Why Use An Escrow Account When Buying Property In Costa Rica

Are you dreaming of owning a slice of paradise in Costa Rica? Whether it's a beachfront villa in Samara or a mountain retreat in Escazú, buying property in this beautiful Central American country can be an exciting adventure. However, navigating the real estate market in a foreign country can also be challenging, especially when it comes to handling large sums of money. That's where escrow services come in. In this comprehensive guide, we'll explore why using an escrow account is crucial when buying property in Costa Rica and how to navigate the process smoothly.

What is Escrow and Why is it Important in Costa Rica?

Before we dive into the details, let's clarify what escrow is. Escrow is a financial arrangement where a third party holds and regulates payment of funds on behalf of two parties in a transaction. This third party, known as the escrow agent, ensures that both the buyer and seller meet their obligations before releasing the funds.

In Costa Rica, escrow services play a crucial role in real estate transactions, especially for foreign buyers. Here's why:

1. Protection for Both Parties: Escrow protects both the buyer and the seller by ensuring that funds are only released when all conditions of the sale are met.
2. Navigating Banking Regulations: Costa Rica has strict anti-money laundering laws. Using escrow can make receiving funds much easier, preventing potential issues with banks freezing funds during investigations.
3. Convenience for Non-Residents: If you're not a Costa Rican resident or citizen, you likely don't have a local bank account. Escrow services provide a seamless way to handle large transactions without the need for a local account.
4. Compliance with Local Laws: While Costa Rica doesn't have specific escrow laws like the United States, using escrow services ensures your transaction complies with local regulations.

When to Use Escrow in Costa Rica Real Estate Transactions

There are two key opportunities to use escrow services when buying property in Costa Rica:

1. Depositing Earnest Money: This is typically done when you make an offer on a property. The earnest money shows the seller you're serious about the purchase.
2. Depositing the Balance of the Transaction: This occurs at the closing of the sale, ensuring all funds are securely handled and distributed correctly.

12 Steps to Successfully Using Escrow in Costa Rica

To make your property purchase in Costa Rica as smooth as possible, follow these 12 steps:

1. Choose the Right Real Estate Agent: Work with an agent who understands escrow and can recommend reputable escrow services. Their local knowledge is invaluable.
2. Select a Reputable Escrow Service: Consider using a real estate closing attorney who offers escrow services and has a solid reputation in Costa Rica.
3. Get a Detailed Offer in Writing: Ensure your real estate agent provides a written offer that includes all necessary details of the transaction.
4. Draft a Comprehensive Purchase-Sale Agreement: Have your real estate attorney draft a reciprocal purchase-sale agreement that includes all transaction details, including the escrow services to be used.
5. Wire Funds Carefully: When sending earnest money to the escrow agent, double-check all account details to prevent errors. Avoid bringing large amounts of cash, as Costa Rican banks have strict limits on cash deposits.
6. Be Aware of Wire Costs: Understand that international wire transfers often involve multiple banks, each potentially charging fees. Factor these costs into your budget.
7. Use Escrow for Primary Transaction Only: Don't send additional funds through escrow for furniture, home inspections, or other expenses without consulting the escrow agent first.
8. Agree on Earnest Money Amount: The purchase-sale agreement should clearly state the earnest money amount. While 10% is common, the exact amount should be agreeable to both buyer and seller.
9. Clarify Dispute Resolution: Ensure the agreement clearly outlines who gets the earnest money if the sale falls through. Consider including an arbitration clause for dispute resolution.
10. Choose Your Escrow Agent: In all-cash purchases, the buyer typically has the right to choose the escrow agent. If there's disagreement, a neutral title company's escrow service can be a good compromise.
11. Coordinate Closing Payments: The escrow agent can handle all closing-related payments, including their fees, closing costs, and real estate agent commissions.
12. Verify Final Disbursements: At closing, ensure the escrow agent provides a detailed closing statement and disburses the correct amounts to all parties. Don't forget to claim any leftover funds promptly.

The Escrow Process: What to Expect

When you use escrow services in Costa Rica, here's a general outline of what to expect:

1. Opening the Escrow Account: Your chosen escrow agent will guide you through the process of opening an account. This typically involves filling out Know Your Client (KYC) forms and providing various documents.
2. Document Requirements: Be prepared to provide:
• Identification documents (passport, driver's license)
• Recent tax returns (usually for the last 2-3 years)
• Bank statements (typically for the last 3-6 months)
• A letter of reference from your bank
• Any relevant documents if funds are from specific sources (e.g., loans, property sales, inheritance)
3. Escrow Agreement: You'll need to sign an escrow agreement that outlines the terms and conditions of the escrow service.
4. Funds Transfer: Once your account is set up, you can transfer the agreed-upon funds (earnest money or full purchase price) to the escrow account.
5. Verification of Funds: The escrow agent will verify the source of funds, which is a crucial step in compliance with Costa Rica's anti-money laundering regulations.
6. Holding Period: The funds will be held in the escrow account until all conditions of the sale are met.
7. Disbursement: At closing, the escrow agent will disburse the funds according to the instructions in the purchase-sale agreement.

Choosing the Right Escrow Service in Costa Rica

Selecting a reputable escrow service is crucial for a smooth and secure transaction. Here are some tips:

• Look for Experience: Choose an escrow company with a proven track record in Costa Rica real estate transactions.
• Check Credentials: Ensure the escrow agent is registered with SUGEF (Costa Rica's financial regulator).
• Ask for Recommendations: Consult with your real estate agent, attorney, or other expats who have purchased property in Costa Rica.
• Verify Security Measures: Inquire about the company's security protocols for handling funds and sensitive information.
• Understand the Fees: Get a clear breakdown of all fees associated with the escrow service.

Final Thoughts

Using escrow services when buying property in Costa Rica is not just a good idea – it's essential for protecting your investment and ensuring a smooth transaction. While it may seem like an extra step, the security and peace of mind it provides are invaluable, especially when making a significant purchase in a foreign country.

Remember, every real estate transaction is unique, and laws and practices can change. Always consult with a qualified local real estate attorney and a reputable escrow service to ensure your property purchase in Costa Rica goes off without a hitch. With the right preparation and professional assistance, you'll be enjoying your piece of paradise in no time. Pura vida!