Navigating real estate transactions in a foreign country can often feel daunting, especially when it comes to financial transfers and closing procedures. In a insightful session hosted by Brooke Bishop and Karina Ugalde from Bishop Realty in Grecia, Costa Rica, they break down everything you need to know about using an escrow account when buying or selling property in Costa Rica.
If you prefer watching the video instead, click here to watch it in Spanish with English subtitles.
1. What Is an Escrow Account and Why Is It Used?
For international buyers, using an escrow service is standard practice. However, local sellers in Costa Rica often ask why a neutral third party is required instead of transferring funds directly.
- A Neutral Third Party: An escrow company acts as an impartial entity that holds funds securely until all conditions of the purchase agreement are met and the sale is ready to be finalized.
- Insured Funds: Escrow accounts in Costa Rica are backed by financial insurance policies that typically cover up to $1,000,000 USD, giving both buyers and sellers complete peace of mind.
2. Preventing Frozen Funds & Anti-Money Laundering Laws
A common question foreign buyers ask is: “Why can’t I just wire the money directly to the seller’s bank account?”
Costa Rican banking regulations enforce strict anti-money laundering (AML) laws. Direct wire transfers from international banks into private Costa Rican personal accounts can easily trigger red flags, resulting in the bank freezing the funds indefinitely while demanding extensive documentation.
An escrow company avoids this bottleneck by:
- Collecting and verifying all source-of-funds documentation prior to closing.
- Ensuring full compliance with local banking regulations.
- Guaranteeing a clean, secure, and on-time transaction without last-minute frozen accounts.
3. Who Sets Up the Escrow and Who Pays for It?
- Seller’s Responsibility: Zero. Sellers do not need to submit financial underwriting documents to the escrow company, nor do they pay for the service.
- Buyer’s Responsibility: The buyer and their real estate agent coordinate directly with the escrow provider to submit background paperwork and open the account.
- Associated Costs: Escrow fees typically range from $600 to $1,500 USD, depending on the total purchase price and how long the funds need to be held. These fees are covered entirely by the buyer.
4. Protecting Earnest Money & Due Diligence
Prior to tax and legal reforms, initial earnest money deposits were often handed directly to the seller or held in private attorney trust accounts. This created significant risks:
- What if structural defects were discovered? If an issue arose during due diligence and the buyer chose to walk away under contract terms, sellers were sometimes reluctant to return the deposit, resulting in lost funds and lengthy disputes.
- How Escrow Protects Both Parties:
- If a contingency fails during the agreed due diligence period, the neutral escrow company safely releases the deposit back to the buyer.
- Conversely, if the due diligence period passes smoothly with no issues, but the buyer simply decides not to complete the transaction (or faces an unrelated issue), the earnest money deposit is released to the seller as contractual protection.
5. When and How Does the Seller Receive Payment?
Timing is crucial to ensure a seamless closing day:
- One Week Before Closing: All purchase funds must be fully deposited into the escrow account. Waiting until 1–2 days before closing risks international wire delays, which can derail the signing schedule.
- Document Preparation: During the week prior to closing, the escrow agent collaborates with attorneys and real estate agents to draft a full itemized closing statement detailing all fees, tax withholdings, and distributions.
- Closing Day Release: As soon as the final deed of sale (escritura) is signed before the notary/attorney, the escrow company immediately executes wire transfers to disburse funds to the seller and relevant parties.
Summary
While escrow can sound like an intimidating technical term, it is simply a protective mechanism designed to safeguard all parties involved in a real estate transaction. By ensuring regulatory compliance and holding funds securely, escrow guarantees that buyers get a clear title and sellers receive their money safely and on schedule.
