Navigating Property Purchase in Costa Rica

Published on May 27, 2024

Our lawyer in Costa Rica, expert in Real Estate Law, shares this guide on the steps and recommendations to follow to get through a real estate transaction in Costa Rica as a first-time buyer.

Nestled between the Pacific Ocean and the Caribbean Sea, Costa Rica stands as a beacon of natural beauty, cultural richness, and investment potential in Central America. Renowned for its lush rainforests, pristine beaches, and commitment to sustainability, this small yet vibrant nation has emerged as a hotspot for real estate enthusiasts seeking a slice of paradise.

In recent years, the "Pura Vida” real estate market has experienced a remarkable surge in interest from both domestic and international buyers. From coastal estates to secluded mountain retreats, the country offers a diverse range of properties to suit every taste and budget. Whether you're in search of a tranquil retirement haven, a lucrative investment opportunity, or simply a tropical getaway, Costa Rica presents an attractive range of options.

But beyond its stunning landscapes and lucrative investment potential, what sets Costa Rica apart as a real estate destination is its unparalleled quality of life. With a stable democracy, a well-developed infrastructure, and a strong commitment to environmental conservation, the country offers residents a harmonious blend of modern comforts and natural wonders. From vibrant urban centers like San José to laid-back beach towns such as Tamarindo, Manuel Antonio and Dominical, Costa Rica caters to a diverse range of lifestyles, making it an ideal destination for both full-time residents and part-time vacationers.

In this article, we will go over on how to buy a property in Costa Rica, and what things must be considered whether you're a seasoned investor or a first-time buyer.

1. Due diligence essentials

Purchasing property in Costa Rica offers an enticing opportunity to invest in a slice of tropical paradise. However, to ensure a smooth and secure transaction, conducting thorough due diligence is imperative. Here is a comprehensive guide to the key aspects that should be included in your due diligence checklist when buying property in Costa Rica:

a. Title Search: Begin by verifying the property's title to ensure that the seller has legal ownership and that there are no outstanding liens, encumbrances, or disputes over the title. Engage a reputable attorney to conduct a thorough title search. Although Costa Rica has a public database of the properties and its title chain, it is highly advisable to have an expert review the title to ensure there are no risks and impacts in the title chain that may later hinder ownership.

b. Property Survey: Engage a topographer to obtain a recent survey of the property to confirm its boundaries, dimensions, and any easements or restrictions that may affect its use. This step is crucial, especially for rural or undeveloped land parcels where there may be overlapping properties or surveys that do not match the property’s area.

c. Zoning and Land Use Regulations: Get to know the zoning regulations and land use restrictions applicable to the property. This information can be obtained from local municipalities, which set the rules on how their county shall be developed. Ensure that the intended use aligns with local zoning laws and obtain necessary permits or approvals if planning any construction or development.

d. Environmental Assessment: Given Costa Rica's rich biodiversity and strict environmental regulations, assess the property's environmental status. Determine if there are any protected areas, wetlands, or ecological reserves on or near the property that may impact development plans. These restrictions may not only impact the property itself, but any intended use.

e. Infrastructure and Utilities: Verify the availability and adequacy of essential utilities such as water, electricity and sewage. Assess the condition of existing infrastructure and confirm any obligations or costs associated with connecting to municipal services. Not having access to utilities may limit the development of the property.

f. Tax and Financial Obligations: Understand the property’s tax obligations and any other financial liabilities associated with the property. This includes reviewing past tax payments, assessing potential capital gains taxes, and identifying any outstanding debts.

g. Condominium or Community Regulations: If purchasing property within a condominium (gated community), review the governing documents, including bylaws, regulations, and homeowner association fees. Understand the rights, responsibilities, and restrictions imposed by the community and whether they align with the intended use for the property.

h. Building Inspections: If buying a pre-existing structure, conduct thorough inspections to assess its structural integrity, safety, and compliance with building codes. Engage qualified professionals, such as architects and engineers, to identify any potential issues or deficiencies. Although this is not mandatory, it is highly advisable especially when buying constructions 10+ years.

i. Legal Due Diligence: Consult with a qualified real estate attorney specializing in Costa Rican law to review all contractual documents, including the purchase agreement, escrow arrangements, and closing procedures. Ensure that the transaction complies with local regulations and safeguards your interests.

j. Benchmark: Engage with a local real estate broker who can assist in researching the local real estate market to assess property values, demand trends, and comparable sales in the area. This information can help determine a fair purchase price and negotiate effectively with the seller.

By conducting comprehensive due diligence encompassing these key areas, you can mitigate risks, make informed decisions, and proceed confidently with your property purchase in Costa Rica.

2. The importance of using an escrow agent

Navigating the intricacies of purchasing property in Costa Rica requires careful consideration of various factors to ensure a secure and seamless transaction. These intricacies can be represented by issues related merely to the property and its use or complexities related to the transactional part and the location of the parties involved in the transaction. One critical aspect that can significantly mitigate risks and provide peace of mind for both buyers and sellers is the use of an escrow agent. Here's why employing an escrow agent is advisable when purchasing property in Costa Rica:

a. Neutral Third-Party Facilitation: An escrow agent serves as a neutral third party entrusted with safeguarding funds and documents related to the property transaction. By holding funds in escrow until all conditions of the purchase agreement are met, the escrow agent helps prevent disputes and ensures a fair and transparent process for both parties.

b. Protection Against Fraud and Misrepresentation: In a real estate transaction, fraudulent activities or misrepresentation of property details can pose significant risks to buyers. By using an escrow agent, buyers can rest assured that their funds are secure, reducing the likelihood of falling victim to scams or deceitful practices.

c. Streamlined Closing Process: The involvement of an escrow agent streamlines the closing process by coordinating the exchange of funds, title transfer, and completion of necessary documentation. This reduces administrative burdens on both parties and helps expedite the closing, leading to a more efficient and hassle-free transaction experience.

d. Regulated entities: Escrow (trust) accounts in Costa Rica are regulated by the Government Banking Regulatory Authority known as SUGEF (Superintendencia General de Entidades Financieras, in Spanish). This entity regulates the entire banking and financial industry and has placed rigorous standards overs escrow agents to guarantee they comply with local law and conduct their business under high principles.

In conclusion, utilizing an escrow agent when purchasing property in Costa Rica offers numerous benefits, including enhanced security, legal compliance, and streamlined transaction processes. By entrusting the escrow agent with the responsibility of overseeing the transaction, buyers and sellers can navigate the real estate market with confidence and peace of mind, knowing that their interests are protected throughout the process.

3. Customary Transaction Structure

Understanding the customary transaction structure for buying and selling properties in Costa Rica is crucial for both buyers and sellers to navigate the process smoothly and efficiently. Here's an overview of the key steps involved in a typical real estate transaction:

a. Purchase Option: The transaction begins with the buyer making an offer to purchase the property, usually through a purchase option which shall be binding to both parties. The main purpose of the purchase option is to guarantee that the property will be taken off the market and set the main conditions for the transaction (e.g. Earnest deposit, due diligence period, conditions under which the earnest deposit shall be refundable, closing conditions, etc.)

b. Escrow Agreement and Earnest Money Deposit: Upon execution of the purchase option, the buyer typically provides an earnest money deposit to demonstrate their commitment to the transaction. The earnest money deposit is held in escrow by a neutral third party until the closing. Opening escrow accounts has become a challenge due to banking regulations; hence, it is advisable to engage the escrow agent at an early stage to understand all the supporting documents that need to be provided to open the account.

c. Due Diligence Period: After execution of the purchase option, the buyer typically conducts due diligence on the property to verify its legal status, title, and condition. This may involve obtaining a property survey, conducting environmental assessments, and reviewing zoning regulations and land use restrictions. Customary due diligence period is 45 days, which may be extended. However, the parties may agree a different term.

d. Acceptance/Rejection of Due Diligence: Either during due diligence or at the expiration date, buyer shall send a letter to seller approving or rejecting the due diligence.

e. Closing Procedures: Prior to the closing, the parties must fulfill any remaining conditions outlined in the purchase agreement, such as obtaining financing or securing necessary permits. The closing typically takes place at the office of the buyer's attorney, where the final documents are signed, and the escrow agent disburses the funds. Closing agents are not very common in Costa Rica, and due to applicable legal formalities, most times the attorneys take care of closing and post-closing matters.

f. Title Transfer and Registration: At the closing, the seller transfers the legal title of the property to the buyer by signing a transfer deed before a notary public. The transfer deed is then registered with the National Registry to officially record the change of ownership.

g. Payment of Closing Costs and Taxes: Both parties are responsible for certain closing costs and taxes associated with the transaction. These may include transfer taxes, notary fees, legal fees, capital gain tax, and any outstanding property taxes or municipal assessments.

h. Post-Closing Obligations: After closing, the buyer assumes responsibility for maintaining the property and complying with any ongoing obligations, such as property taxes and homeowner association fees.

By following this typical transaction structure and working with experienced legal professionals familiar with Costa Rican real estate law, buyers and sellers can navigate the purchase and sale of properties with confidence and peace of mind.

4. Purchasing a property

When considering the purchase of real estate in Costa Rica, understanding the concept of fee simple ownership is essential. Fee simple, also known as "freehold" or "absolute" ownership, represents the highest form of property ownership, providing the buyer with the most comprehensive bundle of rights and privileges. There are no restrictions under local law does not on foreign individuals or corporations acquiring fee simple title to property, except for properties located in the Maritime Zone, as further explained below. Here's what you need to know about purchasing property in Costa Rica in fee simple:

a. Absolute Ownership Rights: Fee simple ownership grants the buyer absolute and unrestricted rights to the property, including the right to use, occupy, sell, lease, or transfer the property as they see fit, subject only to applicable laws and regulations.

b. Permanent and Inheritable: Properties held in fee simple in Costa Rica are typically owned in perpetuity, meaning that ownership rights extend indefinitely and can be passed down through inheritance to future generations. This provides a sense of long-term security and stability for property owners and their families.

c. Title Guarantee: When purchasing property in fee simple, buyers receive a title deed serves as legal proof of ownership.

d. Flexibility and Control: Fee simple ownership provides buyers maximum flexibility and control over their property. Unlike leasehold or other forms of ownership, fee simple ownership allows for greater autonomy in decision-making regarding property use, improvements, and development provided zoning and constructions provisions are observed.

e. Investment Potential: Properties held in fee simple are often more attractive to investors due to their enduring value and marketability. Whether for residential, commercial, or investment purposes, fee simple ownership offers greater flexibility and potential for appreciation over time.

f. Responsibilities and Obligations: While fee simple ownership grants extensive rights, it also entails certain obligations, such as property taxes, maintenance, and compliance with local regulations. Buyers should be aware of these obligations and factor them into their decision-making process.

g. Conveyance of title: All transfers of title must be documented through a public deed issued by a Costa Rican Notary Public and must be recorded in the Public Registry to be enforceable against third parties.

Based on the above, purchasing property in fee simple in Costa Rica provides buyers with comprehensive ownership rights, long-term security, and investment potential. By understanding the implications of fee simple ownership and undertaking thorough due diligence with the assistance of legal professionals, buyers can confidently navigate the real estate market and acquire their piece of paradise in Costa Rica.

5. Concession Rights over the Maritime Zone

In Costa Rica, the Maritime Zone Law governs the use and administration of coastal areas, including beaches, mangroves, and other coastal ecosystems. Individuals or entities seeking to develop or utilize coastal land within the Maritime Zone must obtain concession rights from the Costa Rican government.

The Maritime Zone is a 200 meter (656 foot) wide strip of land from the coastline, starting at the high-tide line. Properties in this zone, with a few exceptions, cannot be privately owned or transferred in fee simple. However, there is a legal procedure to either apply for a concession or acquire concession rights granted a third party, provided the terms and conditions of Law No.6043 (the "Maritime Zone Law”) are met. Specifically, the Maritime Zone is divided into two areas:

  • Public Area: 50-meter (164 foot) strip of land closest to the shore which is public land and cannot be owned or possessed as private property; and
  • Restricted Area: the remaining 150-meter (492 feet) strip after the Public Area, are granted for leasing by the Municipalities (the local governing body) to private individuals or corporations for a term between 5 and 20 years.

5.1 Applying for a Maritime Zone Concession

Here is an overview of the process for obtaining concession rights over the Maritime Zone:

a. Identify Location: The first step is to identify the specific coastal area where you wish to obtain concession rights. This may include beachfront properties, coastal resorts, or recreational facilities situated within the Maritime Zone. There are three main requirements (i) there is no concession granted or ongoing application; (ii) the area subject to application must be plotted with land markers indicating the high tide line and the line where the 150 restricted area ends. Many beaches in Costa Rica are not marked, in which case the applicant must request to the National Geographic Institute for a survey of the land and establishment of the marks ("mojones” in Spanish); and (iii) there must be a Zoning Plan created by the local municipality, which divides the beach into separate zoning category (i.e., residential, recreational, tourism, commercial, and/or camping) these uses must be approved by the Municipality prior to granting any concession. Each zoning category has its own set of requirements.

b. Consult with Legal Experts: Due to the complex regulatory framework governing the Maritime Zone, it is advisable to seek guidance from legal experts familiar with Costa Rican real estate and maritime laws. A qualified attorney can provide invaluable assistance in navigating the concession application process.

c. Prepare the Concession Application: The concession application typically includes detailed information about the proposed project or activity, such as its purpose, scope, environmental impact assessment, and anticipated benefits to the local community. The application must comply with the requirements outlined in the Maritime Zone Law and be submitted to the relevant government authority (local Municipality), and often the Costa Rican Tourism Institute (ICT) or the Ministry of Environment and Energy (MINAE).

d. Environmental Impact Assessment: Depending on the nature and scale of the proposed project, an environmental impact assessment (EIA) may be required as part of the concession application process. The EIA evaluates the potential environmental effects of the project and identifies measures to mitigate any adverse impacts on coastal ecosystems and biodiversity.

e. Public Consultation and Approval: In some cases, the concession application may be subject to public consultation or review by local communities, environmental organizations, or government agencies. Obtaining support from stakeholders and addressing any concerns raised during the consultation process can enhance the chances of approval for the concession.

f. Execution of the Concession Agreement: Once the terms of the concession have been defined, the concession agreement is executed between the concessionaire (applicant) and the government authority responsible for administering the Maritime Zone (local Municipality). The agreement outlines the rights and obligations of both parties and is typically recorded with the National Registry.

The concession application may take three to eight years.

6. Transferring concession rights of a Maritime Zone Concession

Concession rights can be transferred either directly or indirectly. Direct transfer most of the time takes the same time and implies similar requirements as those for a first-time concession, with the risk that the transfer may not be granted. Indirect transfer can take place when an entity is the concessionaire, and the transfer is done through assignment of the participations of the entity holding the concession rights.

Before transferring a concession, the acquirer to be the beneficiary of such concession must meet the following rules: (i) Be a resident with minimum five years of residing in Costa Rica; (ii) Be a Costa Rican citizen; or (iii) Have a Costa Rican entity which is owned at least in 50% by a Costa Rican citizen. Any assignment or sale of stock to a foreign national in violation of these restrictions is null and void and constitutes a violation of the Concession Agreement. Nonetheless, there are alternatives that can be put in place to comply with these requirements when a foreign national intends to get a maritime zone concession.

7. Papagayo Gulf Tourism Project

The general provisions on concessions do not apply to concessions in the Gulf of Papagayo Tourism Project area (Gulf of Papagayo). The Gulf of Papagayo Tourism Project is a real estate area structured as a unique regime that includes characteristics of both a concession and fee simple title. The Gulf of Papagayo Tourism Project is governed by Law No. 6370 and its regulations (which is a specific set of rules specially created for this area). Even though properties within the Gulf of Papagayo are defined as maritime zone concessions, there are very important differences from the regular maritime zone concessions described above. For example, (i) there are no restrictions on foreign ownership, (ii) the concession terms are longer (usually 50 to 99 years), and (iii) there is a Master Plan and covenants and restrictions applicable to all owners, even if the property is not subject to a condominium regime.

8. Compliance and Monitoring

Once the concession has been obtained or transferred, the concessionaire is responsible for complying with the terms of the concession agreement, including payment of concession fees, adherence to environmental regulations, and implementation of approved development plans. Government authorities may conduct periodic inspections and monitoring to ensure compliance with the terms of the concession. Also, the concessionaire must pay a special yearly fee to the Municipality depending on the authorized zoning category:

i. Agricultural: 2%
ii. Residential: 3%
iii. Hotel and tourism purposes: 4%
iv. Commercial, industrial: 5%

Concession fees are calculated by multiplying the applicable percentage by the appraised value of the concession land, as determined by the Tax Authority.

In conclusion, navigating the intricate process of purchasing property in Costa Rica demands a comprehensive understanding of the legal, regulatory, and environmental landscape. From due diligence essentials to the significance of escrow agents, customary transaction structures, fee simple ownership, and concession rights within the Maritime Zone, prospective buyers must carefully navigate each step to ensure a seamless and secure transaction. Through this comprehensive guide, we've outlined the key considerations and procedures involved in acquiring property in the Pura Vida.

Costa Rica's allure as a real estate destination lies not only in its breathtaking natural beauty but also in its commitment to sustainable development, democratic governance, and cultural diversity. Whether you're drawn to the pristine beaches of Guanacaste, the lush rainforests of the Osa Peninsula, or the vibrant urban landscape of San José, Costa Rica offers a diverse range of properties to suit every lifestyle and investment objective.

Thorough due diligence is the cornerstone of a successful property purchase in Costa Rica. From verifying title ownership to assessing environmental impact and understanding zoning regulations, buyers must conduct a comprehensive assessment to mitigate risks and ensure compliance with local laws. Engaging qualified legal professionals and real estate experts can provide invaluable support throughout the process, offering guidance and expertise to navigate the complexities of the Costa Rican real estate market.

Utilizing an escrow agent can further enhance transaction security and transparency, providing a neutral intermediary to oversee fund disbursement and document execution. By entrusting the transaction to an escrow agent, buyers and sellers can minimize the risk of fraud or misrepresentation and ensure a fair and equitable process for all parties involved.

Understanding the nuances of fee simple ownership and concession rights within the Maritime Zone is essential for buyers seeking to acquire property in Costa Rica. While fee simple ownership offers maximum autonomy and investment potential, concession rights provide access to coastal areas subject to specific regulations and restrictions. By familiarizing themselves with these concepts and undertaking thorough due diligence, buyers can make informed decisions and secure their piece of paradise in Costa Rica.

As Costa Rica continues to attract investors and property buyers from around the globe, the demand for real estate expertise and guidance remains strong. By staying informed and seeking professional advice, buyers can navigate the complexities of the Costa Rican real estate market with confidence and seize opportunities for growth and prosperity in this tropical paradise.

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.