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Real Estate Buying in the US vs Costa Rica: A Buyer's Guide

 Costa Rica has rapidly grown into one of the best real estate markets for foreign investors. However, some investors are hesitant to take the first step, because they believe that buying property in Costa Rica is more complicated than it actually is. In reality, the process is relatively straightforward. Foreigners can buy properties as easily as locals, as long as they have the means to finance the purchase. Brush up on some timely information to learn the process and the ins and outs of real estate in Costa Rica. To get started, here is an overview of the differences between buying property in the United States and Costa Rica:


Financing


Most people need to finance at least part of their real estate purchase, and the financing system works more or less the same in the United States and Costa Rica. However, there are some subtle differences you’ll need to be aware of.


Down Payments


Almost all lenders will require a down payment. There are two reasons this a requirement for a mortgage:



  • Lenders need to know you have a stake in the investment. Buyers are less likely to default and walk away from a mortgage if they stand to lose their down payment.

  • Down payments serve as an insurance policy for the lender. They minimize the losses if the borrower fails to make their payments.


In the United States, lenders typically require at least a 20% down payment. Costa Rica banks are a bit more lenient; you can usually receive a loan with only a 15% down payment.


Fewer Protections Against Lending Discrimination


The United States has a number of laws designed to shield protected groups from lending discrimination. For example, the Fair Housing Act prohibits lenders from taking race, age, familial status and other demographic factors into consideration. As long as you have good credit and the right debt to income ratio, lenders will offer you a loan.

Unfortunately, getting a loan isn’t that easy in Costa Rica. Costa Rica is more of a free market economy. While there are some laws on the books to make borrowing opportunities more equitable, lenders aren't prohibited from these types of discrimination. In fact, age discrimination is very common, and you may have a more difficult time qualifying for a loan if you’re a woman, older citizen or part of another demographic that’s often targeted for discrimination.

Retirees, in particular, may find it difficult to secure a mortgage, as most banks won't issue loans to consumers that will be 75 by the end of the loan terms.


Higher Interest Rates


Mortgage interest rates can be confusing for even Costa Rica borrowers. Here, you’ll find most mortgages are anchored to the Tasa prime interest rate, which is set by the Costa Rica Central Bank once every six months. Terms for a standard mortgage are usually the Tasa rate plus 2%. You’ll pay a fixed interest rate for the first five years, but the variable Tasa rate after that.

On average, Costa Rica mortgages are usually 2% higher than those offered by American banks. You may be able to save money by finding a U.S. bank that will give you a loan instead; however, many banks are reluctant to offer loans to purchase property outside of the United States. If a U.S. bank does offer you a loan, they may charge a higher interest rate due to the additional risk.


Lax Building Regulations


Building regulations in Costa Rica tend to be much more lenient than in the United States - a double-edged sword for many buyers.


Easier to Make Renovations


If United States, you usually need to visit your local municipality for a permit before beginning renovations. However, you probably won’t need one if you're doing a remodeling or renovation in Costa Rica. Even if you are required to have one, the local municipality doesn't usually enforce it, and this more libertarian system minimizes potential stress when you need to work on your home.


Buyer Beware


Of course, there are also downsides to Costa Rica’s laissez-faire housing regulations. If you’re purchasing a home, be aware that the current homeowner may have done some un-permitted work that can compromise the structure of the building. Carefully assess the building before making an offer. Find out if there are any structural problems that need to be addressed and how much they’ll cost to repair.


Restrictions on Beachfront Property


That said, there are few ways that the Costa Rican government is stricter than the United States, including an ownership restriction of beachfront property.

In 1973, the Costa Rica government passed the Maritime Terrestrial Zone Law, which prohibits construction of any properties within the first 50 meters of the high tide line.

Properties that were built before this law was passed are exempt, provided the original owners received a title from their local government. According to the law, the next 150 meters is classified as a restricted zone, which places limits on construction, though not an outright ban.

If you’re purchasing a property near the high tide line, make sure that it was built in compliance with the Maritime Terrestrial Zone Law. If the property was constructed within the first 50 meters of the high tide line, you’ll need to make sure that the property was grandfathered - and you’ll need to do that before buying the property. If you’re purchasing a property within the restricted zone, you’ll also need to consider the types of renovations that you plan on completing in the future. You may want to purchase a property further from the coast if the restrictions will make the future changes you want to undertake impossible.


Buying Property in Costa Rica


Ready to lock down your own piece of tropical paradise? Here are the steps you’ll need to take:



  1. Research Available Properties


Contact a local real estate agent to find available listings. Make sure that the agency has offices in the area you would like to purchase the property.



  1. Discuss Terms with the Seller


Speak with the seller to make sure that you’re on the same page. Find out how much they’re asking for, whether any other offers have been made and when they’d like to finalize the sale.



  1. Make an Offer


Once you’ve decided to purchase a property, submit an offer to purchase to the seller. The offer will specify the proposed price and date of transfer.



  1. Receive a Sale and Purchase Agreement


The Letter of Intent isn’t a legally binding agreement, even if the seller accepts it; you still need to draft up a formal sale and purchase agreement. This contract obligates the seller to transfer the deed to the property after the purchase requirements are met, outlines the means of payment (such as whether the property will be paid for with cash or financing), the date of transfer and any exit clauses. Further, the contract should stipulate that the seller assumes the risk of loss if the property is destroyed before the transfer.



  1. Conduct Due Diligence


Remember to always conduct your due diligence before making any payments. Here are some things that need to be assessed during this stage:



  • Are there are any liens on the property?

  • Is the home underwater (and the seller has the means to pay the remaining balance after the payment has been made)?

  • Does the seller has the title to the property?

  • Did you inspect the home for any signs of damage?


The due diligence process can take as little as a few days, or as long as a month, depending on the number of issues the home faces and how long it will take to find an appraiser and contractor to handle the inspections.



  1. Confirm Payment and Notarize the Transfer


After ruling out any reasons to rescind your offer to purchase the home, the final step is to make the necessary payment and transfer the title (conveyance). The conveyance process must be completed in front of a notary agent. If you’re purchasing the property with cash, then the title will be transferred to your name. If you financed the purchase with a lender, then the lender will receive the title (as in the United States).



  1. Register the Property with Your Municipality


Your local municipality requires that you to register the property for tax purposes. Make sure all documentation that you provide to them is accurate, because you can face fines if you provide misleading information to lessen your property taxes.


Don’t Be Intimidated Buying a Property in Costa Rica


As an American, buying a property in Costa Rica may seem scary, but the process is pretty straightforward. In fact, the steps are pretty much the same as the United States.

Truly, the only challenge you’re likely to face is securing the necessary financing. Interest rates tend to be a little higher in Costa Rica and most borrowers don’t offer the same protections. However, you shouldn’t have trouble getting a mortgage if you are under 50, have a reliable source of income and a low debt-to-income ratio.


Have you ever purchased a home in Costa Rica? What was your experience? Feel free to share your thoughts in the comments below: