This very good article from wealthmanagement.com succinctly explains what to expect when you proceed with a Panama property purchase. It refers to six hazards, but really outlines six characteristics of the typical transaction that are very useful to know.
We are impressed by and would agree with most of the article with some caveats.
The most important one is that while it is customary to provide a deposit directly to the seller at the time of signing the initial promise to purchase agreement (usually 10% of the purchase price), it is often not necessary to take that risk; especially when dealing with an individual owner.
There are countless successful transactions in Panama wherein the seller does directly receives the deposit. However, when giving a deposit directly to the seller at signing, there are some risks which include:
- The Sale Does Not Proceed and The Seller Already Spent the Deposit: If the seller does not choose to or is unable to proceed with the transaction they may have already spent the deposit and if they simply don’t have any money are unable to return it. This could be an honest case of the seller just not having the money any more without an intention to defraud.
- Seller Keeps Deposit Fraudulently: In the unlikely event the seller is dishonest, they may decide to keep the deposit, pocket it and either sell the property to another party or simply keep the property despite the risk of legal action against them.
- Dispute Over Terms: If there is a dispute over the terms of the agreement, the seller has added leverage by already having the deposit in hand.
- Lien Placed Against Property Before Transfer: It is possible that a lien is placed against a property prior to the submission of the transfer documents at the public registry. We have seen this happen before. It can occur without any prior knowledge of the seller.
There are several effective ways to handle transactions in Panama with the equivalent of an escrow mechanism that do not require the seller to directly receive the deposit at signing. We are well versed in these. Casa Solution listing agreements call for such protection for the buyer. Therefore we know in advance if there will be any opposition to an escrow-type protection for the buyer and can advise buyers accordingly. As a result, the great majority of Casa Solution brokered transactions include this buyer protection escrow feature.
When might it be appropriate to give the deposit to the seller at signing?
There are cases where it can be very appropriate. There are sellers who, either as a matter of custom or policy, will not do a transaction otherwise. Also, developers who are used to receiving deposits direct may be inflexible on this issue. If you are asking for special terms or conditions, it can give a seller confidence to proceed if they have the deposit in hand. And, if you would like to request an extension or other modification to an already existing agreement, the release of some or all of the deposit funds prior to transfer can be appropriate to smooth the way. It can serve your purposes to go ahead with a deposit direct to the Seller, but you should be aware of the risks, benefits, and alternatives before proceeding.
Another important aspect to be aware of regarding the wealthmanagement.com article is that it mostly deals with property transfers. The sale of corporate shares and control over a corporation that owns a property is a common way that real estate transactions are done in Panama. This is not directly addressed.
There are a few other clarifications we could point out, but the important message of this quality article is that transactions are different in Panama than other countries such as the United States. It is a good idea to become familiar with the differences as well as to work with trustworthy, knowledgeable and competent professionals who can acclimate you to the process and protect your interests along the way.
Panama Offers Real Estate Investment Opportunities
Watch out for six hazards, Oct 30, 2014 by David Reid
For individuals, companies and institutions interested in investing in Latin America, Panama has become a promising gateway. It welcomes foreign investment and boasts a dynamic economy. For a U.S.-based investor, Panama’s use of the U.S. dollar offers the added benefit of removing currency risk from an investment. Nevertheless, a number of potential pitfalls can complicate a transaction in Panama for an investor not accustomed to doing business there. Here are some of the hazards investors may face in real estate, timberland or agricultural land transactions in Panama.
Doing Business Abroad
Transactions in Panama, like other foreign investments, may take longer and be more costly than a U.S. investor expects. As in other cross-border transactions, an investor should carefully review tax implications in Panama and in the United States. Perhaps most critically, an investor should identify competent and trustworthy local consultants and counsel. Good local team members will save time, money and heartburn by anticipating problems commonly faced by foreigners. Even so, both the U.S. investor and the local advisor may have unstated assumptions and expectations based on different customs. Experienced U.S. counsel accustomed to cross-border transactions in Panama can bridge the gap between the U.S. and foreign legal and business principles by anticipating misunderstandings.
Real estate purchase agreements in Panama differ from their U.S. counterparts in several important ways. The agreement must take the format, or at least incorporate the elements, of the customary Promise of Sale and Purchase Agreement (PSPA). The PSPA often contains fewer contingencies and covenants than a typical U.S. purchase agreement and is registered in the public records as a lien against the real property pending the sale. Most U.S. purchasers will be uncomfortable with these conventions. As a compromise, a more expansive unregistered purchase agreement can incorporate a PSPA by reference, thus allowing only the more limited instrument to be registered.
Earnest Money and Prepayment of Taxes
Real estate transactions in Panama often include an earnest money deposit of 10 percent of the purchase price. Unlike in the United States, the purchaser customarily delivers the funds to the seller upon execution of the purchase agreement. The seller must return the deposit to the purchaser if the closing doesn’t occur for reasons other than a default by the purchaser. In practice, the seller doesn’t hold these funds in a segregated account. Often, the seller uses the deposit to pay its transfer taxes and capital gains taxes, which are due before the closing. Without prepayment of these taxes, the government won’t issue a tax clearance certificate, one of the seller’s required closing deliveries.
The delivery of earnest money to the seller and the prepayment of taxes as a condition to closing may be unsettling for a U.S. investor accustomed to third-party escrow agents and payment of taxes at or after closing, and with good reason. The U.S. investor may not know the creditworthiness of the seller before entering the transaction, and the investor may face difficulty recovering its funds if closing fails to occur after the seller has prepaid the taxes. Even a sophisticated seller in Panama who has experience using escrow agents may not have sufficient cash to prepay transfer and capital gains taxes without access to at least a portion of the earnest money deposit. U.S. investors should be prepared for this request from a seller in Panama.
Purchase Price Mechanics
At closing, the earnest money (if not already with the seller) is released to the seller, and the parties pay their respective expenses. However, a purchaser (or escrow agent) typically doesn’t release the balance of the purchase price to a seller until receipt of the duly registered deed, which may occur up to several weeks after closing. As title insurance is less common in Panama than in the United States, parties rely on registered title, which must be approved by a government notary, to confirm ownership of real property. Until a purchaser receives the registered deed, it can’t claim ownership.
Document execution and closing formalities also differ in Panama. Unlike in the United States, where escrow closings and attachment of separate signature pages have become routine, parties customarily sign the same physical documents and initial each page (either in each other’s presence or by signing and delivering them serially). For documents that will be publicly registered, such as deeds (which the grantor and grantee sign), the party executing the document must speak Spanish or must have a certified translator present when signing. As execution of registered documents must take place before a government notary, principals of foreign investors must give a power of attorney to someone local if they can’t sign the instruments personally in Panama.
For U.S. investors, title insurance has become a risk management tool used in nearly every transaction. Title insurance in Panama is less common and significantly more expensive. Moreover, the documentary requirements of title insurers may exceed what attorneys in Panama typically receive from registrars’ offices. Obtaining all required documents and opinions of local counsel may result in delays unless sufficient time is built into the due diligence process. In contrast to the United States, where a marked title commitment binds the title insurer at closing, a marked commitment in Panama doesn’t insure good title until the purchaser receives the duly registered deed days or weeks after closing. This risk is partially offset because the purchaser retains the balance of the purchase price until receipt of the registered deed.