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    How Does Escrow Work in Real Estate Transactions?

    Although not a usual Costa Rican practice, it is becoming increasingly more common

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    Although not a usual Costa Rican practice in the past, it is becoming increasingly more common to resort to escrow as a business practice for most real estate transactions.  It originated as an Anglo-Saxon practice, and is now widely used in the purchase and sale of real estate.  It has become so popular that some businesses have specialized, and are exclusively dedicated to providing escrow services.

    To be better informed, let’s review the characteristics and usefulness of the escrow services.  In Spanish, escrow would translate as a custody agreement or trust account.  The parties in a business transaction designate a third party, who is not involved in this transaction in any way, to act as a neutral custodian of the funds that are being considered in that business transaction.  The escrow company acts as a ‘safe’ place to deposit your funds while the transaction is being completed, and indicates your commitment and ‘good faith’ in going forward.

    The most common case, but not the only one, is when funds are advanced and therefore deducted from the final price.  This acts as a guarantee to ensure that the business transaction goes forward, and then binds both parties in the transaction.  Usually the funds are deposited with the escrow company, but not delivered to the seller until any number of conditions have been met.  For example, obtaining financing, completing any repairs agreed upon, or addressing any obstacles to the sale.

    In this way, depositing funds with an escrow company assures the seller that the funds have been deposited, and the serious intentions of the buyer.  It also assures the buyer that if the conditions are not met, those funds are returned to the buyer.  Therefore it is very important that the instructions are clear to the escrow company as to the terms and conditions that apply, as well as the instructions for making the respective disbursements.  Which all comes down to the importance of the escrow contract agreed upon by all three parties – the buyer, the seller, and the agent.

    However, in Costa Rica, these escrow contracts are not specifically regulated by law.  But not just anyone can exercise these escrow responsibilities.  Costa Rican law requires that any escrow company or agent must meet the requirements set out by SUGEF for the management of third-party funds.  Having met these requirements, the buyer and the seller can be assured that the escrow company or agent are qualified to act on their behalf.

    Contact Us for more information on matters relating to real estate in Costa Rica.

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