Costa Rica is currently experiencing a residential construction boom. Offerings of pre-construction (pre-sales) property purchases by developers are abundant, particularly in the tourist-oriented beach areas and in the Central Valley, around the Greater Metropolitan Area of San José. Buyers are routinely offered sizable pre-sales price discounts by developers who are eager to use a purchaser’s money to defray the financing costs of completing their real estate projects.
Purchasers do have to consider the additional risks to be incurred when proceeding with a pre-sales real estate purchase. Horror stories are abundant from would-be purchasers entering into such agreements without proper legal advice and documentary protection.
Risks for pre-sales property purchases
Would-be purchasers are usually first introduced to a pre-sales purchase opportunity in an artist’s depiction of what the proposed development will supposedly look like when completed, as advertised on the developer’s website or other social media. However, it is wise to ask the developer for client references and a list of other completed projects, in order to view the quality of construction and the developer’s professional and timely performance.
It is very important to know that the developer owns, or has irrevocable control over, the land where the project is to be built and that all government licenses and approvals have been obtained to build the proposed project.
The pre-sales purchase agreement entered into between the purchaser and developer should be very specific as to what the final product will look like, the building timeframe. It should include declarations by the developer of the quality of materials to be used, with building plans and inventories of fixtures and furnishings, attached as addendums to the purchase agreement.
Paying the purchase price to the developer
This, of course, is the single most important factor in such a pre-sales real estate purchase. The question that must be answered is, how can the purchaser’s monies be protected in the payment to the developer for a constructed entity yet to be built? The answer is, all purchase monies, including any deposit amount agreed to be paid by the purchaser to the developer under the purchase agreement, must first be placed in an escrow account of a government-registered escrow company, pursuant to the provisions of an escrow agreement entered into by the purchaser, developer, and escrow company.
This escrow agreement will govern the dispersal of purchase monies to the developer, as various construction milestones in the project are met by the developer. Before any good faith deposit amount is released from escrow in favour of the developer, the purchaser must have conducted and be satisfied with the legal due diligence for the project.
Subsequent purchase monies disbursed from escrow will only be made when a specific construction milestone, such as laying the foundation or erecting the walls, have been certified by an independent engineer or architect as having been met, in compliance with both the building plans and quality of the materials agreed to be used. In that manner, the purchaser will be protected for the property value and construction value completed, in relation to the amount of funds advanced to the developer at any given time during the construction process.
The usual hold-back for the final payment of purchase monies to the developer is 10% of the purchase price, until any irregularities found by the purchaser, on what is commonly referred to as a punch-list, are corrected within a specified time by the developer. Should the original developer default in the completion of the project, remaining funds held in escrow should be sufficient to complete the project as contemplated, utilizing the services of a different developer.
It is clear that the risks to a purchaser involved in purchasing a property from a developer through a pre-sales purchase agreement are significantly greater than purchasing a property in a completed project. However, if a purchaser carefully follows the due diligence steps that I am recommending in this article, with proper legal guidance, there can be a significant financial benefit realized by a purchaser in acquiring a property for a lower purchase price than they would pay for a completed project of a like nature.
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