Richard Detrich’s Boquete, Panama Weblog

ESCAPE TO PARADISE - Sample Chapter - Buying Real Estate In Panama

The following is an excerpt from Richard Detrich’s ebook,ESCAPE TO PARADISE.

One of the real problems many Americans face is the challenge of finding and buying real estate in the land they’ve chosen to call their new home. This is particularly true in Central America, and especially in Costa Rica and Panama.

“Professional Real Estate”

The real estate market in the US is largely influenced by, and some would say “controlled” by professional real estate. Real estate in the US is highly regulated, compared to most places in the world. In California the real estate business is highly regulated by the Department of Real Estate (DRE) and has a strong infrastructure of title companies, escrow services, inspection services, multiple listing services (MLS), and real estate associations.

If you want to become a real estate agent in California you first take a real estate course. This can be either in a class room setting, on line, or by home study. You then must pass a written exam administered periodically by the DRE. Then you are fingerprinted, you are checked for any police record, and given a provisional license. To get a regular license you must take additional courses. Licenses are renewed every four years and you must continue to take professional development courses mandated by the DRE. Most importantly, the DRE is always looking over your broker’s shoulder, who is always looking over your shoulder as an agent.

Most, but not all, real estate agents in the US are REALTORS®. REALTORS® are very particular about that trademark – that it always be in all caps, with the Ò behind it. This designation means the agent is a member of the American Association of REALTORS® and has subscribed to a very detailed Code of Ethics. Additionally REALTORS® are usually a member of their local Real Estate Board and the local Multiple Listing Service (MLS).

Once in a while a REALTOR® does get out of line. If it is a question of violating the Code of Ethics usually the local Real Estate Board steps in and peer pressure alone leads to a change in behavior. If the infraction is a violation of California Real Estate Law the DRE steps in and puts the violator on probation or yanks their license. It is against the law in California to sell or represent the sale of any property other than your own if you are not licensed. This is why when you call a California broker in response to an ad in Sunday’s paper, and just want a quick answer about a property, the receptionist cannot by law give you the answer, but must transfer you to a licensed real estate agent.

Most Americans are used to a real estate market that has a strong MLS or multiple listing service. Professional real estate in the US is set up with one goal in mind: to get the highest and best price for the seller. [This is why the wise buyer will sign an Exclusive Buyer Broker Agreement which means that the real estate agent is working only for them, and not for the seller.] All the brokers who list their properties on the MLS agree that they will share their commission with whatever broker actually brings the buyer. This gives properties the widest exposure in order to achieve the highest possible selling price in an open market. As I used to constantly tell my clients, “It doesn’t make any difference whose name is on the sign, I can show you any property!”

So most Americans come from a real estate environment that is:

Highly regulated

Professional

Has a strong infrastructure of related services - finance, title, escrow, home inspection

Has a strong MLS system.

“You’re not in Kansas anymore!” . . . or California

Suddenly they are thrown into a country like Panama that has a real estate environment that is nothing like what they’ve always known.

There is little, if any, effective regulation - There are rules but little budget for enforcement.

Everyone and his brother is selling real estate - the hairdresser, the dentist, the taxi driver, every expat - everyone!

There is virtually no infrastructure of related services.

There is no MLS so every agent is only showing you properties on which he makes a commission, i.e. his listings.

Throw into this mix real estate laws that are very different than those in the US, dealing with square meters and hectares instead of square feet and acres, then add the fact that not all real estate in Panama is actually owned by title – well, you can understand why many Americans are confused and, sometimes, swindled.

Consider these events, all similar to actual events, any one of which would have caused the perpetrators to have, at the very least, their licenses yanked in California.

Ocean Front Lots! Affordable! - The lots were small, but drop-dead gorgeous! Bordered on one side by a not-bad-by-Panama-standards road, and sandy beaches with coconut palms on the other side, it was the stuff of dreams! Azure-blue waters and great fishing. You could pull your own boat right up on the beach and drift of to sleep with the sound of waves. And the price was fantastic! Problem: Despite the signs, the flags, and the lot markers, the property between the road and the beach was actually owned by the Republic of Panama and by law wasn’t for sale by anyone at any price.

Mountain Paradise! - Spectacular mountain views in this alpine paradise. American builder will construct your dream home in this alpine paradise for 20% less. Using a streamlined US approach to building development, we can give you greater building quality for less money. We guarantee to have your home completed in 8 months without the usual Panamanian delays. Top quality! Problem: The builder required 80% of the cost of the construction up front. Although apparently well-intentioned the builder had never built in Panama before, got in over his head, and went belly up taking the dreams of several dozen unsuspecting families with him. Interestingly these people were mostly back in the US, assuming their homes were progressing as promised. They accepted at face value glowing emailed “progress reports” only to find they had nothing but cement slabs for the 80% they’d paid up front.

Caribbean Island Dreams – Spectacular sun sets, coral reefs, turquoise-blue waters, Captain Morgan’s Fancy has it all! Live on your own private island with only 30 others and enjoy your own marina and 8-hole golf course. Only 10 beautiful sites remain! Hurry! Problem: Although the development was spectacular, and the homes already built were really nice, everyone was in for a big surprise, including Captain Morgan. The developer had purchased and sold “rights of possession” that were acquired from an American company. Unknown to the developer or the American company a Panamanian family had acquired prior rights of possession twenty years earlier, and had maintained a tiny, run-down wooden house on one tiny point of the island where members of the family occasionally visited to relax and fish. Enter lots of lawyers, long litigation, and major uncertainty for everyone involved.

Pacific Sunsets – Pacific island property, just meters away from a marine reserve. Spectacular views, palm-fringed beaches, protected anchorage, and just off shore some of the most spectacular fishing in the Pacific. 20 hectares, $7 per square meter. Problem: The American expat knew paradise when he saw it, and began negotiations with the real estate sales person who had showed him the property. He was ready and anxious. The agent came back and said that there was a slight problem. It seemed another unknown buyer had come in at the last moment and snapped up 10 of the 20 hectares and the seller had now raised the price on the remaining 10 hectares to $14 per square meter. The price had doubled overnight! The prospective buyer walked away. In the meantime the seller, who knew nothing about “the last minute unknown buyer” and still had 20 hectares to sell, contacted the prospective buyer directly asking, “What happened?” When buyer and seller compared notes, it turned out that the real estate agent was carving off 10 hectares for herself while the prospective buyers was to pay for the whole thing!

Understand that this does not apply to all real estate sales people in Panama! Brokers, not agents, must be licensed. There are real estate firms and sales people who are professional, dedicated, have great integrity, and who will bend over backwards to steer their clients through waters sometimes infested with sharks. There are Panamanian real estate firms who have been in business for many years and have a long and enviable history of servicing their clients. But there are also folks who’ve been kicked out of one country or another and who’ve left a trail of disillusioned and “taken” clients.

The point is: be careful! You are not operating under the same assumptions and rules that applied in the US. Take your time. Talk to people. Don’t believe everything you hear, but if you talk to enough people the same names will come up again and again, both in terms of recommendation and caution.

I think the “Buyer Broker” concept, where the agent is hired by you to work for you and to negotiate the best deal for you, makes a lot of sense, particularly in Panama. If your agent knows that he is going to be paid a certain percentage by you regardless of what you purchase, it opens the door for your agent to go out and beat the bushes and find the property that meets your needs at the price you want to pay.

Because Panamanian real estate is not as developed and organized as real estate in the US, many sellers question what, if anything, they are getting for their commission. So “for sale by owner” offerings are very common. Drive into Boquete from David and you’ll see tons of “Se Vende” signs with the owners phone number. When owners are setting the prices without consultation they may be asking too little or, in some cases, far too much. “Gringos will pay anything,” may be the key pricing consideration. In the US, with organized real estate, MLS, and local real estate boards, an agent with a few computer strokes can give you “comps”, i.e. the exact price of comparable properties and when they sold. This is critical when a market is going rapidly up or down. You can’t depend on what people say they paid or what sellers say they got. Everyone wants to look good, so the actual prices tend to be adjusted accordingly. Again, this is an argument for using a buyer’s agent or consultant who will work for you, scout the territory, and negotiate realistically on your behalf with “for sale by owner” sellers.

Don’t think “for sale by owner” offerings are shark-free either! Sometimes sellers just don’t actually own what they’re trying to sell! Or they want to play games. I was very interested in a property listed online for $399K for a nice coffee farm. I emailed back and forth with the owner in the states and went out to see the property several times. It was a nice property, attractively priced, and we were very interested only to discover that once he knew of our interest he jacked the price up to $600K! I told him I was always interested in negotiating the asking price downward, not upward! Thanks, but no thanks! It is fairly common with “for sale by owner” properties to find the seller jacking up the price at the last minute figuring that either that Gringos have tons of money, or are stupid, or are both!

Who owns what?

There are two types of property transactions in Panama: titled property and rights of possession. Titled property is similar to what we understand in the US, except for the fact that there are no title companies to research the title and insure the title. In Panama your attorney will do a title search and confirm that the title or escritura is registered in the public registry. This includes verifying that there are no encumbrances on the property and that the property has been surveyed. And you should have the property surveyed by your own surveyor to verify the accuracy. Rights of way is very tricky in Panama. Every piece of property must have access to the public, at least by a walking path and the access must remain public even if the ownership of the property changes hands. Once a right of way has been granted it must continue in perpetuity if it is regularly used, and regularly can be as infrequently as once a year. When property is subdivided the original owner must provide access from a public road and sometimes, over the years, these rights of way have not always been duly recorded and yet they still exist.

Some developers in Panama will hang onto the title until your home is actually completed and you receive a certificate of occupancy. However, if the developer suddenly goes South after you’ve almost completed your home, but before you get your certificate of occupancy, you can either be out of luck or find yourself tied up in court for years.

Rights of possession are a type of title, but do not constitute titled property. To acquire rights of possession a Panamanian citizen files an application to the government including a survey and statements and agreements from the neighbors. He then has possessory rights, Hanging onto those rights requires that the “possessor” actually use the property and make improvements. Improvements can be buildings, or something as simple as planting grass, palm trees, or fencing in the property. The “possessor” can then sell his rights of possession to you, after which you need to actually buy the property from the government. If you skip this important step, you have the right to use the property – sometimes referred to as “The right to pick fruit” – but you do not actually own it.

In recent years the government has ceased issuing title to island property and property adjacent to the ocean. This has created havoc in areas like Bocas del Toro and actually made real estate scams easier. There is supposedly a move within the government to return to issuing titles for island and ocean property as a way to more closely regulate ownership and eliminate some of the scams. Stay tuned.

Ways to Own Property

When you purchase property in Panama you can purchase it in the name of a real person (your own name), or in the name of a corporation, or in the name of a Private Interest Foundation. Panama does not recognize joint ownership by husband and wife. If one dies, property is not automatically transferred to the other. Most expats choose to own property in the name of an S.A. corporation for various legal and confidentiality advantages. The owners of the corporation own the shares and the corporation owns the real property.

Signing on the Dotted Line

Say you actually find a piece of property and you and the seller agree on a price, then what? This is where you’re really not in Kansas . . . or California any longer!

As a REALTOR® in California I used to chafe over the length and complexity of the California Association of REALTOR® residential purchase agreement. But it was a standard agreement that applied to the purchase of all real estate in California, and it prevented a lot of problems by clearly defining everything and anticipating problems in advance and indicating how these problems would be resolved should they occur. In Panama there is no “offer” and “acceptance” document, and there’s no deposit or earnest money. Having reached agreement, the “intending” seller and “intending” buyer sign a “Promise-to-Sell” agreement and the intending buyer makes a down payment. The agreement is amazingly simple and doesn’t anticipate problems, in my humble opinion opening the door for misunderstandings and conflict. Once the contract is signed, the intending buyer makes a usually sizable down payment. The “Promise-to-Sell” agreement is then recorded in the Public Registry to prevent the seller from selling to someone else.

Say what?!?

There is no escrow as we know it in the US and particularly in California. There is no neutral third party to hold the money in a trust account, be sure the terms of the contract are fulfilled, and parcel out the money at closing according to the contract. (For this reason, real estate brokers can sometimes find themselves stiffed on their commission.) Funds are sometimes held by the lawyer, assuming the parties are using the same lawyer or can agree on whose lawyer will hold the money, a bank, and in some cases the real estate agent. If this sounds dicey . . . well, coming from California, it is! It seems to me there is a lot of trust involved. Trust, when you’re the new kid on the block and may not know who to trust. We were lucky: our builder and his attorney not only were honorable and trustworthy, but they have also become our good friends. But . . .

When the title is actually registered at the Public Registry the money changes hands. If you’ve bought property held by a corporation you’ll also receive the bearer shares for the corporation that owns the property. You’ll want to put these bearer shares in your safe deposit box . . . except for one problem, Panama banks don’t the safe deposit boxes we’re accustomed to in the US. So when you pack your container bring along a good safe. Unless you’re loaded down with the family jewels, a good fire rating is the most important thing in selecting a safe.

Panama has several advantages over some of the other Central American countries retirees may consider. Foreigners can own property in Panama, which is not always the case. And Panama does not have the problems of squatters and squatter’s rights as in Costa Rica.

Location! Location! Location!

Anywhere in the world, these are still the three most important words in real estate! To really understand the differences in location, you need to do your homework, ask around and spend some time in an area before you commit.

Shopping Online

Funny thing, when the Boeing 707 made Trans-Atlantic travel comfortable and fast, people said the age of passenger ships was over, yet today the cruise industry is booming! When DVDs first came out, people said movie theaters were finished, yet today where there was once a ratty little theater you’ll find a 20-screen moveable with lines at the box office! When Amazon was launched people predicted the death of bookstores, yet today Barnes & Noble and Borders have become vast emporiums of literature and community centers! When the Internet first started showing real estate listings many brokers were wringing their hands, yet today the Internet is the single biggest marketing tool for REALTORS®. Goggle and other search engines have made it relatively easy to ferret out properties for sale anywhere in the world.

But like anything else, the Web can be abused. Have you ever noticed how REALTORS® in the US generally leave up the “For Sale” sign until the new owners are threatening to bring the sign to the broker’s office and hit him over the head with it? Why? It’s great and free advertising! I once took a listing for a home on the busiest street in Ventura, right by a freeway entrance. I thought to myself, this will take forever to sell, but what a great advertising opportunity. Fortunately for the seller, unfortunately for me, I sold it in two days! Unfortunately the same thing happens on line. Either intentionally, or just because they don’t know how to get the damn page down, properties remain “for sale” online long after they are sold. Aside from being very frustrating to Internet shoppers, this ads to the confusion. For example, I was looking for property on a certain Panamanian island. I found what appeared to be the ideal property, titled, partially developed, listed by a real estate broker at a whale of a good price. When I actually cruised by the property I discovered the development had long since been finished and the property had in fact been sold years ago, which is why it was priced so low. It’s probably still online! After inquiring about two or three more properties listed by the same agent, and never receiving any response, I’ve concluded that those properties have probably been long since sold as well. So I just ignore her site.

There are sites where sellers can pay a monthly or flat fee to showcase their property for sale. Some of these are realistic sellers: others are people who’ve said, “Well, if we could get X dollars, sure, we’d sell.” So they’re not really looking to sell, unless some fool happens along who is willing to pay their “dream” price. Sometimes there are hotels, B&Bs and small businesses where the owner is tired of being an indentured servant, and would like to cash out, if they could get a price that really doesn’t make sense if a prospective buyer runs the numbers.

Uncle Sam’s Warning

Real estate is so different in Panama that Uncle Sam has issued a formal advisory to US citizens interested in purchasing property in Panama. This should not dissuade you, just encourage you to move slowly and with caution.

Purchasing Property, April 2005

INTRODUCTION AND SUMMARY. The following is general information on purchasing real estate in Panama. It is not to be construed as legal advice. The different categories of land make it imperative to engage professionals for more detailed information. Real estate laws on the mainland can be quite different than those on islands, coastal areas, and areas near national borders.

Generally, there are two very different ways to buy real estate: 1) the purchase of titled property, and 2) the purchase of rights of possession (derecho posesorio). Titled land, and the process of buying this, is similar in concept to that in the U.S., and land and deeds are duly recorded with the Public Registry (Registro Público). “Rights of possession” is an entirely different process, a kind of squatter’s or concession rights. For rights of possession on the mainland, it might be possible to convert this later to a titled property; on islands and coastal and border areas, it is much more difficult if not impossible. Many areas in and around Bocas del Toro, including beachfront and island properties, are government property, and cannot be owned, although there are very limited and complicated exceptions. One should not buy “non-adjudicable” lands (áreas inadjudicables) unless the purchase is from the Government of Panama. Ultimately, there is only one way to acquire property in Panama to the fullest extent of the law: titled land. Rights of possession is not titled land.

TITLED PROPERTIES: Panama has a reliable Public Registry system, and this office maintains a record of all titled properties throughout most of Panama. Information regarding titled properties is readily available through the Public Registry, and is a fairly routine process to undertake through due diligence on a lot or property (finca). Your attorney can issue you in writing an abstract title of the land, along with any and all liens, mortgages, covenants, encumbrances, maps, verification of tax payments and utility bills, special characteristics, ownership history, fence lines, encroachments, shared driveways, and registered surface area, and can verify that the person who is selling the property is the actual owner.

RIGHTS OF POSSESSION: Not all properties in Panama are of private domain and thus are not subject to Public Registry registration. Such properties are public property, and can rarely be owned or titled outright. In such cases, it might be possible to obtain “rights of possession,” a kind of squatter’s or concession rights, as an alternative to title, permitting one to acquire a right to possess based on the occupation and use of a certain area of land over time. (Think of trying to “buy” parts or all of the Grand Canyon, New York’s Central Park, or the Washington Mall. You obviously cannot. However, a U.S. rancher can buy grazing rights in a U.S. national park, a company can buy limited use of national lands for mining or drilling, and a company can gain a concession to build a restaurant within a national park. But none will ever hold title.) Much of the property in and around Bocas del Toro, beachfront properties, islands, and areas in rural, agricultural and special tourism zones, are government-owned. In some cases, titles are held by families from many generations back and obtaining rights of possession might be possible, but the buyer would still have to pay for the land when and if, he or she obtained the title. This is a risky method of acquiring real estate.

It is important that all properties undergo a title search before purchasing. There are potential conflicts in owning rights of possession. Properties can be subject to third-party and and/or conflicting claims of ownership, and the vagaries of Panamanian law and local politics. It might be possible that the original owner return to claim it, or the government could exercise its right to re-occupy it without compensation or warning. For titled property, no one can do this without following a condemnation process similar to that in the U.S., with the owner compensated for land and improvements. Rights of possession are handled and recorded by the Ministry of Agriculture’s Agrarian Reform Office, not the Public Registry.

Although Panama law allows nationals and foreigners to purchase titled property in many parts of Panama, it is important to note that Article 121 of the Panamanian tax code states that foreigners and Panama corporations with foreign ownership cannot purchase property located less than ten kilometers from borders, or on most islands. Although some have contested the constitutionality of this law, until this situation is resolved, buying such property remains a risk to foreign investors. Exercise caution of “Panamanian corporations” that appear to grant entitlement to such lands.

Another important difference between titled property and rights of possession is that the latter cannot be mortgaged. This makes sense: if you do not actually own the land (hold title), you cannot mortgage it. The buyer should ensure that the activity contemplated is allowed, that the construction is acceptable to the government, and that the award be extensive for a period of time suitable to the purchaser. The length of the transaction process for the possession rights transfer varies and can take months, depending on many factors, such as the date of recognition of these rights and the granting entity’s inspection, etc. Many land developers in these areas have already procured the rights of possession documents and transfer the ownership of them by means of the sale of a Panamanian corporation and its assets. Aside from the problems with this (stated above), be aware that corporations might have other businesses besides that related to the property, and there is no official registry of this.

LANDS IN NON-ADJUDICABLE AREAS (áreas inadjudicables or áreas insulares). These are lands that the government has set aside and are NOT subject to title or rights of possession.

CONTRACTS IN ENGLISH HOLD NO LEGAL WEIGHT IN PANAMA. All juridical processes in Panama are conducted in Spanish. For any real estate transaction in Panama, a contract written solely in English carries no legal weight, and is generally not recognized. All contracts for property must be in Spanish on a formal public deed, and signed before a public notary, in order to be legally enforceable and to be filed at the Public Registry.

GET PROFESSIONAL HELP. Buying real estate in a foreign country should not be guesswork. As when purchasing real estate in the U.S., common sense should be the guiding factor. Again, engaging a reputable attorney and licensed real estate broker is recommended. Even some Panama City-based real estate lawyers might not be fully familiar with such intricacies as land law in certain areas, e.g., Bocas del Toro.

Panama’s Bar Association and Supreme Court advise that the Supreme Court issues a “Certificate of Good Standing” to lawyers. The Court receives complaints about lawyers and decides whether to sanction them. This certification may be requested via fax or mail from the Panamanian Supreme Court from: Lic. Carlos Cuestas, Secretario General de la Corte Suprema de Justicia Organo Judicial, Calle Culebra, Edificio 236 and 237, Ancon, Panama, Republic of Panama. Tel: (507) 262-8358, Fax: (507) 262-2505. Note that such a certification is still no guarantee.

The Embassy also maintains a list of lawyers; write us at panama-acs@state.gov for the list. The Embassy assumes no responsibility for the professional ability or integrity of the persons or firms whose names appear on this list. They are, however, selected with care.

REAL ESTATE TRANSACTIONS IN PANAMA are usually done in two steps. The Promise to Purchase Agreement is a preliminary contract between the buyer and seller, and gives the buyer time to work out financing and due diligence before committing to buy. It also can be used to get the seller to meet certain commitments and conditions before the sale occurs, and list “contingencies” under which the buyer can be released from obligation to buy if questions are not resolved, or if hidden defects are later found. Only when the buyer is completely satisfied should the sale close. If the buyer is satisfied, a Purchase and Sale Agreement (or Contract) is made in the form of a public deed and registered at the Public Registry of Panama, at which time the buyer becomes the owner.

The safest way to pay is by an irrevocable letter of payment issued by a bank, contingent on receiving from the seller proper title to the property. The bank holding the funds issues the irrevocable letter of payment to the seller and pays it as soon as it is presented with the registered public deed transferring title to the buyer. The buyer often opens a bank account (or gets a mortgage) and then formally requests that the bank issue this letter, which is considered to be an appropriate form of payment. If the buyer does not obtain a mortgage, he pays the bank for this service.

Real estate agents normally get paid only when the sale closes. Contracts signed are legally binding documents, and you should ensure that you have read and understood them completely before signing. While a good real estate agent can help you through the steps of buying, he cannot provide you with legal advice; an attorney does that. Escrow and title insurance are not generally used or needed in Panama, as such functions are performed by the bank and Public Registry, as described.

COMMODITY SPECULATIONS: Commodity investments and speculations, such as for noni and teak require extreme caution. For these crops, proper growing climates and soil conditions are very specific. Teak is not native to Panama. Projections and assumptions about noni and teak involve highly uncertain factors such as availability, price, vagaries of season, changes in government, crop yields and quality. There are no guarantees.

The best two words of advice: “BE CAREFUL!” In Spanish, one word: “CUIDADO!” There are many honest sellers, brokers, and real estate sales people out there. There are honest developers and builders. But there are also sharks in these waters, so “Be careful!” Do your homework. Do your due diligence. Ask around. Don’t jump. There have been times in California where if you didn’t write an offer on the hood of your car and offer full price, and maybe even more, you didn’t stand a chance of getting your dream home. Generally it’s not that way in other countries. Properties in Panama tend to be on the market a while, even if they’re good properties and priced right. So take your time. Don’t come down for a week and plan to find your dream home. It may happen – it did for us! – but “Be careful!”

Note: There is a real estate company in Panama called “Panama MLS”. This is, however, not an MLS service as we know it in the US, but a real estate agent. Clever name though, since many Americans looking on the Internet for property in Panama, given their experience in the US would gravitate to a company named “Panama MLS”.

Excerpt from ESCAPE TO PARADISE - HOW WE DISCOVERED PANAMA & HOW TO FIND YOUR PARADISE. Copyright 2008 Richard Detrich. All rights reserved.

And, by the way, since we are building a new house on our coffee farm, the house in which we are now living - in Valle Escondido, overlooking the Valley, the stream, and the 9th hole of the golf course - is for sale!