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What you should do with the earnest money deposit is a real estate FAQ or frequently asked question in Costa Rica real estate.
This question arises all the time because, in Costa Rica, it’s custom for the buyer to give the earnest money to the seller. Costa Ricans rarely use escrow because they don’t know what that is.
What is an Earnest Money Deposit?
The earnest money deposit is really like a handshake when agreeing on the property purchase between buyer and seller. But the deposit must be accompanied by a formal agreement. Because if one of the parties defaults, what will happen to this earnest money deposit?
Also, when financing is involved in a real estate transaction, the lender will request a formal agreement. To seal this agreement, you need an earnest money deposit. Neither party could walk away from the deal without any penalty. In Costa Rica, this deposit is called “deposito de garantía” or “arras confirmatorias”.
If the earnest money deposit is refundable, a purchase-sale agreement doesn’t make sense. Therefore, I always prefer to make a deposit non-refundable and subject to certain contingencies and due diligence described in the purchase-sale contract.
The agent must also negotiate the earnest money deposit when negotiating the purchase price. Customarily, the earnest money deposit is between 5% and 10%. I hate to see more than $20-$25,000 sit in escrow for a long time. But, in my opinion, it should be enough for the seller to feel comfortable without losing the sale.
Have you fallen in love with a property and want to buy it? Then take it off the market. You can only do this by making this deposit. These are the steps to be taken:
Before formalizing an offer, hire your own attorney (never the seller’s) to do a thorough title check. Do not make any deposit because you have done this title check. If there are any doubts or issues, make your offer subject to clearing up those issues.
Once the buyer and seller agree on the sales price and other conditions, they formalize an offer. This offer is made by writing up a formal agreement, which can have the following names.
- Option to purchase sale agreement
- Buy-Sell agreement
- Property purchase agreement
- Purchase option
In the option to purchase – sale agreement, you want to put all the conditions your offer is subject to. The option will also say where the earnest money deposit goes and what will happen to it if one of the parties defaults on the purchase/sale.
In Costa Rica, local buyers hand over the earnest money deposit to the buyer. Often only in return for a receipt. Unfortunately, if for example, the seller passes away and his wife spends the money to bury him, you have a problem. There are smarter ways to handle the deposit.
A third party can hold the earnest money. The best third party for this matter is an escrow company. In case of non-compliance by either party, the earnest money is safe.
Earnest money release
The earnest money deposit is part of the purchase price and should be released to the seller unless the buyer defaults on the agreement.
When using an expert real estate agent, you do not have to worry about all the details. Contact one of our agents now.
This is a collection of Costa Rica real estate FAQ – frequently asked questions that I have put together to help you buy or sell a home. Do you have any other questions not listed in our FAQ blog?