Purchasing Real Estate in Puerto Rico
By Frank Lopez, Esq. – Real Estate Broker Lic. 9026 and Attorney/Notary Lic. 16724
The process for purchasing real estate in Puerto Rico holds as many similarities as it does differences from what would be in the mainland. It is understandable to feel a bit guarded when dealing with this type of transaction in a new jurisdiction or country, even though we are part of the United States. We are bound by an old Spanish civil law system which is a remnant of when Puerto Rico was under Spain’s' flag. Our legal system is civil law, based on a civil code which was written in 1931, as opposed to Common Law which prevails in the mainland. Our civil code encompasses the fields of contract, family, real property, and estate law. The subjects of mortgage and notary law are specially enacted laws unto themselves. In any particular purchase transaction you could see a combination of all these fields, depending on the particularities of the property being transacted, and the parties selling and purchasing said property.
The Property Registry and Preparing for a Transfer of Ownership
The recordation of title is performed at a regional registry, under a new electronic platform called Karibe. This process would be somewhat analogous to recording a title in City Hall or the County Clerk office in most States. This system has been digitalized recently but there are still many provisions that are archaic yet legally prevailing, and there is still considerable human intervention in the process. Once a property is initially registered in the property registry, any change of ownership is then recorded on marginal notes. These books or records have a legal description of the property as well as any easements that affect the property such as power lines crossing over it, public water lines going underneath, etc. They will also show if there are liens on the property, such as IRS liens, or a legal judgement against the property owner. Most importantly, it will let you know if you are buying from an actual property owner or if the property is still in the name of a deceased party in case of inheritance. The same would apply for when sellers were married upon the purchase of the property being transacted, but have since divorced. It is always recommended to perform a title search prior to closing a purchase. It is also highly recommended when purchasing a property directly from a seller in absence of the intervention of a licensed real estate broker, especially if seller requires an earnest money deposit and said monies are not deposited in an escrow account. This is one of the major advantages of transacting a real estate transaction through a licensed real estate broker.
After agreeing to purchase a particular property by signing what is locally known as an “Option to Purchase” agreement, but could be identified under several other titles with the same content or legal effect, a title search should be ordered. The contract that our office typically prepares will state that the sale is subject to clean and transmissible title. Should there be a problem with the title, it may be able to be resolved prior to closing. If the problem cannot be resolved or if it just simply takes too long to resolve, then the buyer will have the option of withdrawing from the contract without any penalty whatsoever.
An inquiry of the property tax status will also be conducted prior to closing. If there are back taxes outstanding, that amount will be withheld from seller’s proceeds and paid directly to the municipal property tax collector. The buyer is not held responsible for any back taxes that may be owed and this stipulation should be on the purchase deed signed at closing.
Title insurance may be purchased as a discretionary option when purchasing on a cash basis. If a purchase involves financing, the bank automatically will require it and issue its own policy. The buyer may shop elsewhere for his own title insurance policy but should be prepared to provide a copy of the prepaid policy to the lender prior to closing.
The Closing Process
Once all due diligence has been done by the closing notary, we move to closing. It is important to know that in Puerto Rico, a notary is an attorney who specializes in contract, mortgage, real property and estate law. To receive the title of notary, an additional license is required. This is not the same as a notary public in the mainland. The closing notary is typically chosen by the seller. However, this person represents the state of Puerto Rico, and does not represent either the buyer or seller.
All legal documents which convey title from one party to another are done by way of a public instrument or deed. This document is signed on the same calendar day before an authorized notary and within the jurisdiction of Puerto Rico. If it is not possible for all parties to be present at the closing, a power of attorney can be assigned. This is a legal process that must be started well before the date of the closing.
The buyer has the option of hiring a personal attorney for document review purposes. Should you decide to hire an outside attorney, you should make sure that the attorney you hire has experience and knowledge in these matters.
Information Included in an Option to Purchase Agreement (or Buy / Sell Contract)
The average Option to Purchase contract will contain the following information:
1) Names of seller and buyer, marital status and place of residence as well as the method of identification used for contract purposes (typically a driver’s license or passport).
2) Description of the property, the legal description of the property as shown on the deed, and a list of inventory included in the sale, such as furnishings or appliances.
3) Property tax ID number, also known as the catastro number.
4) The agreed upon sales price.
5) The amount of the earnest deposit. This amount will go into the listing broker’s escrow account. Typically this amount will be between 3%-5% of the sales price, and will be applied to the sales price at the closing. The listing broker’s escrow account is a government registered non-interest bearing account. The earnest money will remain in the escrow account until the date of the closing.
6) Term to close. This will typically be anywhere between 30-60 days in the case of a financed sale. Cash sales have the capability of closing much more quickly, if agreed upon by the seller and buyer.
Note: As of this date (May of 2021), financed sales are taking an average of 45-120 days to close. This is due to the Covid-19 pandemic as well as a surge in home sales and refinancing due to the current low interest rates.
7) Any contingencies that are agreed upon. A contingency is a clause which allows the contract to be terminated without penalty. An example of some typical contingencies include: subject to clean and transmissible title, property appraisal price, clean survey, home inspection, etc.
8) Distribution of closing costs.
Typically the buyer pays for the title search and tax certifications (a statement to show there are no back taxes outstanding). The buyer pays for all expenses related to the financing process, including loan origination and discount fees, credit report, survey and appraisal. There will also be some incidental stamps on the purchase deed that will be of minimal cost.
The sellers normally pay the expenses for the notary fees related to the preparation of the purchase deed and some government stamps which are calculated on the basis of the amount of the transaction. All expenses for the cancellation of any existing liens or mortgages, are to the seller, unless negotiated otherwise. Typically the notary fee will be .50% to 1.0% of the sales price, or .50 x new mortgage constituted by buyer or the cancellation of the existing mortgage (seller). The seller is also responsible for the broker’s commission in most cases.
Once the closing has concluded, you should make sure to receive from the lender:
- Copy of your appraisal
- Copy of your title search
- Copy of your land survey, in the case of a home sale
- Copy of your property tax certification (known as CRIM certification), with zero balance. Should the statement show a pending balance, make sure the arrears have been withheld from the seller’s proceeds and are shown on the Closing Disclosure. You my also request a copy of the check to the CRIM the lender prepares at closing
- Copy of the Home Owners certification with zero balance, or evidence of withholding as with the property taxes
- Copy of the purchase deed signed at closing, which you will need to switch your utility services in your name
- Copy of utility bills with account numbers
The author of this article is an attorney and notary and practices mostly real estate law. He has been a licensed real estate broker for 21 years with F. L. Realty, and previously was a loan originator with Banco Popular for 2 years and a mortgage broker for 5 years.