How to Guide: Buying Real Estate in Panama

Alex's Note: This is not legal advice so DO NOT take this as such. Get a good attorney and get a full run down from your attorney on this process. This guide was not written by an attorney.

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How to Buy Real Estate in Panama

This free report is intended to help readers of www.panamacostarica.com handle their first purchase of land or other real estate in Panama safely and efficiently.
Anyone coming from anot her country to buy real estate in Panama is likely to encounter confusion over the different procedures and customs. It's no surprise; many locals are surprised or dismayed by some of the requirements to sell their land to you!

Once you find a property you are seriously interested in, you should ask the owner for the Plano de Catastro and the Escritura. Especially in the countryside, many property owners in Panama will be reluctant to show you these documents until they have established a sense of who you are. These documents are considered to be valuable and personal, not to be shown casually to just any passerby.

You need to note the owner(s) name on the Escritura, and the finca number and the information that goes with it, such as the numbers following the words Rollo, Tomo, Codigo de Ubicacion, Asiento, and anything else. Copy all these down carefully. Be particularly careful to note who the owners are. If there are several of them, you will need ALL to be represented in the contract. You will see the ID, or cedula number, of each - note all those precisely, as well. Note the size of the property. The escritura, or deed, should match the area shown on the Plano de Catastro exactly. Study the Plano to ascertain, if you can, that it matches the land you are seeing. If you cannot ascertain that, you'll need a topographer/surveyor to verify you aren't buying some other piece of land.

Before paying to have someone else check the basic information, go online at www.registro-publico.gob.pa and choose Consultas to look up the property by finca number. Often, several properties will have the same finca number and you will need the property size and location code (codigo de ubicacion) to match it to the one you are investigating. You may need to click on, and open up the window for each property showing that finca number until you hit the right one. Check the property size and the owner's name again. They should match. If not, your lawyer will need to check further. Often the owner's name has not been entered in the computerized system.

You will need a contract from a lawyer or other reliable source, called a Contrato de Promessa de Compraventa. And this is where it is not quite like home.

In most purchase situations in Panama, especially when you're buying land or a resale property, you will have to give the Seller a down payment, approximately 12%. Your desire to put the down payment into escrow will nearly always mean the deal is off. Escrow doesn't work in Panama for down payments. It is not simply that people don't know about it, or mistrust it. It's a deal killer for a very simple reason: the Seller needs the down payment from you to pay his capital gains taxes. These taxes must be paid before -- BEFORE -- he can sell to you.


Let's repeat that, because it defies logic for most foreigners. The Seller must pay his taxes BEFORE he can sell to you. Not just his transfer tax of 2%, but also his capital gains tax of 10% on the profit he is realizing. In most parts of the world, taxes come AFTER the taxable event. Sometimes, as with sales tax, they come WITH the taxable event. Not in Panama real estate, however! The government realized too many people weren't paying their taxes after selling a piece of real estate, so they cleverly switched it. Now the tax payment PRECEDES the taxable event, the sale to you. It's brilliant on their part, but creates a hurdle for the buyer and seller. The Seller won't risk his own cash to pay the taxes -- it would be nice, but it just isn't happening! -- and either you take a leap of faith and ante up a down payment that he should hand over to the tax authority, or you can buy property in a different country.

I will defer all questions like "What if he waltzes off with my down payment!?" to your legal counsel. It hasn't happened to us yet, and there are ways to mitigate this risk, but that gets more involved and is better discussed directly with people who have experience buying land in Panama. Yes, it's a valid concern and either you take on the risk, safeguarded by a contract you hope has some teeth, or you skip buying in Panama.

Generally, I protect myself by getting into a detailed discussion with the Seller about exactly when and how he will pay his taxes using my money. It's good to walk them verbally through the steps involved, such as going to the Ministerio de Finanza y Economia and filling out the forms. It may be smart to suggest they bring a relative to help -- older farmers often have an adult relative in Panama City who can navigate the bureaucracy better. If you're buying from a slick city lawyer, obviously he can handle it, but have the discussion anyhow. If the Seller happens to be that bad egg who wants to abscond with your 12%, maybe you'll pick up on subtle signals. Unless there is a very large mortgage on the property, or some grave problem they're afraid you'll discover, sellers have 88% motivation to stick around and finish the sale correctly. By the way, I always tell the Seller that I am postdating the check 10 days to give me time for surveys and inspection. That comes before I hand over the check, of course. Their reaction tells a lot. If they get indignant and argue that they have other sellers waiting to snap it up, so they can't give you ten days, get up and scoot. They're afraid of what your investigation will find. Usually I phone them a day before the check becomes valid, remind them of it, and reiterate that once they cash it, we are "tied together, locked together." Thus far, it's worked. Panamanians are, in the great majority, honest and upstanding. That helps!

There are two opposing viewpoints about when to hand over the financial instrument that entitles the Seller to the rest of his money for the property. Some say deliver it with the down payment, others prefer to wait until the closing, or traspaso. Let's explain how the other 88% of the purchase is paid: it is not in cash. Some condo developers may require cash (which means a cashier's check) at the traspaso, but every Seller in Panama SHOULD accept a Carta de Promessa de Pago Irrevocable. The key word there is Irrevocable. It is a payment you cannot revoke. The Seller cannot cash it, however, until he delivers to your bank (which freezes your 88% funds for this purpose) a new deed that establishes you have full title to the property. The deed comes from the Registro Publico. The bank is required to check it carefully. Presumably, if they make a mistake and issue payment on the Irrevocable Payment on a fake deed, they are liable to you.

This is actually a very workable system. It does a pretty good job of protecting buyers - certainly it's better than Costa Rica's system. Escrow in Panama tends to be costlier than Costa Rica, and certainly more expensive for you the Buyer than obtaining a Pago Irrevocable.

Here's how the Pago Irrevocable works. If you are buying a property for $100,00 then you make a down payment of, say, $12,000 and deposit $88,000 into a Panamanian bank account in your name. By the way, establishing that account can take several months, so you cleverly did start that process the very moment you decided to buy property in Panama. As an alternative, if you have no bank account, a lawyer can prepare the Pago but will usually bill you 2% of the amount. A bank will charge you $50 to $75 rather than $2,000, so having your own account is very much worth the trouble and hassle.

You will sign and give to the bank a form called a Prenda, to freeze your funds. The branch manager will usually supply you with the Prenda form to fill out. They can also help you fill out a Solicitud, or application, for the Pago Irrevocable (Irrevocable Payment). It should spell out that the property must be in your name, or the name of your corporation, for the Seller to cash it. Basically the Pago Irrevocable is a letter of credit that is meant to be cashed. This Pago is completely useless to the Seller until you own the property.

Some buyers like to give the Pago Irrevocable to the Seller at the same time as the down payment, because holding a pago for $88,000 is great motivation to pay those taxes with your down payment and do everything quickly to get the property into your name.

One tip: if at all possible, leave the bank two weeks to prepare the Pago Irrevocable. Go get it in your hands and check it the day before the traspaso/closing. Often there are mistakes that only you will spot; wrong amount, a missing seller, wrong property number. Check it at the bank before you leave; if it's wrong, have them fix it right then and there. Remember - your purchase contract must be worded so that you have enough time to have the bank issue the Pago Irrevocable, to avoid any danger of defaulting and losing your down payment.

It will be some time, probably years, before most Panamanian sellers can be persuaded to let you put the down payment in escrow and risk their own cash on paying the taxes. In the current hot market, it's a waste of your time to argue with them about this. Even if they accept, their shocked friends and relatives will probably talk them out of following through with such craziness. And in most cases, country-side sellers don't have any cash to pay the taxes, so it's not a possibility.

So open a bank account ASAP; it can be in your own name even if a corporation will take ownership of the property. Have a look at your lawyer's contract ahead of time, so it's not a total surprise and you can ask questions and get answers - lawyers generally will not be on your timetable, it's not an instant process like in the US. In another future article, we'll look at what should be in your contract.




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