner laid out in the Buy Direction Letter.
Why Costa Rica Real Estate
- Stable government; Currency,Infrastructure,Values foreign investment, Protects foreign investment
- Investment security; excellent lending market, ROI, low tax rate, intrinsic value, insurable title/home
- Healthcare; high-quality, high tech, inexpensive, easy access, insurance
- Economic; stability, foreign investment, government, investment potential
- No ownership restrictions; valued by government, no restrictions, same rights as natives
- Proximity to the U.S.; 10 major North American cities with a 3-5 hour direct flight to Costa Rica
- Culture; high standard of living, friendliness to foreigners, education, low crime rate
- Nature; beaches, rainforest, protected lands and species, eco-tourism, diversity
The Buying process
- Finding a broker; certified, experience, track record, language, area knowledge
- Calculating value; comparative value, asking price, investment potential, true value, municipal
- Purchasing; incorporation, appraisals, home inspections, attorneys, contracts, survey map, registration, notary, taxes, titles, closing
- Financing; mortgages, documentation, banks, property protection, using retirement fund
- Types of properties; stand-alone house, apartments, gated communities, condominiums, timeshare
- Building; land & title, permits, size, utility of land, civil engineer, architect, construction, contractors
- Protecting the investment; insurance, making claims, property management
- Oceanfront real estate; defined, taxes, usage, foreign ownership
- Common & avoidable problems; liens & encumbrances, expropriation, environmental & squatters
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The Buying Process
Financing
Documentation
In order to properly secure a mortgage, you will need to present:
- Mortgage application filled out and signed.
- Two copies of the registered survey plans.
- Documentation for proof of ownership for vehicles and notable assets.
- Two photo IDs (usually a passport and a driver's license)
- A bank issued statement with current investment, savings and retirement accounts for the preceding six months.
- A copy of your tax returns for the last two to three years.
- Proof of your last U.S. address.
- Social security #
- Copy of purchase option agreement and down-payment receipt from seller.
- Documentation from the municipal authorities showing that all taxes on the property have been paid.
- If applicable, Costa Rican utility bills.
- Copies of your last six months worth of credit card statements. All credit accounts should be noted to the bank for they will perform a credit check in your home country.
- If you have had a mortgage or loan, verification of your last payment.
- Income certification provided by a CPA showing monthly gross income.
With this documentation in hand, the mortgage application process will be successful. There are some other circumstances that require additional information. If you wish to refinance a current Costa Rican real estate purchase you need the last letter or receipt from your previous creditor. If you property is in the name of your corporation, then the bank will ask for additional documentation as well.
For real estate owners that are planning to build on the land or perform an addition, you must present the building schedule, summary of the construction fees and proof of approval from the Colegio de Ingerieros y Arquitectos and the local municipal authority.
In the eyes of the bank, income verification is the most important thing in determining the terms of the loan. There are three classifications that the Costa Rican banks use for source of income: self-employed borrower, buyer on salary and foreign income borrower.
For a self-employed borrower, the first thing you must give the bank is an authentic copy of your income by a certified CPA that is authorized to practice in Costa Rica. They must verify your current job position, your company's business type and an average net income for the last fiscal period.
For a buyer on salary in a company within Costa Rica required income verification. A letter from your employer summarizing your employment must be addressed specifically to the bank.
For a borrower with foreign income, the bank will use the same procedure as for the self-employed.
The Buying Process
Financing
Mortgages
For Costa Rican real estate transactions, it is customary for the individual who is receiving financing to pay the expenses involved with composing and registering the mortgage instrument. A mortgage can be initiated during the closing of the real estate transaction by the addition of a mortgage clause within the transfer deed. Another way is to draft a separate mortgage instrument.
It costs 0.1% of the total value of the mortgage to be paid as a registration fee. Mortgages in Costa Rica also require that you pay for documentary stamps. The public notary will charge an additional fee that falls in the range of 0.625% to 1.25% of the total value of the mortgage for drafting the mortgage instrument. The range for the fee will often vary based on the legal state of affairs with the property.
When we discuss the total value of the loan, please be advised that it will not equate to the agreed upon purchase price. The bank will send out an appraiser to the property and survey the house and the land. Based on this assessment, the loan that the bank will issue will be a maximum of 70% of the assessed value. If however the sales price is lower, then you will get a loan for the full price agreed upon with the seller.
The Buying Process
Financing
Banks
Costa Rica's banking structure is comprised of the central bank; three state-owned banks, which is responsible for almost half of total banking assets of Costa Rica, a state-owned mortgage bank, sixteen commercial banks, eleven private finance groups, four mutual house-building companies and 27 savings and loans cooperatives. In addition, there are more than thirty investments, retirement funds and trusts run by both state, private commercial banks and the state-run insurance company.
When selecting a bank for purchasing Costa Rican real estate, consider personal convenience and the payment schedule your two most important factors. Mortgages and fees can vary greatly from bank to bank.
State run banks are backed and supported by the Costa Rican government and more risk averse. They are conveniently located in every town and almost every city in Costa Rica. Unfortunately these banks usually have long lines and bilingual staff is often not available.
Private banks typically provide quicker and more personalized service, shorter lines and English speaking personnel. They do offer fewer branches so it may be less convenient to utilize them. For a big purchase like real estate, it may be your bank type of choice even though you would open a checking account at a more accessible state-run bank. For foreign buyers, most all of the private banks are associated with banks outside the country which enables easy and quick money transfers.
Mortgage terms, bank by bank:
Banco San Jose offers 15 to 20 year mortgages from 25K to 500K. They offer financing up to 80% of the total real estate purchase price for loans of 150K or less and 70% from 150K to 300K. Loans over 300K are available at 60%. For home improvements, renovations and additions, financing is available at 70% for loans of 30K to 400K at rates of 5.25% over the three month Libor rate with a maximum of 7.5%.
Scotiabank gives loans in dollars and in the colon with 10-30 year loan terms. They offer very flexible terms allowing for financing of up to 90% of the total value of the property and an option for mixing currencies. For colones interest rates are about 20% to 22% and 7% to 10% in U.S. dollars. Rates vary with credit and the length of the term of the loan. Bank fees and processing chargers account for roughly 7.5% in U.S. dollars.
Banex has similar terms to the ScotiaMix which allows for a loan to combine colones and dollars. For dollars, the mortgage credit interest rate is based on Libor plus 6% for terms of up to 30 years. Bank charges are roughly 6%.
HSBC and Citicorp have been acquiring and assimilating banks across Costa Rica. They offer similar real estate mortgage terms to those laid out above. They are constantly changing and these will be close to the current rates, but are not perfect. The rates offered by HSBC and Citicorp should be competitive with the banks listed above.
