Due Diligence Process for Purchasing Real Estate

Purchasing a property is an investment. Nobody decides to buy a piece of property with the expectation to lose money.  Just like any other investment, you need to do some due diligence to determine that it will be a sound investment which includes avoiding risk. A due diligence helps you to assess the conditions of the property which will dictate whether you will complete the purchase or not.

What to look in to?

There is some basic information that you must know about the property, but there are also some elements that will depend on what type of property you are looking to buy. It is not the same to buy a one acre ocean view property in Santa Teresa than to buy a condo in Escazú. We will review the basic stuff as well as the more intricate elements that you must consider when purchasing real estate in Costa Rica.

Title and Tax Information

This is some basic important information that you should review when considering buying a piece of property regardless of the type of property it is. All property in Costa Rica is titled and it must have this basic information in the title. When looking at the title of the property, you should pay attention to the following:

1. Property ID. This is also called Folio Real, or Matrícula, or Número de Finca. The number will have the following sequence 0-000000-000. The first digit estates the province where the property is located, the second set of six digits is a consecutive number given to when a property is created, and the third set of three digits establishes whether there is a co-tenancy.
2. Location, which includes, province, county and district.
3. Tax Value.
4. Area in square meters.
5. Survey Number. All properties must have a survey number.
7. Owner information which includes full name and ID number.
8. It will also show any liens and encumbrances.

When it comes to the property tax information, it is possible to obtain this at the local municipality. Most of the time, the tax value stated in the title will not be the same as the tax value reported in the municipality. Usually, the municipality will show a lower tax value.

Specific Information

If you are planning on purchasing a condo, it will be good to consider the following:

1. Maintenance Fee. You want to make sure how much you have to pay for the maintenance of the condo. In addition, you should look into how the fees are calculated.
2. Occupancy rate. The cost of maintaining a project is quite high, which is why it makes sense to share the costs among the other owners. If there is a low occupancy rate in the condo, there is the risk for the maintenance costs to be high. It is important to determine with the developers and according to the articles of incorporation how the maintenance expenses are to be calculated and distributed among the lot owners.
3. Bylaws of the Condo. You should be aware of the various regulations governing the condo. You may not like some of the provisions in there, which you may want to find out prior to purchasing. On the other hand, you want to make sure that there are some stipulations that are important for you such as is the case for sustainable communities. Buyers in these types of communities want to make sure that the Condo Bylaws incorporates the policies and practices that furthers the interest of the sustainable community. The Bylaws should also include clauses related to dispute resolution.
4. In some instances, people purchase a condo as a second home with the expectation to make some money from rentals. You should know if there is a property management service provided by the Condo Managers, or a third party. Certainly, you will need to take a look at the management agreement to make sure that you have your bases covered.

Purchasing for a Specific Purpose

If you are planning on purchasing a piece of land for some particular endeavor, such as hotel, a farm, a processing plant, for tourism, so on and so forth; then you must make sure that the land is permitted for that particular purpose.

Purchasing in the Country Side

When purchasing property in the rural areas, you should consider the following:

1. The date the survey was issued. If the survey is old, it is suggested to get a new survey for the purpose to make sure that the boundaries have not been changed. You want to make sure that you are getting all the land you are paying for. The survey will help you make sure that the land size matches the description in the title.
2. Surrounding areas. You should know whether the property is close to a creek, a park, a natural reserve or protected area. There are restrictions on what you can do with a property depending on the adjacent areas. These limitations are included in the title, so it is easy to tell whether the title has limitations. The title does not contain a description of the limitations, just an enunciation, and thus, further research will be required to determine what those limitations entail.
3. Most of the time, you will find easements for properties in the rural areas, mainly, easements for water and power. It is also common to find easements for passage. You would like to know whether your property is the dominant or the servient of an easement. If you are the dominant lot, you should be allowed to use the easement to access your property and the public road. If you are the servient, you must allow the right of passage to the owner of the dominant lot.
4. Maritime Zone. This is applicable to most properties in the coastal areas. By law, the first two hundred meters from the beach are public property (owned by the government) there are some places where you can find titled beach front property, but it is rare. Maritime zone land can only be leased, it cannot be bought, so beware of whom is “selling” beach front property. Complete your due diligence.

Due Diligence for the owners

We suggest for the seller to complete a due diligence to make sure that the property they own is in order and fully compliant with tax regulations and the title does not have any issues. It is important to do this to avoid any surprises in the future whether when selling the property, financing, doing a project such as an addition or building another structure, or for when the heirs are completing the probate proceedings.

For Estate Agents and Developers

These group of people are in the business of selling property. You do not want to encounter issues with the title when trying to make sale. In addition, your reputation as an honest agent or developer lies in the ability to deliver what you promise. Therefore, it is absolutely important for an agent or developer to complete a due diligence on the properties they are selling just to make sure that everything goes right with the buyers.

For the Buyers

Certainly, you do not want to lose your money in a bad deal. You want to make sure that you are getting what you are paying for. If the owner or the real estate agent have not done a due diligence, you are the last person available to confirm the property is right. Make your purchase a happy story.