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Why Buy Real Estate In Costa Rica?

Why Buy Real Estate In Costa Rica?

A couple of decades ago, Costa Rica was near the top of the list for almost anyone interested in a “second home in the sun.” Then things started to change. Prices rose, the bureaucracy became stifling, and the country abandoned its famed pensionado program that provided financial incentives to foreigners on a fixed income.

Today the situation is improving for the foreign investor. Prices have leveled off throughout the country, though cars and some other items are still unreasonably expensive. The bureaucracy is far from streamlined, but it’s forging ahead with transportation improvements, as well as reformed property rules that will make title searches more efficient. You can now live in a growing number of inexpensive areas that were once too remote to consider before highway and airport improvements. And if you want to apply for residency in Costa Rica, you can now make the application from your home country.

a372a6747c71b471ead661ca98377fd2Costa Rica has a stable government, a well-educated populace, and some of the world’s most enjoyable activities: fishing, bird-watching, scuba diving, snorkeling, kayaking, surfing, and horseback-riding. And, of course, there are many opportunities to dine and dance under the stars on the beach.

Throughout Costa Rica, the cost of living is moderate. The leading expatriate organization, The Association of Residents of Costa Rica, estimates that a couple that owns a house and car and has no debts can live comfortably on $1,500 to $2,500 a month.

Despite the rise in real estate prices, it’s still possible to find a second home in Costa Rica for a fraction of what you’d pay in North America…you just have to look harder. The country’s Central Valley continues to attract Americans and Europeans who value gorgeous landscapes, a good climate, and an established expat community.

What Every Costa Rica Real Estate Buyer Should Know

There Are No Restrictions on Foreign Property Ownership

However, no one can own property within 50 meters of the ocean, and for the next 150 meters, real estate comes under maritime zone laws. These laws permit development only under government “concession.” This means that anyone shopping for property should be doubly cautious about buying oceanfront real estate, including condos. Before entering into a transaction, insist that your attorney assures you that the title is legally consistent with the concession laws.

Title Issues

Though Costa Rica’s property regulations are steadily improving, some buyers still wind up with real estate that has a lien or title that can be challenged. For that reason, it’s also essential to have your lawyer make a thorough title search and to assures you that when the transaction is completed, you will have a clear title to the property.

Never rely on a seller’s assurance or retain an attorney recommended by the seller. Instead, choose your own attorney, one with specific experience in real estate transactions and title searches. To find an attorney, ask for recommendations from your U.S. lawyer, Americans living in Costa Rica, or members of an expat organization such as The Association of Residents of Costa Rica Residents.

Residency Requirements

Depending on how often you plan to visit or live in Costa Rica, it can be necessary to establish legal residency. (Tourist visas are valid for 90 days.)

Many owners of second homes choose either pensionado or rentista status. For pensionado status, you must show proof of monthly income from a qualified pension plan or Social Security benefits of at least $600. For rentista status, you must show proof of at least $1,000 monthly income, as well as evidence that the income will continue for the next five years.

Financing

Many owners and developers will finance up to about 70% of your real estate purchase, as will a few international banks in Costa Rica. The rate is usually about two or three points above what you’d pay in North America. The best move is to consult with your U.S. accountant or financial adviser before deciding on how to handle financing.

Costa Rican Title Insurance

10 reasons live costa rica 620x429Costa Rica has little restrictions on the ownership of property but does, however, have a complex legal system that governs the ownership of property and the transfer of titles.

Don’t be scared off by the complexity of it though, because many excellent attorneys specialize in streamlining the process for comparatively modest fees.

Yet even after your lawyer assures you that the title to the property you plan to buy is clean and valid, it’s still wise to take out title insurance.

Mistakes do happen, especially when dealing with government bureaucracy and, of course, after mistakes happen there’s often little you can do unless you have a good title policy. If you do, you can make your claim directly to the insurer who then takes up your case.

When you buy a title-insurance policy for foreign real estate, be sure that it covers these threats to title:

  1. Ownership issues – what if the property isn’t really yours?
  2. Liens, mortgages, contracts, options or other encumbrances on the title.
  3. Fraud and forgery issues, including those that might have resulted from undue influence, duress, incapacity or impersonation.
  4. Rights of access to and from the land and covenants limiting the use of the land.
  5. Transfer problems, such as unauthorized conveyances by a corporation, partnership, trust, limited liability company or other legal entity, or one derived through defective judicial proceedings.
  6. Documentation disputes, such as the invalidity of a document executed under an invalid power-of-attorney, or one improperly executed or recorded, or one with an erroneous or inadequate legal description of the land.

The good news is that title insurance is affordable. It usually only amounts to 0.5% of the purchase price – and often less

Real Estate Taxes In Costa Rica

Property Taxes

Property taxes in Costa Rica are low. The current annual rate is 0.25% of the recorded value, which is nearly always lower than the actual value. If a house costs $200,000, for example, you would pay only $500 a year even if that were the recorded value. In practice, it would generally be much less. In Costa Rica, property taxes are usually paid quarterly.

Annual Property Taxes

Beginning Nov. 30, 1995, the law changed to place the administration and collection functions for property taxes in the hands of local governments (municipalidades) where the property is located. It is these entities’ responsibility to conduct property appraisals and collect the corresponding property tax. The property tax is established on an annual basis and may be paid annually, by semester, or by quarter, depending on the procedures established by each local government. The municipality may set its own rate not to exceed 1%.

Transfer Taxes

There is a 3% property transfer tax. This tax is based upon the registered value placed on the property transfer deed at the time of sale.

The Cost Of Closing The Deal In Costa Rica

Closing costs in Costa Rica are relatively low: less than $2,000 per $100,000 of the sale price.

Part of the reason for the low cost is that the registered value of property is normally just a small fraction of its actual market value. To head off the possibility of future tax problems, make sure your attorney is aware of the disparity and tells you that the difference is within the normal range.

Many owners and developers will finance up to about 70% of your real estate purchase, and so will a few international banks in Costa Rica. The rate is usually about two or three points above what you’d pay in the U.S. or Canada. The best move is to consult with your U.S. accountant or financial adviser before deciding on how to handle financing.

The buyer and seller usually share equally in the closing costs, but this is open to negotiation. Estimated closing costs would be $1,800 for property with a transaction price of $100,000 and a registered value of $15,000.

This is the breakdown:

  • Transfer tax (1.5% of the registered value): $225
  • Public registry fee (0.05% of the registered value): $75
  • Tax stamps, including $20 for a municipal stamp, $20 for a hospital stamp, $10 for an agrarian stamp, $2.50 for a bar association stamp, $2.50 for a fiscal stamp and $0.05 for a national archive stamp
  • A notary fee of $1,250, based on 1.5% of first million colones of the sales price and 1.25% of the remainder.

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