Should I use the services of an escrow agent for real estate transactions and what are their requirements?
by Quatro Legal Real Estate Team | Jan. 3, 2024 | Article, Real Estate
One of the most common parties involved in a real estate or commercial property transaction is the escrow agent. The escrow agent is an independent third party (regulated by SUGEF if operating in Costa Rica) with whom one party deposits an asset of any kind (normally cash) that is subject to specific terms and conditions before being delivered to the other party. It is a very well-known document in real estate transactions in many countries.
Retaining the services of an escrow agent implies execution of an escrow agreement. The escrow agreement is a unilateral, bilateral, or multilateral contractual arrangement that defines the terms and conditions under which a specific transaction is executed. Escrow agreements are useful for investors to move money to Costa Rica and to secure its availability prior to purchasing the property or during negotiations. The escrow account could also serve as a private bank account to keep funds available prior to opening a personal or corporate bank account at a bank in Costa Rica.
The escrow agreement is a key element to making transactions secure as it serves to guarantee that each of the contracting parties will receive exactly what is agreed upon. A well drafted unilateral, bilateral, or multilateral escrow agreement should include:
- The terms and definitions relevant to the transaction.
- Clear instructions on the escrow of funds, such as acceptable use and release conditions.
- The Escrow Agent’s fees, as well as the duties and obligations that must be met.
- The law applicable to the transaction.
- Jurisdiction in the event of a claim or legal action.
All transactions are different and so it is wise to invest in an escrow company or agent to prepare an escrow agreement tailored to your needs. Another key element to ensure a safe transaction is to confirm that the escrow company or agent is an individual or entity duly registered with SUGEF (Costa Rican Superintendent of Financial Institutions) and subject supervision. If it is a foreign entity, it is important to verify that it is a reliable company duly incorporated to perform this activity.
Normally, each escrow company will have its own set of requirements to provide the services to buyers and sellers of properties being the norm that foreign escrow companies will have more flexible requirements and processes as they do not need to conform or operate under SUGEF regulations.
In Costa Rica, escrow services are regulated activities that fall under the supervision of SUGEF. Escrow agents must abide by the regulations created and revised from time to time by Costa Rican regulators. The standard requirements to open an escrow account are the following:
- Know Your Client forms from the person or entity funding the account.
- A copy of the depositor’s valid driver’s license and passport.
- A copy of the depositor’s tax returns for the last two- or three-years showing proof of income.
- Bank statements for the last three to six months for the origin account of the funds (checking, savings, investment account, brokerage account, IRA, etc.).
- Letter of reference from a banking institution showing account information, financial products, and balances.
- Execution of the escrow agreement provided by the escrow agent of choice.
- If the funds are from specific activities such as loans, sale of property, sale of a company or inheritance, notarized and apostilled copies of the documents attesting to the origin of the funds.
- If the funds are from a legal entity, articles of incorporation and certificate of good standing.
Escrow services are very serious activities in Costa Rica and abroad and serve a primary purpose in any real estate investment or commercial transaction. Therefore, choose an escrow company with a track record and be wary of any company that is too flexible on the escrow requirements or that does not require the basic documents indicated above.
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