Estimated Reading Time: 5 Minutes
If you want to purchase property, start looking for an escrow agent. An escrow agent is a neutral third party who holds onto the buyer’s funds related to the real estate transaction until both parties have satisfied their contractual obligations and charges a fee for this service. This fee is usually 0.25% of the funds to be wired, with a minimum of $900. Escrow agents are supervised by SUGEF – Financial Institution Superintendency – so there is no risk of anyone stealing your money.
Using escrow during a real estate transaction is a great idea, even if you’re a local property buyer. And just as important as hiring a real estate attorney – notary public – to look after your interests when buying. Why do you need escrow? Let me explain.
Talk to Ticos about using an escrow agent for their real estate business, and they will ask you what for. It’s because they are used to purchasing in a pretty unsafe way: they give the earnest money deposit to the seller. I’m sure that you, as a buyer, want to be able to rely on a safe and secure payment process and the transfer of the property at the agreed time.
You might say, “what a hassle,” after reading this article. And you’re right. Unfortunately, there is no way around the documentation anymore. So, I think it is easier to have the escrow company take care of it all and be done with it.
Earnest money deposit
In a real estate transaction between Costa Ricans, the buyer typically hands the earnest money deposit over to the seller. Sometimes, they’ll ask the attorney to hold an earnest money check. If you use an escrow agent during the transaction, the earnest money deposit can be held in escrow until closing.
Transfer funds to purchase
Here is the main reason a buyer should use escrow in a property purchase transaction: non-residents cannot open a bank account unless it’s a simplified bank account. Therefore, a buyer cannot open a bank account, wire the amount needed to purchase to this account, and have the funds available for closing.
If the buyer is a resident or citizen, the documents mentioned below (KYC, origin of funds) are required to prove that the funds were not illegally acquired.
Money Laundering laws
SUGEF obliges banks, escrow agencies, and real estate agencies to comply with the provisions of Law 7786. This is the Law on narcotics, psychotropic substances, unauthorized drugs, related activities, money laundering, and financing of terrorism. Law These obligations include the request for the following buyer’s documents:
- KYC – Know Your Customer form. In this form, you declare who you are.
- Origin of Funds – You supply where the money to purchase a property originated: the sale of a property, your savings, stock market, inheritance, or other.
All the buying parties (in the case the property is purchased by, for example, two spouses) have to deliver the documents, even if both own the house or stock market funds sold to obtain the funds.
First in Line
Because the escrow company is the first in line during the process, they will share the documents with the bank and the real estate company, who have the same obligations with SUGEF.
Translations and Apostille
Until now, the process has been pretty simple. Nonetheless, I already see some banks are asking for a translation of documents required, depending on the language they’re in. Also, some banks request the documents be apostilled. You’ll be done quickly and efficiently using the first in line, the escrow agent.
The notary public does not have an obligation to request these documents. But the other parties require a copy of the deed, which the notary public will deliver after the closing.
Through an option to a purchase-sale agreement, or letter of intent, the buyer’s notary public describes the details of the transaction. The escrow agent needs a copy of this document, signed by buying and selling parties, to open the escrow account at their bank.
The seller needs a copy of the deed with both parties and the notary public’s signatures. Some banks might request the buyers’ origin of funds.
The Steps in the Process
Let me walk you through the steps of the process so this article makes more sense to you:
- Make an offer on the property.
- Once both buyer and seller accept the offer, the buyer’s attorney (notary public) writes up the option to purchase.
- The escrow company needs a copy of the option to purchase, the KYC, and the origin of funds documentation. Ask your realtor for guidance.
- Once the Escrow agent’s bank has approved your application, the agent will send you the wire instructions so you can send the earnest money deposit.
- Now the buyer’s attorney will start the due diligence process.
- Once the due diligence process is complete and the closing date is near, the escrow agent will ask you to wire the rest of the funds. This shouldn’t only include the escrow fees, the cost of the wire, and the closing cost the buyer promised to pay.
- The escrow company will request a disbursement statement from the closing attorney (notary public) showing how the funds will be disbursed. This includes the earnest money deposit, the purchase price balance, notary fees, escrow fees, real estate commissions, and closing costs.
- After the closing, the notary public will give all parties a copy of the deed.
Some real estate agencies still hold the earnest money deposit until closing. It is forbidden by law for a real estate agent to hold funds unless it’s in a SUGEF-approved escrow account.
Used in featured image: Image by cookie_studio, Image by kues, and Image by starline on Freepik.