The Differences between Costa Rica and U.S. Real Estate Law

	Preston A. Gitlin
	President, Co-founder CR CommunitiesCosta Rica’s leading developer of retirement destinations 011 (506) 8639-5034 http://www.CRCommunities.com	Tweet

Purchasing property in a foreign country can be daunting for a variety of reasons. The laws, languages, and customs from one country to another are often times very different. As is the case in Costa Rica, however, one does not have to be a resident or citizen in order to own property in the U.S. This makes purchasing property in the United States a lot easier than say trying to transfer title in a country like Thailand.

I have outlined in this document some key similarities and differences to help Costa Ricans better understand what to expect when purchasing real property in the United States. They will find that while stark differences exist between Costa Rica and U.S. real estate law, purchasing real property in the U.S. is actually quite easy. The following information will outline these similarities and differences, and will provide comfort to any foreigner looking to purchase real estate in the United States:

Napoleonic code versus American common law

The Costa Rica legal system is inspired almost entirely by Napoleonic code, named after Napoleon Bonaparte who reformed the legal system of France during the early 1800s. In contrast, the U.S. uses American Common Law which comes from the Common Law of England.

Similar: Both systems are governed by a judicial system featuring various levels of judges. These judges interpret law, contracts, and historical cases to make rulings. Precedents from past cases and rulings will help these judges in coming to their decision-making process.

Different: Napoleonic code is judged only by what is written—law cannot be changed without a new law to replace it. It is literal by nature. In American Common Law, the laws are forever evolving as times and circumstances change.

Finding your property

It is most practical to use a real estate agent for your property search and purchase needs. These professionals usually have a broad understanding of local market prices and regulations.

Similar: Real estate agents in both countries will usually have listings, an array of property options available for sale. Agents will typically earn a commission and will work with clients through the entire purchasing process.

Different: Real estate agents in the U.S. need to be licensed by their state government. It is typically recommended to use an agent who is also a member of the National Association of Realtors (www.Realtor.org), an organization that only allows members who follow a strict ethical code. In Costa Rica, anyone can be a “real estate agent” as a license is not required. This arguably causes unnecessary risk to the system and results in agents who are not always fulfilling a fiduciary duty to their clients. Often times agents will enact a “sobre de precio” or “above-price”, telling an unsuspected buyer that a property costs X, when in fact the seller has asked for much less—the result: The real estate agent profits the difference between the real sales price and what the buyer ultimately pays.

The MLS (Multiple Listings Service): In the United States the vast majority of properties are registered in an online database that is only accessible to licensed real estate professionals. This allows real estate agents to quickly cull up dozens of properties in the same vicinity, helping agents better understand fair-market prices and available inventory. In Costa Rica this system is non-existent and makes finding available properties an arduous process.

Transfer and search of title

Whoever owns título, or “title” has legal ownership to any real property. It is important before purchasing real estate to do a title search preferably with the help of an attorney.

Similar: All ownership must be registered with the government. In Costa Rica, the Registro Nacional, or National Registry is where an attorney will submit all pertinent documents, including the escritura, or deed. In the United States this documentation is usually recorded at the Recorder of Deeds.

Who can own title: Real estate title may be held in the name of a person or corporate entity. In Costa Rica most real estate is held in the name of a Sociedad Anónimo, or S.A. This is most similar to a United States Limited Liability Company where all liability is limited to the corporation, and not the individual.

Different: Almost every real estate transaction in the U.S. involves some form of title insurance. This is usually provided by a title company, such as Stewart Title. Title insurance provides protection to the buyer from issues such as scams, liens, second or third mortgages and/or any other issues that could appear after closing. While all of these potential threats exist in Costa Rica, title insurance is seldom used as most buyers are comfortable with a simple search in the National Registry combined with due diligence provided by their attorney.

Real estate taxes

Similar: In both countries annual taxes are due based on a percentage of the registered value of a property.

Different: In the United States, the value of real estate is assessed by a licensed appraiser. The annual payment is calculated by taking the local and State tax rate and multiplying it by the appraised value of the property. In Costa Rica, buyers are actually allowed to register their own assessed value. They are then taxed at .25% of this number. It is not uncommon for buyers to register their property next to nothing, say $400 USD so that they pay virtually nothing in property taxes.

The closing process:

Similar: At closing, title is transferred and the buyer takes ownership of a property. An attorney, and usually the real estate agent, is present. Taxes, fees and documents are disbursed accordingly.

Different: In Costa Rica there are usually far fewer documents. Shares and title are transferred by making hand-written annotations in corporate books. The seller relinquishes his/her shares if the property was purchased with an S.A. The buyer must then name a President, Secretary, Treasurer, and “Fiscal.” Only the President will have signing power unless otherwise written in the corporate records. The new deed is then presented, and all documents are notarized by a legal notary who is usually also the attorney.

In the United States the closing process is much more complex. There are usually more documents because quite often a finance company is involved. In Costa Rica, the interest rate is usually 4-6% higher on the U.S. dollar than it is in the United States. Typically there is a minimum down payment of 30% and the loan is usually not approved for at least 6 months. Almost all real estate transactions are made in cash in Costa Rica. Documents one can expect at a U.S. closing would be piles of paperwork related to the deed, mortgage, receipts, statements, affidavits, insurance, survey, studies, health and safety approvals, tax information, certificates etc. There are usually many piles of paperwork.

Legal representation: In the United States buyers and sellers must be represented by their own counsel. In Costa Rica only one attorney is mandatory by law for a real estate transaction. The U.S. system is set up to avoid any potential conflict of interest.

Legal fees: Even though the U.S. attorney is doing a lot more work, legal fees in the U.S. typically run about $500 to $800, and additional fees related to registration of title, typically another $200 to $400. In Costa Rica, attorneys are legally entitled to 1.5% of the first 1,750 million colones (roughly $3,500 USD) and 1.25% of the remaining sales price. Because sales prices can be many hundreds of thousands, or even millions of dollars, attorneys will usually wave their right to such outlandish fees off the record, but they are not allowed to do so by law.

There are also legal fees for creating a corporation which usually costs about $400 USD. Closing costs are normally paid for by the buyer in Costa Rica and usually cost around $1,200 for everything, assuming the attorney is providing a fair fee. In the United States, closing costs are generally split equally between buyer and seller, and each party pays his/her own attorney fees.

Taxes at closing: In the United States, taxes at closing depend on local and State laws. In Costa Rica, tax rates can be found here: http://www.costarica.com/real-estate/information/buying-real-estate/costs-and-fees/

Conclusion

While there are certainly plenty of differences between the Costa Rican and U.S. system, when purchasing real estate, one should be primarily focused on finding the right legal counsel and the best real estate agent possible. Presently thousands of U.S. citizens are purchasing property in beautiful Costa Rica each year. A little extra bureaucracy should not prevent one from doing the same in the United States.