This is part 4 of a 4 part series. Click for: Part 1 || Part 2 || Part 3
Due Diligence
The term for due diligence is normally 3 weeks, and closing is usually in 4. Due diligence starts when the deposit is made, which follows the the written Offer to Purchase having been signed by buyer and seller. This document will have the contingency points detailed out. Some properties have no contingency points, some have several, it depends on the property. This is one of the more important areas where you, the buyer, have to rely on the expertise of your broker.
Your broker may have an intimate understanding of the property, or he/she may not. It just isn’t possible to know each property intimately. I have some properties that I know extremely well, perhaps having sold a number of lots in the development already, and so I can speak authoritatively to the specific contingencies that should be itemized on the Offer To Purchase (OTP) document. When I don’t have this familiarity with the property, it still works out since I know what the basic concerns are. Road, water, electric, soil stability, and knowing for sure that the buyer will be able to use the property as they wish.
There are boiler-plate concerns that the lawyer will study on every deal, and these don’t need to be itemized. The most basic is, can the seller sell the property? Does he/she own it free and clear?Are there any encumbrances? The lawyer will make a study of the National Registry (www.registronacional.go.cr) for most of this information. What, if any, easements are there on the property? If the property is part of a development, are there any Codes, Covenants & Restrictions (CC & Rs)? Buyer will know what monthly and annual fees are required in ownership of the property. Annual taxes are ¼ of 1% of declared purchase price.
All of the above considerations will be dealt with on the OTP. Full disclosure of all things pertinent to the property are the breath and spirit of good real estate brokering in Costa Rica (well… anywhere really). If you, the buyer, get the sense that you are not getting the whole story, and that maybe your agent is not offering all that there is with respect to a property, you might want to look for another agent. You don’t want to feel that you are having to ask all the right questions, but instead that your agent is pro-active in informing you about the property.
The term of due diligence and closing can vary from one property to another, but the periods mentioned above are customary. As mentioned in Part III of this series, there are no “subjective” concerns that can result in a refundable deposit. The only thing that can derail the deal are the contingency line items, and these line items must be satisfied during due diligence.
If there is a legitimate reason for extending either the due diligence period, or the closing, the buyer should express the concern to their agent. I like the use of “option to extend” clauses, when necessary. I have had cases where we were unsure that we could get a property re-surveyed by the end of due diligence. In such case, we simply mention in the OTP that every effort to get it done by the term of due diligence will be made, but may ask for a 2 week extension, or some such arrangement, leaving it less binding. The seller may reject or accept, it depends on the seller. I have seen cases where the seller will reject such a clause, but then assist in getting the item satisfied, perhaps using his influence with the topographer to guarantee that the new survey is done by term. I have also seen situations where we get to term, without such an extension clause, and an extension has been granted when we provided the explanation of what all had transpired. By the way, I’m not emphasizing the re-surveying of land as a contingency. This is done with some regularity but isn’t always necessary.
After the deposit is made, if the buyer changes his mind for some non-mentioned cause, and decides to not purchase the property, he/she will lose their deposit. However, if something is uncovered during due diligence that fails to satisfy one of the contingencies, the buyer will have the option of having the deposit returned to them, or renegotiating the deal.
The Closing
Below is a paragraph from when I first wrote this article in 2008. It no longer applies. Shelf corporations are a thing of the past. Costa Rica now taxes corporations whereas it did not previously. So, for a lawyer to have some corporations sitting on their “shelf” for the convenience of the buyer is a relic practice of a bygone era. Ditto this for developers having multiple properties in separate corporations.
The concerns mentioned below regarding acquiring an existing corporation are still valid. These do not render such acquisitions as not do-able. But they can be done with caution.
Almost all land transactions in Costa Rica are done using a corporation. It is likely that you will purchase a “shelf” corporation from the same attorney that is doing the deal. The attorney likely has any number of such corporations available in his/her office for just this purpose. (again, shelf corporations are no longer offered by lawyers, this is a clip from a past article)
A word about corporations in Costa Rica.
Buying an existing corporation in Costa Rica is generally not advisable. Using the “shelf” arrangement is (was) common and safe. But, if the seller of a property is suggesting that you purchase his corporation that owns the property, thereby avoiding the transfer of title fees, which can add up to thousands of dollars, you are taking a risk. There is no way to thoroughly study the history of an existing corporation. Agreements can be made in the name of a corporation, binding the owner of that corporation to the obligation. When the corporation is sold, that obligation goes along with the corporation and you find out down the road that you’ve got to pay for the previous corporation owner’s obligation.
Besides the “shelf” arrangement, there is one other that works well also. A developer of multiple lots may go ahead and put each lot in the name of a separate corporation, thus making the sale of the property both less expensive and easier for the buyer, the broker may vouch for the integrity of the developer. This can be a very clean way to do a deal as well.
Buyer doesn’t have to be present for the closing. He can assign a power of attorney (POA) in the corporation that is buying the property. This power is very specific and allows him/her to buy one time in the name of the corporation. Some corporations have this provision built in. On your next visit to Costa Rica after closing, you can remove this power, or the original POA document can state that it (the power) dies after being used one time. If you think about it, there is essentially no exposure to damage in assigning such a POA. It would be very difficult to harm a corporation by “buying” in the name of the corporation. It would be the power to “sell” in the name of the corporation where some damage could be done.
So with this power to buy one time, the closing can happen with, or without the buyer needing to be present. This is immensely helpful in Costa Rica since the buyers may have gone home 4 weeks prior to closing and may not be in the position to get back down for closing.
The buyer should transfer funds into the escrow account several days before closing, to be sure that the international transfer gets there in time. It is not uncommon for a wire transfer initiated in the morning in the States to arrive in Costa Rica in the afternoon, but I have seen these take up to five days to arrive.
So closing takes place, funds are disbursed, and there is a celebration on the part of all involved.