I’ve been a real estate investor for more than 20 years and have bought and sold hundreds of properties so I know real estate. But in Panama the whole process of buying and selling are completely different.
You should know that only a Panamanian can be a licensed real estate agent or broker. Foreigners can sell real estate but are considered a “consultant” or associate. A foreigner cannot prepare any contracts or other paperwork for the purchase or sale of real estate. A foreigner cannot be a “real estate agent”.
Any foreigner who is working in Panama or selling real estate is required to have a work permit. If you’re working with an expat (foreigner) to buy or sell real estate, you should ask to see their work permit to verify that they are working legally. An owner can sell their own real estate without having a work permit… unless they have made a business out of buying and selling real estate then they need a work permit.
If a foreigner is advertising that they have a “real estate agency” in Panama, it’s an illegal operation. Chances are they do not have a work permit either. It is better to work with a company and sales people are work legally in Panama and avoid those who are not.
Neither the Panamanians nor the foreigners who sell real estate or help you buy real estate are obligated to a fiduciary responsibility. A fiduciary responsibility means that they will put your interest above their own. It’s not required in Panama though some honest real estate agents/consultants do put your interest first and foremost. Others will say and do anything to get the sale and their commission.
Some agents, but certainly not all, will put their commission above your best interest. (see the examples below) That’s why it is important to always have your OWN attorney do a title search and create the purchase contract. Your attorney can also give you advice about what is needed to successfully buy real estate in Panama. Unfortunately, many real estate sales people will not tell you that:
♦ You should always get the property inspected
♦ You should get the septic and water systems inspected
♦ You should verify that there is a Certificate of Occupancy filed
♦ You should verify that all taxes have been paid (even if in a corporation)
♦ Be aware of the pros, cons and dangers of Right of Possession property
♦ 3% capital gains tax (on full sales price) even if a corporation
♦ 2% transfer tax (on full sales price) even if a corporation
♦ Review the survey to verify what you are buying or get a new one
♦ If there is a tax exemption, it needs to be transferred to you
♦ The best way to take title for your situation
Your attorney will make sure that your interest is protected before any contracts are signed, money changes hands or title is transferred. Most likely, all contracts and other documents will be in Spanish. Unless you are fluent in Spanish it is especially important to get YOUR attorney to create, or at least review, all documents. Do not trust what someone other than your attorney says the documents say. You can request that the contract be in Spanish and English.
Closings are handled in a completely different way in Panama. There are no title companies or escrow offices. It is customary to give the seller 3-5% down when the contract is signed (it’s not held in escrow) so it is imperative that your attorney is involved before any money changes hands. Your attorney should not be the same attorney as the seller’s attorney or the real estate sales person’s attorney. You need to have an attorney who represents you and your interest. Your attorney will prepare the closing documents, then you and the seller will go to a notary to sign everything. Your attorney will record the documents once everything is notarized. There are slight variations for right of possession properties.
Titled Versus Right of Possession Property
Not all property in Panama is titled. If you are considering buying a property, you should ask the seller or the real estate sales person for the FiNCA (farm) number. With the Finca number, your attorney can do a title search to verify that the person selling you the property is really the owner(s), can determine if there is a mortgage, the balance of the mortgage, if the payments are current, and if all taxes have been paid.
If the seller cannot supply you with a Finca number it is probably a “right of possession” property, meaning there is no title. These properties are usually priced much less than titled property. Because it is not titled, you are taking the risks that someone could come along later claiming that the property has been in their family for years. At that point, you lose your home and all the money you invested. It rarely happens but it does happen.
Right of possession property can be titled but the process takes about 5 years about costs about $6,000 to $100,000. I know some people who have been trying to get their property titled for 10 years with no success. I also know people who lost $10,000s of $100,000s of dollars buying right of possession property. And I know people who have purchased right of possession property with no problems. If you do buy right of possession property, you still need to get your attorney to review all the documents that the seller has to claim their ownership of the property. Get your attorney to review the survey to verify what you are buying. Buyer beware of right of possession property.
Not all right of possession property can be built on. If you plan to build, verify that you can get a building permit before you give anyone any money. If there is a current building on the property, verify that it is legal and can stay.
If you buy titled property, you can avoid any right of possession problems because there is a clear and recorded chain of title.
Tax Exoneration – No Property Taxes
In 2008 the government stimulated the real estate industry by promising a 20-year tax exoneration for properties which were built prior to January 1, 2012. This tax exoneration, which only applies to titled property, can be transferred from one owner to the next. But you should be aware that the tax exoneration only applies to the improvements or construction. You will still need to pay taxes on the land.
The tax exoneration rules changed in 2012. You still get a break on property taxes for houses or condos built after 2012 but not a 20 year tax exemption. Depending on the price, the tax exoneration could be for 15 years to as little as 5 years. In 2018, the property tax code changed again. Properties purchased for less than $120,000 will never have property taxes. Properties purchased between $120,000 to $750,000 will have a property tax of .50 of the value.
Then in 2018, the property tax laws changed again. If you purchase a titled property for $120,000 or less, you will NEVER have property taxes. Properties valued at $120,000 to $750,000 only have a 0.50% property tax but that is only after the 20 year tax exoneration if it applies.
Right of possession properties currently pay zero property taxes. That’s a plus. But the government is talking about requiring all right of possession property owners to title their property which could cost $6,000 to $100,000 depending on the size of the property.
How To Take Title
In Panama, it is not customary to take title to a property in your own name. Instead, you would take title in the name of a corporation or a foundation. There are several reasons this is done including, hiding who the shareholders are for asset protection but also for estate planning. Some agents will tell you that you do not have to pay capital gains taxes if you just buy the shares of the corporation instead of the real estate. This is not accurate. If the seller does not pay the capital gains taxes when the property is sold, you could get stuck with the bill later.
There are pros and cons to taking title in a corporation. The biggest “pros” are asset protection and estate planning. You could avoid probate too. The biggest “cons” are the upfront cost in setting up a corporation which can be $1,000 to $1500 depending on which attorney you are working with. But there is also a $350 to $450 annual renewal fee to keep the corporation alive. Plus all corporations are required to file a tax return in Panama which can cost $250 each. If you’re a US citizen, you will also have to report the “offshore corporation” to the IRS. If you take title in your own name, you can avoid these additional costs.
When you set up your corporation, do not let your attorney be the President or any other officer of the corporation. They will charge extra fees each year to do this. I know one person who’s attorney, acting as President of the corporation, put several properties that he did not own up as collateral for a $3,000,000 loan. This was only discovered when the owner was selling the property and the mortgage popped up. The person who actually owned the properties did not authorize the attorney do use the properties as collateral to get a multi-million dollar loan. Yes, there are unscrupulous lawyers in Panama, and every country, too.
Easy to Buy, Not So Easy To Sell
If a property is priced right it will usually sell within 30-60 days. But because there is no way to know what the right sales price is, most properties are not priced right. You cannot go by what other people are asking for their property. Generally houses priced under $150,000 sell faster. Anything priced over $500,000 could take two or three years to sell. Some houses have been on the market and priced too high for more than 5 years – yet the sellers refuse to lower their price. It’s crazy!
Some sellers try to justify their sales price based on replacement cost but that is not an accurate way to price properties in Panama because building costs vary considerably.
What If You Die
An important thing to take in to consideration when buying properties in Panama is what happens if you die. Your Panama Will can spell out who will get the property. (Yes, you need a Will in Panama too) If your heirs do not live in Panama it will be a major hassle for them to liquidate your estate in Panama. Your Will should make recommendations on who to use to sell the property otherwise your heirs could get taken advantage of by unscrupulous real estate agents.
Depending on our age, it may make more sense to just rent the whole time you live in Panama.
Good Reasons to Buy
If you are in good health and plan to live in Panama for more than five years, it may make more sense to buy a house if you can pay cash. Then you won’t need to worry about your rent going up.
If you find your dream home and it is priced well below market, it may make more sense to buy instead of renting.
You may want to buy rental properties. There is always a need for more rentals. But you should understand that rents are extremely low in Panama compared to North America or Europe. A typical house worth $125,000 in Panama will only rent for $700 a month – furnished and all bills paid. So your ROI may not be as good as you could get with other investments. You will need to buy way below market for this to make sense. Good property managers are hard to find so it is best to only buy rentals if you plan to live in Panama full time.
If you’d like to build a green house so you can grow your own vegetables, it may be necessary to buy.
Some towns in Panama have more “upside potential” than others. These towns are usually more run down and have fewer expats so they are priced lower than other areas. Their is a chance — a risky chance – that the town will improve and more expats will move in which could – could – cause the property prices to go up. It certainly won’t happen fast though. You should plan on at least five to ten years for prices to go up. Keep in mind that if you need to sell quickly, you may not be able to sell for what you paid for the property. It takes much longer to sell in these type areas. You could lose money speculating on an upside potential.
Some other things you should take in to consideration before buying in Panama:
You will need to determine where the closest grocery store is located and if they have the items you need.
If you travel a lot, you’ll want to be close to an airport.
You may not be able to get fast internet or any internet or cable tv service in some areas.
You’re not just buying a house, you’re buying a neighborhood so it’s important that the surrounding houses are of equal or greater value to yours or you will have a very hard time selling later.
Because there is not a good MLS system in Panama, it is very difficult to determine value. You should not rely on what the real estate sales person or the seller tells you: instead, you should do your own due diligence.
I highly recommend that you rent for at least 6 to 12 months before you even think about buying anything in Panama. In that time, you can be sure you like the area. You will have time to keep track of the sales price of homes in the area so you will know the “right” price to pay when you do decide to buy. During the 6-12 months that you rent, you will get to know a lot of people and get referrals for good and honest real estate agents and consultants. You’ll also likely hear about a few sales people to stay away from. You may hear about a hot deal before it is listed with a real estate agent.
Speaking of listings… many properties you see for sale do not have an exclusive listing with one agent or company. Instead, the seller has told all the real estate sales people in town that they will pay a commission to whoever brings a qualified buyer. With this arrangement, you are likely to see the same property at many different prices on many different real estate websites.
If you are from Canada, do not assume you can trust real estate sales people from Canada. If you are from the USA, do not assume you can trust real estate sales people from the US. Ditto from Europe, etc.
Panamanians are excellent real estate agents! There are a lot of really good expat real estate sales people.
If a real estate sales person goes to church, claims to be a Christian, frequents the Panama forums or Panama Facebook groups, it is NOT a sign that they are trustworthy… the could be just trolling for the next sale/commission.
Getting a mortgage is more difficult in Panama but it can be done. You’ll need at least 20-30% down. And you’ll be required to get a life insurance policy for the amount of the loan and name the bank as the beneficiary so they get their money one way or the other. Most loans will require payment in full by the time you turn 70 years old. Some builders offer short term (5 year) seller financing.
There are a lot of really great real estate agents and sales people in Panama. You’ll meet some of them during a Panama Relocation Tour. But there are also some unscrupulous real estate sales people in Panama too.
Here are a few examples of unscrupulous expat (foreigner) real estate sales person activities:
Case #1: David (not his real name) was caught selling the same property to three different people and collecting a non-refundable deposit from each. He also managed properties and was caught telling the 0ut-of-town owners that the tenant did not pay but actually put the rent in his pocket.
Case #2: An auction company signed a contract to sell a large property as an absolute auction which means the property would be sold to the highest bidder regardless of price. But the auction failed to do much marketing and had no directional signs to even find the property. They brought in their own buyers who got a $2,000,000 property for $750,000.
Case #3: A couple came on my Panama Relocation Tour. The husband was in his 80s and had to use oxygen. They decided to move to Panama and despite my warnings to rent for at least 6-12 months (or forever), they got hooked up with an expat who convinced them that they should buy instead. The property was way off the beaten path and not near a hospital. The expat sales person convinced the buyers that the house was priced $200,000 below market even though it was not. She told the buyers that the sellers were motivated and the house only needed cosmetic repairs. Because the buyers were working with an expat, they thought they could trust her. The expat sales person did not recommend a property inspection or any other due diligence. She just wanted the sale to happen as fast as possible so she could get her $15,000 commission.
The sales person should have said, because of your health conditions, it would be better to buy a property closer to a hospital or at least closer to fast ambulance service. But no…. this sales person was only looking out for her own interest and commission.
After the sale, the buyers found out there was severe drainage problems and a leaking roof in addition to many other problems. The house needs extensive repairs, not cosmetic repairs.
No one should convince an 80 year old person who needs to use oxygen to buy a house out in the middle of no place. It’s just wrong.
Sadly, a few weeks after the buyers moved in to the house the husband had a medical emergency. It took a long time to get him to a hospital and he died.
This could have all been avoided if the expat real estate sales person were more concerned with the buyer’s best interest instead of her own.
It may sound like the wild wild west when it comes to buying real estate in Panama. It is certainly different. The unscrupulous problems mentioned could happen anywhere!
Don’t leave your brains at the border!
When you see that gorgeous ocean or mountain view and a house priced much less than you’d pay where you live now, don’t get so excited about the opportunity that you forgot to do the normal due diligence before buying real estate. Always get the property inspected. Never sign any documents or give anyone any money until your attorney has had a chance to review everything.
One other word of caution – don’t buy real estate then leave town trusting someone else to get repairs done or to build your house. You should be present while a house is being built or when repairs are being done. It is especially important to be “at” the property if it is right of possession. If someone else moves in while you are gone, you could have a hard time getting them out because the right to the property is who is in possession.
NOTE: Panama Relocation Tours does not sell real estate. During a tour we will show you several rental properties just so you can get a general idea of what you get for your money in different areas and different price points.