Costa Rica Escrow Account: Security and Peace of Mind
Using a Costa Rica Escrow Account
When it comes to real estate purchases, there are numerous risks involved. Especially when buying or selling property in a foreign country, the complexity and potential for scams can be overwhelming. GAP highly recommends using an escrow account to protect both parties. This article will explain a Costa Rica escrow account, how it works, and why it is worth the investment.
What is an Escrow Account?
An escrow account is a third-party account created for the purpose of a Real Estate purchase. It acts as a pass-through account that holds the funds until all parties have met their contractual obligations. The escrow account is meant to protect both the buyer and seller, ensuring that each party receives what is due to them once the transaction is complete. The account is typically managed by an escrow company, which is an accountable and neutral third party.
How Does it Work in Costa Rica?
Suppose a US national has identified a home in Escazu that they want to purchase for $300,000. Once the offer has been accepted, the transaction moves into the contract (purchase agreement) phase with an estimated closing date. Let’s assume the earnest money amount (down payment/deposit) is 10% of the purchase price – $30,000.
Transferring the funds becomes tricky in this scenario, given that the buyer is from the United States and the home is in Costa Rica. Between the Know Your Customer laws and the general headaches of trying to open a bank account as a foreigner in Costa Rica, much less with amounts in the tens or hundreds of thousands, the process has an additional layer of complication.
Even assuming that the buyer has been able to transfer purchase money from their home country to Costa Rica, he/she doesn’t want to give the seller $30,000 – these two parties don’t know each other, and there is an inherent trust issue. What if the seller absconds with the money during the due diligence and the property cannot be purchased? Similarly, if no deposit was given to the seller, what if the buyer disappears, and the seller is left with a property pulled off the market for weeks and a sale that will not happen? The possibility of falling victim to a scam is endless. Even if it is not a scam, there is always the chance that the contracts will be changed at the very last minute, forcing pressure on the other party to comply.
Enter the third-party escrow company. A title company or the buyer’s attorney can hold the escrow account in the US. Still, in Costa Rica, escrow companies are set up (and accountable to SUGEF) specifically for this purpose. The buyer transfers $30,000 into the escrow account, and the due diligence phase begins. Both parties have peace of mind, knowing that the funds are protected by a third party that will ensure compliance.
Once the transaction goes through the due diligence phase and both sides are satisfied, including the execution of all documents necessary to close the transaction, the remaining $270,000 must go from the buyer to the seller. Again, the buyer transfers the funds to the escrow company. At closing, the escrow company distributes the money on time to the right parties (seller, real estate broker, government fees and taxes, mortgagee). The seller is satisfied as they have received their expected amount, the buyer is satisfied that their funds were safe, and all other entities are satisfied that their portions have been paid.
Why is a Costa Rica Escrow Account Worth It?
Unfortunately, there have been cases in which developers have gone bankrupt or failed to complete the construction of the property, leaving buyers with incomplete or non-existent buildings and without their deposit. In such cases, an escrow account can be a lifesaver for the buyer, as the escrow company will hold the deposit until the property is completed and ready for delivery.
Can you buy a property without an escrow account? Sure. Can it be seemingly cheaper? Yes. Considering these transactions can range somewhere between several hundred and several thousand dollars, the buyer (and seller, depending on the purchase agreement terms) in the above transaction would have spent about $1000 or more for the escrow service. That’s not an insignificant amount. But escrow accounts arose from a need for scam avoidance and the difficulties in getting funds from one country to another. We believe the price of having an accountable, neutral third party overseeing the transaction to be worth it.
How to Use an Escrow Account in Costa Rica
If you’re interested in using an escrow account for a real estate transaction in Costa Rica, here are the steps you should follow:
- Choose a reputable escrow company: Several escrow companies in Costa Rica specialize in real estate transactions. Research and choose a reputable, experienced company registered with SUGEF (the Costa Rican Financial Services Regulator).
- Include the escrow agreement in the purchase agreement: Once you’ve chosen an escrow company, include the terms of the escrow agreement in the purchase agreement. This will ensure both parties know the escrow service and the fees involved.
- Transfer the funds to the escrow account: The buyer should transfer the funds to the escrow account once the purchase agreement has been signed. The escrow company will hold the funds until the due diligence phase is complete and the parties are ready to proceed with the transaction.
- Monitor the due diligence phase: During the due diligence phase, the buyer should work with their attorney to ensure that all necessary inspections and title searches are conducted. The seller should provide all required documentation and disclosures. The escrow company will hold the funds during this period, ensuring that both parties comply with the purchase agreement terms.
- Close the transaction: The buyer should transfer the remaining funds to the escrow account once the due diligence phase is complete and both parties are ready to proceed. The escrow company will then distribute the funds to the seller, real estate broker, government fees and taxes, mortgagee, and any other parties as required by the purchase agreement.
An escrow account can provide the buyer and seller peace of mind and protection in a real estate transaction. While it may involve additional fees, the benefits of having a neutral third party overseeing the transaction and ensuring compliance with the purchase agreement are well worth it. If you’re interested in using an escrow account for your real estate transaction in Costa Rica, choose a reputable escrow company and include the terms of the escrow agreement in the purchase agreement.
-Written by Glenn Tellier (Founder of CRIE and Grupo Gap)
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Frequently Asked Questions
How does escrow work in Costa Rica?
Escrow assures the seller that the property will be bought so they can take it off the market. There is a third person who is not taking sides. So, instead of giving the money to the seller directly, the third party holds it. A third party holds it for a certain amount of time.
What does “in escrow” mean in English?
“In escrow” means that a third party holds funds or assets until a transaction is completed and both parties have fulfilled their obligations.
How do I set up an escrow account in Costa Rica?
To set up an escrow account in Costa Rica, you should contact an escrow company that is authorized and accountable to SUGEF (Superintendencia General de Entidades Financieras), which regulates the escrow industry in Costa Rica.
How does escrow work?
Escrow works by having neutral third-party hold funds or assets until all transaction conditions are met. This can provide protection and assurance to both the buyer and seller that the transaction will be completed successfully.
Do you get escrow money back?
It depends on the terms of the transaction. In some cases, such as when purchasing a home, the money held in escrow will be applied toward the final payment of the property. In other cases, such as when renting a property, the escrow money may be refunded if all the agreement conditions have been met.
Who usually pays for escrow?
The party responsible for paying the escrow fee can vary depending on the terms of the agreement. In some cases, the buyer may pay for escrow, while the seller may be responsible in others. It is important to clarify this in the purchase agreement.
How much is the escrow fee?
The escrow fee can vary depending on the amount of the transaction and the specific escrow company used. It is important to inquire about the fee ahead of time.
Should you pay escrow?
In many cases, it is recommended to pay for escrow to provide protection and assurance during a transaction. However, it ultimately depends on the specific circumstances and terms of the agreement.
How do you calculate escrow?
Escrow is typically calculated as a percentage of the total amount of the transaction. The exact percentage can vary depending on the specific escrow company and the terms of the agreement.
What is the escrow limit?
The escrow limit refers to the maximum amount of money that can be held in escrow for a specific transaction. This can vary depending on the escrow company and the terms of the agreement.
What is the minimum balance for an escrow account? A: The minimum balance for an escrow account can vary depending on the specific escrow company and terms of the agreement.
What is the initial escrow payment?
The initial escrow payment is the money deposited into an escrow account at the beginning of a transaction. This amount can vary depending on the specific terms of the agreement.
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