Real Estate Lang & Asociados

Formalizing a Real Estate Transaction


Foreign citizens are very usually puzzled when trying to engage in real estate transactions in Costa Rica.  One of the more confusing stages is frequently the one in which, although the basic terms and conditions of the sale have been verbally agreed by the parties, it is time to formalize such agreement and to make a good faith deposit towards the price.

The first thing to understand is that, philosophically, in our opinion, this stage needs to be structured here differently than in other jurisdictions, such as the United States.  Under such line of thought, the concept of offer from the buyer should be revisited.  In Costa Rica, and even though realtors will try to push you as much as possible towards sending a written offer to the seller, such document, if executed by the buyer to be, would be binding for him, and could be used by the seller as a contractual commitment if it is convenient for such party.

Additionally, most offer models used by realtors lack many of the most important aspects that a real estate purchase agreement must have, such as the rules of application for the deposit, a correct identification of the property and its owner and an agreement on payment of closing fees, among others.  These offer letters are also usually exchanged as faxes, with no acceptance by the seller bearing an original signature delivered to the buyer and therefore, due to local regulations, jeopardizing the validity of the agreement.

Instead of the above referenced offer letter, it is wise to wait until basic due diligence has been completed and once that has happened, to formalize the agreement between both parties in the form of a mutually agreeable contract, which could take the form of a sales purchase agreement –a formal agreement to purchase under certain conditions- or an option –an agreement in which the buyer to be is granted a specific period of time to buy the properties, if he so decides, usually against losing a deposit if the purchase does not take place-.

In most cases due diligence is something that can be completed in a few days, especially if it consists only in checking the title and the corporation owning it (if that is the case).  Once such due diligence steps have been met, the buyer would be in a better position to determine if he wants to proceed with the deal or not, and if the transaction is worth a deposit, thus moving towards signing an agreement with the seller.  In cases of more complicated due diligence activities (for example, determination of water availability, forestry coverage, soil studies, etc.) these additional contingencies can be included in the contract and should not delay its signature.

Another common issue at this stage is how to make the deposit and who will hold it.  It is important to consider that even with the best drafted contract in the world, if the seller is holding the deposit, and at the end of the day such party breaches the contract and does not transfer the property under the agreed terms, it would be very hard to recover it.  An objective third party holding the deposit (and accepting its terms by signing the contract) is a more suitable alternative, and, if chosen wisely, would protect it.

In conclusion, and as a rule of thumb, do not sign any agreement or other document related to a real estate transaction and do not give any money down before title and corporate searches are completed and cleared.  Once you are prepared to proceed, get a signed original contract from the seller, and then, either simultaneously or at a later date, deliver a signed original by you.  Deposit moneys only after such documents are signed, and to avoid risk, with an objective third party and not with the seller.

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