183 Legal Advice when buying real estate in Costa Rica

[Richard Bexon]

Good morning, Paola. How you doing?

[Paola Retana]

Hi, Richard. How are you?

[Richard Bexon]

Very, very, very good. Thank you very much. I appreciate you taking time out of your schedule, as I know you have a Luis Miguel concert this evening.

So it's very, very important.

[Paola Retana]

Yes, I'm very excited about that. Thank you for having me here. My first podcast, so I'm really excited.

[Richard Bexon]

If anyone doesn't know who Luis Miguel is, there's a Netflix series on it, and it's pretty awesome. So yeah, I got sucked into that one. But anyway, let's get straight into the podcast, as I'm sure the listeners don't really care about Luis Miguel.

Or maybe they do, but we'll leave that one for another podcast. But I mean, the question I'd like to ask to begin with is like, you know, markets had a good comeback in late 2023. In North America, you know, real estate is kind of flatlined, declined in most areas of the world, especially in North America.

But I mean, how is your 2024 been? And how is it looking?

[Paola Retana]

Yeah, I agree with you. But I think 2024 is looking good for us. Real estate in Costa Rica, definitely, as you know, experienced a huge boom and a huge frenzy during and after the pandemic.

And people realized that they wanted to come and live here at least part time. And I think that surge definitely has not died down. I think despite what may be happening in other parts of the world, Costa Rica is still a very popular country.

We have tourists coming in, people are interested in buying, we're still up on the list of world's top travel destinations, we have very good access to the healthcare workforce. I think overall, there are many reasons to want to be here. Maybe the big difference we're seeing from one or two years ago is we're starting to see a little bit more financing and purchases for vacation homes.

And also, from a developer perspective, I think there's a lot of interesting proposals, proposals to differentiate themselves from the rest of the developers that maybe came down in that time. So for us, this is definitely has kicked off the 2024 year into a little bit more sophistication in the transactions that we oversee.

[Richard Bexon]

How would you compare, like, let's say Q4 last year to your Q1 this year? Well, what's in Q1? I mean, is the volume of transactions the same?

Is it slowed down a little bit?

[Paola Retana]

I think I was pretty impressed on the volume of the transactions at the end of the last year. I think before this pandemic frenzy, we used to have like high season and low season, right, which was very popular in real estate. And I didn't get that feeling at the end of last year.

We had a lot of transactions, again, maybe a little bit more sophistication, maybe a little less fast paced. I think the comparison is at the beginning of the year, it's usually very fast paced, people already know what they want, they want to do it quickly. And then maybe at the end of the year, we see people that are continuing to leverage investments and try to implement decisions that they have been taking.

So I think 2024 is looking good. I'm optimistic about it.

[Richard Bexon]

Look, me too. I mean, I think what's starting to come down here is a little bit more sophisticated money and a little bit more leveraging as well, as you've mentioned. You know, I mean, that's the world that we're in, which is a lot more, you know, sophisticated kind of investments, etc.

Actually, this morning, just making an agreement to buy another piece of land in Manuel Antonio for a project we're working on there. So yeah, I mean, that's what I'm seeing. I'm seeing a lot more investors.

And, you know, that's just keeping us very busy as well, just because, you know, we're in the investment world. You know, I mean, we're in the real estate kind of world, but more in the investment world of analyzing stuff, and, you know, opportunity costs, those kind of things. But I mean, common misconceptions, you know, people have about buying or investing in Costa Rica.

[Paola Retana]

Okay. I think the first one is definitely it would look exactly like they plan it, or exactly how it works in their home country, if it's a foreign investor. You know, Costa Rica is a very particular country.

Sometimes this can be a good thing, and sometimes it can be a bad thing. We have our quirks. So I think this is very important to be advised, because otherwise, people can get frustrated.

I think another misconception that people have when buying real estate is that any property would work. You know, they come, maybe if it's the first time coming into Costa Rica, they take a look at a piece of land, and they say, I want to develop something here. And later on, they can realize, well, this property is not suitable for my investment.

And that's a misconception that we have. And finally, I think the biggest misconception that people have here in Costa Rica can be buying real estate is just a transaction. And for me, real estate is, you know, buying and selling real estate is always a business venture.

It doesn't matter if you're buying a single home. You know, there are a lot of compliance, environmental, labor structures that you need to put in place. So purchasing something, even something small is a business venture and requires, you know, work and strong commitment.

[Richard Bexon]

Yeah, I mean, look, the conversations, you know, even when I start talking with people looking to buy real estate, invest in real estate down here, and I say buy versus invest, like sometimes buy people buy it to enjoy it rather than invest, if you know, make a return. And there is a world where both those exist. But yeah, I typically find is that, you know, it's, it's, yeah, I mean, there's a lot of kind of misconceptions out there.

But people don't understand sometimes the burden that they can be carrying when they, you know, make investment here in Costa Rica, you need to understand all those angles from it as well.

[Paola Retana]

Yeah, I agree. Definitely.

[Richard Bexon]

I mean, what is the job of a lawyer and notary? Because those are two different things as well, if I'm correct, in a real estate transaction in Costa Rica?

[Paola Retana]

Yes. So buying real estate is a very formal, in a way, it's a very formal and protocolary affair. So you always if you're buying a property, you know, directly, a property, you're purchasing a property, you need a lawyer to record the, to record the transaction in a protocol in a formal book that is that can only be held by notaries, which have to be an attorney.

So notaries have to be attorneys, but attorneys don't have to be notary. Yep. We have a public registry here.

So all transactions on properties, even if it's a purchase, if it's a sale, if it's a mortgage, have to be recorded in this public registry for transparency purposes and to give security to people that are buying. And so you every real estate transaction does require a lawyer for that, you know, sorry, a notary for that, you know, to do this protocol and comply with the formalities that our system requires. The attorney is an advisor, I would say, you know, it depends on the type of attorney you are looking, but I would say if a real estate attorney is definitely an advisor, you know, a business advisor that it helps the client, you know, understand the client needs, help them understand what it takes to make a business in Costa Rica, understand their interests, work as a point of contact with other important people that come into play in these type of transactions. So financial advisors, investment advisors, a, a, how do you call this?

It's a topography, water studies, architects, you know, engineers. So I would say the, the, the role of a real estate advisor is a real estate attorney. So sometimes working as a point of contact liaison, with other participants in these transactions.

And then of course, the, you know, the more common things that we do is they create the structures that will facilitate the real estate transactions and eventually support them in upkeeping them.

[Richard Bexon]

And I think that structure in the way that you purchase is very important here as well. I mean, depending on, again, if it's an investment, you need to make sure that it's, you know, it's optimized for when you do, you know, sell it and not having to pay too much capital gains tax or paying capital gains, you know, making sure that your capital that you pay into your business is recorded as like an APIC so that you don't have to pay taxes on that, et cetera, et cetera. And a lawyer does that, you know, so.

[Paola Retana]

Yeah. And I think this is, this is one of the most important things you should look into a lawyer, somebody that understands the business that you're doing and not give you like a generic advice to really understand what are you looking for and what are you going after? So you can be properly advised since the beginning and you don't have any surprises at the end.

[Richard Bexon]

Yeah. I mean, that was a question I was going to ask a little bit later, but let's talk about it now. I mean, there are a lot of lawyers in Costa Rica.

I mean, there are lawyers, accountants and doctors, you know, everywhere in this country, thank God. You know, I mean, how do you tell the great ones from the good ones? You know, and I mean, there are a few bad ones out there, but I mean, you know, I've dealt enough with them that in two seconds I can tell whether someone's good or not, you know, but I mean, what questions do you think somebody should ask?

[Paola Retana]

Yeah. I think coming from my last point, I think the difference between a good lawyer and a great lawyer is definitely a great lawyer will sit down and understand the client's needs before giving any advice. So really understand what are they going after?

What are their interests? How do you see their investment in a short and long term? You know, I think definitely the advice cannot be generic.

It has to be specific for every client. In real estate transactions, maybe most clients do need the same thing, but a great lawyer will be able to tell if this is the case or not, and maybe implement bespoke solutions to create legal structures that can maximize the client's benefits and also reduce the identified risks. I think great lawyers are also deal makers.

This is very important in the business we are. I think a great lawyer will find a way to make the transaction happen. Sometimes this is not possible because there's a, you know, huge issue, but most of the times transactions can be saved by like not going wayside because the creative solution or a simple compromise was not proposed by the attorney.

So I think that's definitely the bigger things. Not to expand myself too much, but I think there's definitely others, some non-negotiables, availability and quick turnaround. That's very important in real estate transactions, understanding the market, knowing the people around, ideally working with somebody that has a lot of experience.

And the elephant in the room for me in this type of transactions is definitely a work ethics, right? This is a business where a lot of money is put in, you definitely want to make sure that, you know, the attorney has your back.

[Richard Bexon]

I think that's a good thing. The attorney has your back, which is again, I always like to separate interests. A lot of the time I had a client, a piece of land the other day just called me up.

It was like, Rich, I want to buy this piece of land that you own. Can we use your attorney? And I'm like, I wouldn't like, I like very easily.

Yes, we could, but no, you need your own attorney to look out for your interests. And you can chat with my attorney to look at the interests.

[Paola Retana]

Definitely. I think that's one of the, you know, and this is a fast paced environment. So typically you would want to do something that is easier.

For example, in that case, it would be definitely easier to use your attorneys, both of it, but you want to be sure that your attorney has your back and is doing it in an ethical way.

[Richard Bexon]

Definitely. I think she was a little taken back that I wasn't going to allow.

[Paola Retana]

You're like, I'm not willing to share.

[Richard Bexon]

Well, I mean, I get, I just not.

[Paola Retana]

I know it's not bad. I know. Definitely.

It's not in her best interest to do so.

[Richard Bexon]

And I'm a sucker for helping people, but, you know, I mean, one of the misconceptions that you had, you've mentioned there is just that the transaction sometimes, you know, this is kind of a country of gray, as I sound, as I say, but like there's black and white in the majority of the world, but sometimes in transactions here, there can be some gray and you need to be comfortable with that. I mean, you know, we worked on a transaction recently where the boundary lines weren't kind of really like, you know, the property wasn't set back from the boundary, right. But you, there could be a way to kind of adjust that over time, you know?

So there always is that kind of that grain, like it's never, I wouldn't say never, but the majority of the time there's always something's going to come up, you know, and I think the lawyer is going to advise you on that. Look, there is this risk. This is how much of a risk it isn't or whether it could be resolved in the future, you know?

And I think that's a misconception that sometimes I've just like, it's going to just be a, some people are blown away of how easy it is, but other people are like, wow, I didn't realize that like the survey studies, soil studies, like it's pretty in-depth.

[Paola Retana]

Yeah. Yeah. And I think that's something that is also has to be very, that's important, super important point in real estate transactions and it's the due diligence part and having the client understand, you know, what are we looking, what are we looking for in the due diligence?

You're looking to identify the risks. You're not looking to find red flags not to go forward with it, right? You just want to make sure that you're making informed decisions when you're buying a property or investing in real estate in general.

[Richard Bexon]

Yeah. Yeah. I agree.

I agree. I mean, I think the big thing that a lot of people are asking at the moment is, you know, should I place a property in Costa Rica in my name or corporation? And especially when people are trying to get, you know, in the investor visa now, putting it in a corporation, a little bit more difficult via, you know, by that means, again, possible, just a little bit more complicated now if that way, but I mean, what is your advice to people, whether to put it in their name or corporation?

[Paola Retana]

Yeah, I don't have a general advice in that point. I think that is one of the cases where you cannot be generic and this is something that you cannot oversee when you're trying to do real estate transactions. It has to be evaluated on a case by case basis.

I think before in Costa Rica, we used to form a corporation for everything. You know, people wanted to buy a car, they would do it. They had five properties, they would have five corporations, but that has recently been changing because we have evolving tax policies, compliant requirements, that there are increasing costs of upkeeping, you know, corporations sometimes.

And definitely I would say most times they outweigh a, you know, the benefits outweigh these compliance issues, but it definitely has to be something that has to be evaluated on a case by case basis. Like you said, if you're going after an investor visa, and you're only a single investor, you're not, you don't have a co-investment operation, you might want to go, you know, putting the corporation under your personal name to facilitate that process. I think something that is very important in this point is that except for special regimes, like free, free American zone land, there are no restrictions on foreign ownership of properties.

So foreign citizens have the same rights as Costa Ricans to buy property here to do real estate transactions. So you don't have to go through any complicated process. In most of the cases, and I think in most of our clients, we do have corporations, I think, because of the, you know, specifics of their transactions and how they're structuring it.

And also, a, you know, I think, if you're a foreign investor, you want to be able to handle things from abroad, maybe you're not planning on living full time here. So definitely, there is an efficiency component here. If you have a corporation, and you have a property under incorporation.

[Richard Bexon]

What about wills, Paola, like, again, like, if you I mean, if you have it in your name, or you have an incorporation, I don't know, you want to have a will, like, how important is it for someone to have a will here in Costa Rica, as well, and not just one up in the US? You know, I mean, if something happens to them, and they die, like, should they have a will registered here in Costa Rica with their attorney that if something happens that it does, because otherwise, you've got to go through that whole process of the US will to Costa Rica, like it can take a long time.

[Paola Retana]

Yeah, I think definitely, that is something that if you're if you have investments here, that's something that you want to do. And this is part of the advice, you know, of upkeeping your investment after you go through all these frenzy of, you know, the decision of purchasing or investing. And after you go through all that frenzy, you need to sit down and think about those things in the long term, right?

I think wills are particularly difficult for people to think about. It depends, it depends. But But most people don't want to think they want, they're gonna die, right.

But I do think that that's something that is very advisable. And also, it depends on on what are you doing? If it's if it's something that you definitely want to make sure that is for your family to be, you know, to have it and not go through complicated process that takes a lot of money, you definitely want to do that.

If you're a more sophisticated investor, maybe you have other structures, and you won't need it.

[Richard Bexon]

Yeah.

[Paola Retana]

Yeah, trust.

[Richard Bexon]

Yeah, I mean, you know, it's it's just well, I mean, just with recent events, of course, I think it's just important for people just to be like, okay, I should probably have a will in Costa Rica, unless I have my trust in the US that owns, you know, this corporation that has it here, you know, you should you because again, it can get very complicated.

[Paola Retana]

Yeah, and expensive as well, you know, time consuming. And this is something that you wouldn't want, you know, your close ones to be handling when you're dealing with these difficult situations. Definitely.

[Richard Bexon]

Yeah, I had a conversation with my dad the other day, where I was like, Dad, can you please sort this out so that I don't have to deal with it when when like something happens, but yeah, nobody really wants to talk about it.

[Paola Retana]

Nobody wants to talk about it. It's hard conversations. True.

[Richard Bexon]

True. I mean, where do transactions go wrong in Costa Rica? You know, and you know, what have you seen?

And what can you do to stop this happening?

[Paola Retana]

Oh, I think transactions go wrong. I would say most of the time during due diligence, if it's not properly conducted, and if people are not properly advised. So sometimes when there's an over or under representation of an issue of or the risk of the transactions, that's something that might scare people away.

And this is something that we stress a lot. And we pride ourselves with doing very good due diligence, working with very good professionals, you know, to make sure that you are aware of the risks, and you know, and we know how to, you know, go work around them. And I think that's, that's something that that probably if you don't do a good due diligence, it will definitely come up also, at the end, you know, eventually, if you're trying to sell and somebody is conducting a good due diligence, you can you can find some surprises.

So definitely, this is something where I think transactions go wrong. I wouldn't say this is the point where transactions go wrong. But I do think that this is a complicated issue that sometimes it's hard for clients to understand.

And it's the verification of the funds and the know your client forms. This is you know, Costa Rica, as you know, has very particular regulations and very strict regulations on fraud and anti money laundering. So banks and escrow companies need to make sure they know where the money is coming from.

And I think this is, this can be a surprise, particularly for investors that have complicated structures set abroad, you know, they have to go all the way to the physical person, to the final benefit, physical beneficiary. So that can get complicated in transactions, again, depending on the client. But I think this is something that it is important that clients know since the offset, you know, you'd have to know that eventually, if you're looking to invest in Costa Rica, you have to prove the origin of your funds.

And it's not, it's not a, it's, it's not super complicated, but it can get frustrating.

[Richard Bexon]

I think that's frustrating. I tell all clients, I'm like, look, if you're gonna, if the escrow is going to be here in Costa Rica, I warn you now, like bank reference letters, copy of like last six months statements, tax returns, if it's a corporate, like it can get pretty, like they'll ask for more stuff probably than you've ever given before to a bank.

[Paola Retana]

I know. And this can come as a big surprise, especially for people, you know, from abroad where they're used to not dealing with any of this. And I think to that point, this is also a leveraging on your point.

It's super, super important to find a good escrow company that's, that is, you know, suitable for the transaction that you're making. If the money is not coming into Costa Rica, you don't have to use a local escrow, right? And this is something that maybe, you know, people make a little bit of mistakes there and can cause some frustrations.

[Richard Bexon]

Yeah. What are the closing costs involved in real estate transactions in Costa Rica?

[Paola Retana]

Yeah. I, to answer this question, I think even though there's some costs that you need to assume from a seller's perspective and from a buyer's perspective, typically, I would say it's, it depends on the area of the country that you're doing, you know, these transactions, they can be shared between the buyer and the seller. It can be decided that one assumes the other.

I would say from the buyer's perspective or the closing costs can be typically around three to 5%. This includes, you know, 1% of the notary fees for the public deeds that we were talking about, 1.5% of the transfer taxes, 0.9% of stamp and expenses. We also have due diligence costs that are included in this three to 5%, depending on the investment that you're making, it can be more or less complicated.

Again, this would include topographical studies, financial assessments, home inspections, water studies, the escrow fees as well, and then financing fees. And then from the seller's side, there's a capital gains tax that you were referring to about and a budget somewhere, I would say 5% to 7% for brokerage commissions.

[Richard Bexon]

Yeah. It's funny you say capital gains tax. I was having a discussion yesterday about that with someone and they're like, I thought because we didn't have capital gains tax.

It was like, well, it didn't used to, but I mean, if it's not a habitual as well, you don't, you know, anyway, yeah, you need to speak to a tax advisor always on that one.

[Paola Retana]

Yeah. And that's part of also, I think finding a great lawyer, the point that we were talking about, you know, sometimes you can give a generic response and say, well, you have to pay 15% or actually, well, there's other options on capital gains taxes. If you're a sophisticated developer, you don't have to go that route.

If it's habitual, you have to be careful. So definitely you need to find a good tax advisor for that.

[Richard Bexon]

We did something when we sold our hotel, which was the, again, we say, I don't know that we sold it. And we only had fact orders for 50% of the value of stuff because we built it like years ago. And we sat down with our tax advisors and they were like, look, there's this method that the tax office here uses for the valuation of a property for luxury tax, which is they do a burrito, like there's a, you can go and get a burrito done of your property.

Now, if you don't have all the fact orders for it, you can go and get a burrito done. And that valuation, if it comes back more than the fact orders that you've got, you can apply that against the sales price and the difference, if not more. In this circumstance, our burrito was worth more than what we were selling the property for.

So we didn't pay capital gains tax. Okay. There is a risk there that they could reject that and come back, but because they're using it for luxury tax valuations here in Costa Rica, they can't use one way for one way and one way for the other.

[Paola Retana]

Exactly. Yeah. Yeah.

I think that's a very good example on why also you need a good tax advisor. They know how the administration works and the workarounds of the different taxes that are going to be, that you have to be complying with. So definitely.

[Richard Bexon]

And our tax was going to be $150,000. So I was like, look guys, I'm going to have to stay this way because even if it goes the other way, we're not going to spend $150,000. You know, so.

[Paola Retana]

Well, and also when you're dealing with an expert, you know, what are the risks, right? They'll tell you upfront, you know, the, this, you will have this risk or you will have this liability for X amount of time. And this is something that is, and then you put the things in a, in a, I want to say a balanza, you know, I forgot the word in English.

[Richard Bexon]

On a scale. Yes.

[Paola Retana]

And you say, well, maybe I'll, I'll pay zero. I have this risk, but I'm not doing it. I'm doing everything properly.

And eventually this is something that I will have to carry over for four years. Are they really going to come after me if I'm paying the luxury taxes on the other hand?

[Richard Bexon]

Yeah. I'm lucky. I've always had great tax guys.

And some of them went on to be the head of like the Costa Rican IRS, which was pretty cool. So, yeah.

[Paola Retana]

So, you know, you know, the ins and outs.

[Richard Bexon]

Some crazy stuff. Yeah. Okay.

My last question for you, Valerie, is it's the it's again, I've kept you long enough. If you inherited $500,000 and had to invest it into a business or real estate in Costa Rica, what would you invest it in? And why?

[Paola Retana]

I've always wanted to answer this. I've always thought, what would I answer if I go to Richard's podcast? And I've thought about this question a lot, but I think today I would answer it from a rational business perspective.

We have so many options here, but rental home incomes in Guanacaste have definitely, you know, proven to be a very profitable investment. So I think today I will go down that route.

[Richard Bexon]

Where would you invest is the question, because Guanacaste is a big province.

[Paola Retana]

It's a big, yeah. This is probably a personal bias, but I would invest in Playa Grande. I lived there for two to three years.

I love it. It has such a cool vibe. I think it's really profitable.

It's a very organized community. You know, it's very nice neighbors. I think everybody, well, not everybody, but most people that want to live there are kind of in the same same line, you know, they want to keep Playa Grande as it is.

And so I really think it's one of my favorite places in Costa Rica.

[Richard Bexon]

I'm biased, you know, that one anyway. So I don't, guys, just to be clear, I don't just get people on here that like Playa Grande to say it. Once you've been there, you're like, damn, because it must be like one in ten are like Playa Grande, not Playa Grande, Playa Grande.

And I'm like, ugh.

[Paola Retana]

It's such an amazing place. And honestly, yeah, I think once once you set a foot there, you'll understand that it's that it has something special.

[Richard Bexon]

Yeah, it's raw authenticity of a cool beach, cool surf beach.

[Paola Retana]

Yes. And it's close enough to, for example, Tamarindo, which is, you know, on the bigger scale, you have access to supermarkets, you have access to parties, you have access to other national parks. So it's I think location is amazing.

[Richard Bexon]

I agree. Well, Paolo, it's an absolute pleasure to get you here on the podcast. Anyone that wants to reach out to you guys and LegalShe, I'll put all the contact details in the description down below.

But really appreciate your time.

[Paola Retana]

Thank you so much, Richard, for inviting me. This was great.

[Richard Bexon]

Thanks very much.

[Paola Retana]

Have a good day.

[Richard Bexon]

Bye bye.