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Purchasing Property in Nicaragua – The Process

This article was written previously but with so many new readers and with a few updates, I am republishing it.

Whisper to someone that you are thinking of buying property to anyone in Nicaragua and you will be besieged by dozens of people that know about the best deals. Even the guy selling cashews in the park will advise you. I can tell you dozens of stories of people that paid too much, were poorly advised, did not get a clean title, lost a lot of cash in the construction process, just had bad timing or never saw their home built. As in any transaction that involves much money, do your due diligence and be careful where you put your trust. Always check the references of who you are dealing with to minimize the problems.

Assuming this is your first purchase here, you will need a good realtor and a good lawyer. The realtor is to help you find the right property at the right price and the lawyer will ensure you have a clean title and hopefully, help you pay the correct taxes and fees in the purchase process. In Nicaragua a realtor is not required to have a license though the major realtor chains usually have some requirements of training to sell real estate. Dealing with a big name office does not guarantee an honest, knowledgeable realtor and a small local office may have excellent realtors. Ask for references and talk to local expats about their experiences. Find someone you like and trust then assume you need to double check on everything. If buying in a development, the developer-owner may act as the realtor.

The Multiple Listing Service (MLS) concept is just starting in Nicaragua but the progress is being hampered by lack of exclusive listings. Most people list their properties with every realtor in the area then list it themselves on Craig’s List, their own website, etc. This creates a lot of confusion since a realtor will not put as much effort in marketing a property when another realtor may steal the final sale, or worse, the seller sells the property directly to the buyer telling them they can then avoid the realtor’s commission. Yes, all that crazy stuff happens here.

Remember, if something does not exist, there is no guarantee it ever will. There are so many developments that still do not have any infrastructure such as water or electricity or that clubhouse. It is not always the case that the developer was dishonest, they may just not know what they were doing. In Nicaragua, many expats think they can start a restaurant, a hotel, sell real estate or build a development. During Nicaragua’s real estate boom, many people bought lots with no intention of ever building. With the real estate bust in 2006, then the 2008 global economic crises, many developers were dependent on the revenue from building homes which never happened. Whether it was dishonesty or incompetence you still lose your investment.

Finding a good lawyer is also no easy task. Find one with a lot of real estate experience and that many of the local expats will recommend. Yes, a lawyer with good connections will be able to get lower taxes and fees on your property. It is not a good sign if the lawyer is related to the seller. The number one concern of expats buying property is getting a clean title to their property. In any case, there may be title issues that come up during the search through the history of the property ownership. You may find there are some legal procedures that have to be completed before the title can be conveyed to you. For example, the owner of the property may have passed away requiring a death certificate to be created and the title lawfully conveyed to the rightful heir. This will delay the closing but it does not necessarily mean it is a dirty title. Things are loosey-goosey here. Lawyers have forgotten to register the property and realtors have forgotten to follow up.

Of a more serious nature is the discovery that there are title issues such as confusion on the identity of the true owners, property ownership by a large group of people, property lines not being clear and other issues that may not be easily or ever resolved. In these cases, the realtor or lawyer will advise against buying the property and return your deposit. Do not blame the realtor or the lawyer, they are only doing their jobs of protecting you.

Below are the usual steps in purchasing property in Nicaragua. Your experience may be somewhat or radically different.

1.      The realtor will help you find the right property for the right price at the right location. They will discuss your needs and arrange to show you properties that fit your criteria. They will advise you of any factors that may affect your choice of property. A realtor is the best source of available properties assuming they have a good website and a way of tracking properties.

2.      Eventually you select your desired property. The realtor will assist you in making an offer on your chosen property including sales terms. Seller will accept, decline or counter-offer. During this time, a cursory investigation of title is usually performed. Yes, the realtor may represent both the buyer and the seller and is quite common, though you can request someone else as an intermediary or just use a different lawyer if it makes you more comfortable.

3.      Once the offer is accepted by the seller the realtor will usually ask for a 10% deposit which is kept until the closing and it should not go to the seller. It is difficult to get money back from a seller. The sales contract (promesa de venta) is written then signed by seller and buyer which includes terms, sales price, estimated closing costs and identification of power of attorney for you if you cannot be in the country for the closing. Contract should explain that your deposit will be returned if any irregularities are found in the title search, seller changes the terms, etc. Unless you are a resident they may require a copy of your first two pages of your passport. If you simply change your mind about buying the property, at this point the deposit is usually forfeit. Regardless of what you hear, an English sales contract is binding in Nicaragua though most realtors and lawyers write them in Spanish to make them easier to defend in court.

4.      Document procurement.
All documents should identify the property by its legal description including the Finca, Tomo, Folio and Asiento identification numbers. From the seller the realtor requires: Copy of the deed (escritura) and site plan (plano). Unless the site plan is fairly recent it is a good idea to have a surveyor create or provide it. A Letter of No Objection (LNO) may be required if the property is near a lake, ocean or river. The LNO usually is completed after the closing since it may take months to complete.

5.      Document  processing with the assistance of a lawyer.
You can provide the lawyer or the realtor will suggest a lawyer but you have your choice. At this point a detailed title search is being performed, usually at least 34 years back. The property title is investigated to ensure the taxes and other obligations to the government are paid and up to date i.e. garbage pickup fees, cemetery fees (this research is called the solvencia). They will also ensure there are no liens, ownership issues nor encumbrances against the property (libertad de gravamen). All utilities must be paid up to date by the seller, surprisingly the utility companies will often expect the new owner to pay and sometimes does not pursue the seller. If there is a cuidador (caretaker) or other on-site employees, ensure all obligations to these employees are resolved by the seller. If you decide to keep the employees, it is better to have the previous owner terminate them then start new contracts else you are liable for their accumulated termination pay which could be six or more months of pay.

You can see that the realtor should be informing you of all these things. This is why you pay them a commission.

Power of Attorney

If you plan to be out of the country at time of closing, you can execute a power of attorney (POA). The cost of this is around $30-$50 and allows your chosen representative to perform the closing procedures for you. The POA is limited to buying this property. Give the POA only to a trusted friend since they are signing for you. Surprisingly, many people give the POA to the realtor which I find amazing.

These closing preparation procedures usually take 2-4 weeks depending on difficulty on obtaining documents, issues uncovered, lawyer availability, etc so expect at least a month from the offer to the closing.

Closing Costs

Closing costs including sales commission are often paid by the buyer but all things are negotiable. You will be provided a detailed list of closing costs to the best of the realtor’s and lawyer’s knowledge. Some of the fees are based not on the sales price but on a symbolic or cadastral value which may be determined after the closing during the property inspection registration process. Cadastral value is normally much lower than the sales price. Also, the magnitude of the sales price may change the percentages. For the lawyer, it is almost the same amount of work for a small sale as a large sale.

As stated before, all things are negotiable. Commission costs can be 6-7% of the sales price and 10% if the sales price is under a certain amount or for just land.

Normally closing costs are around 3 to 3.5% of the sale price but with transfer tax and commissions this may approach 10%.

1% to the lawyer is common but some lawyers charge 1 ½% and I have seen fees up to 10% on unsuspecting foreigners.

The lawyer’s fee usually includes all document processing and creation.

Title registration fees are usually around 1% of the cadastral value to a max of C$30,000.

The property gains or transfer tax (DGI or la renta) which is 1% of the total amount if the amount is up to $50K, 2% of the total amount if the amount is 50K to 100K, 3% of the total amount if the amount is over 100k and 4% of the total amount if the amount is over $200,000 of the cadastral value. My opinion is that this should be paid by the seller since it is an income tax but many realtors charge it to the buyer. Everything is negotiable.

At some point before the closing you must wire the remaining funds. This can be a frightening process since you have not closed yet. Most people time it to occur just before the closing to minimize the risk. There are very few mortgages here and they are expensive. There are few escrow services available. This is why you must have a realtor and lawyer you trust.

At the Closing

At the closing will be the seller, buyer’s attorney and buyer (seller and/or buyer may be represented by whomever holds the power of attorney). Since there is no MLS service and few exclusive listing contracts, there is usually only one realtor and one lawyer present at the closing. Again, a frightening realization for the newbies buying property.

You will sign the new deed (escritura) and provide the remaining purchase funds.

You are now the owner of the property and in full possession.

Ensure you have a copy of the unregistered deed (testimonio)) and the plot (plano).

Post Closing Processing

The attorney proceeds with the registration process i.e. new deed (escritura) is registered.

Fees are paid and the property is usually registered within 1 to 6 months.

If a letter of no objection is required, this may take 6 to 8 months.

When documents are completed, they will be given to the buyer.

Since the cadastral value of your property is unknown until the registration after the closing, the exact amount of your fees is unknown. A settling then occurs and the realtor or lawyer rebates any overpayment on the registration fees or charges you for the underpayment. Similarly for the seller, if they are paying the property transfer tax, the exact amount for the property transfer tax is determined and the difference is settled.

As with any property owner, you have rights and obligations. Remember that you are responsible for paying taxes, paying utilities, paying for employees and providing security for your property. You also have a responsibility to maintain your property in consideration of your neighbors. This is especially important to remember if you do not plan to live full-time in Nicaragua. I have many good stories where a foreigner buys a property then does not maintain it or even return to Nicaragua for years then are surprised to find the roof missing, electrical wiring removed or even squatters living in it.

Conclusion

Some of these procedures may seem loosey-goosey to people from North America or Europe. Just use your head, find people you can trust and buy your dream property. Remember, you do not get a registered title until sometime after the closing. 30 days after the closing, start bugging the realtor and/or lawyer to follow up though it may take several months.

Clouds on the Horizon

Partially due to the USA’s IRS (tax arm of the government) putting pressure on all banks, one problem is that some institutions want the sales documents to reflect the real sales price and not the cadastral value which determines your transfer tax and property taxes. Many of the towns here want to raise more tax revenue. Banks were being given a property sales document stating $10,000 but the seller was depositing $100,000. Hard to dispute the problem. Most people have no problem with all of the documents stating the true sales price but now the city inspectors want to use the sales price for the valuation which may raise your transfer tax and property taxes much higher. Most towns here charge .8 to 1.0% for the property tax.

For example, a typical home selling for $200,000 may have a cadastral value of $30,000 so the property taxes are $240 a year. If you used the new valuation and sell the home for $220,000 then property taxes would be $1,760 a year but even worse, the transfer tax would be $8,800. Think that would stop a few buyers? And remember, your property taxes here are not buying many services like you had back home. So yes, start using the real sales price but the government needs to drastically reduce the percentage for transfer tax and property taxes but then what do you do about all of the other homes – revalue them? It is a sticky mess not to be solved very soon. For USA property owners it is a real problem since they may have bought the property under the old rules i.e. your documents show you bought a property for $15,000 (when actually you paid $150,000) and now are selling it for $200,000. How do you convince the IRS of the real values for capital gains taxes?

When we first arrived in Nicaragua the normal practice was for the buyer to pay the realtor’s commission. Strange but that was the way it was. Some new buyers coming to Nicaragua are refusing and some are insisting that the seller pays it but then it means the seller paid it when they bought and now must pay it when they sell. Of course, that is like putting additional taxes on a corporation. It really does not affect them directly, they simply raise the price of their products to cover the cost. The same is happening here and many sellers are simplifying the process by simply stating they want to net a minimum amount from the sale and let the realtors work it all out. Make sure your sales contract lays out all of the terms and who pays what, especially the transfer tax which is becoming significant.

Note – I am not a realtor nor a lawyer and this is my understanding of the procedures after having been at many closings. Each realtor and lawyer handles things a bit differently.