How not to get screwed in Panama

So you have just spent two grueling weeks waging war in the streets of Panama, dealing with realtors that don’t show up on time and home owners that answer the door in their pajamas. You are on the home stretch, and have finally decided on your “short list” of Panama properties: you’re ready to buy. 

This report is designed to be a bit of a primer for someone that has never purchased real estate in Panama. You will find that many of our laws, customs, and things to think about are quite similar to what you are used to at home, but there are also a number of distinctly Panamanian laws and nuances that you need to be prepared for.

Remember that the Panamanian Real Estate Market is still relatively unregulated, and many agents do not know the laws and protocol set forth by governing bodies such as ACOBIR and the Ministerio de Vivienda . This guide is an accumulation of my experience helping clients to buy and sell real estate here in Panama, and I am providing it to the community as a resource during a time of financial crisis so that any decisions made with regard to Panama real estate are sound ones.

The Offer
How do you know what a fair price is when there is no such thing as an MLS? Well, although Panama does not have a formal MLS, there are a number of classified advertising sources that have reasonably up-to-date pricing information. While it may be very time consuming, it is possible to run searches by neighborhood and criteria, but pay careful attention to fields such as “last updated “, because you may be looking at a terribly outdated listing that has no relevance whatsoever. You should be suspicious of project delivery dates (sometimes not even listed) as well as potentially deceiving pictures.
The other main challenge is that there is no true, comprehensive sales history that is maintained in Panama.  All real estate transactions ARE recorded at the Registro Publico, and this information is public, but the challenge is that the registered price is not always the actual sales price. The majority of real estate transactions are completed using offshore corporations and nominee boards of directors, and oftentimes the corporation that owns the property may be sold for less than the value of the property for tax purposes, and a separate contract written for things like “ the furniture “ or even a personal loan ( both of which are legal ).   Good for tax purposes, bad for a buyer that needs to know fair market value before jumping in. Not to mention that going to the public registry itself and trying to sift through information is like pulling teeth.
What does that mean for you as a potential buyer? It means that you will have to make sure that Your agent is doing his homework and is familiar enough with the market, with the seller’s situation, and with what constitutes a fair offer.  In short, he/she needs to be your best resource for gathering and interpreting all of the market data that is available. Be careful getting pricing advice from attorneys, family members, and others that may not be as up to date on current market conditions as someone who does this for a living. Some of the people mentioned above might still tell you things like “ Casco Viejo is so dangerous “, or “ Don’t pay any more than $1000 per square meter in Punta Pacifica. “ They may be a BIT out of touch, so you’ll need to rely on your agent to provide comparables and sales history.
Because there is no formal protocol for submitting a buy/sell offer, most agents will work on a verbal offer and end the negotiation process once a price has been agreed upon. Don’t fall victim to this rushed and often times incomplete process: make sure all offers are written and explicitly approved by the seller or the seller’s agent.
An offer should always have the following:
•    Price
•    Payment terms
•    Due diligence period
•    Move in Date
Once both parties have agreed to the offer in writing, you will need to create a “promise to purchase” document stating the terms above. Make sure to have your attorney register this document (signed by both parties) with the public registry so that the seller cannot turn around and sell the property to someone else. 

Oftentimes the seller will require some earnest money in order to take the property off of the market (10% is the standard amount). You can use an escrow account or your attorney’s account to deposit said monies, which will not be transferred to the seller until the contract is signed. Note: Cancellation clauses should always work both ways. If the seller backs out of the agreement, you should get any deposit money back plus some sort of indemnity for tying up your money. It’s not easy to collect, but is always worth putting in the contract.
Find yourself a good legal service in Panama, who you should be comfortable doing business with BEFORE MAKING AN OFFER. Although your agent will push you for some earnest money to keep the deal together, do not transfer any money until you have consulted with an attorney. Remember also that real estate deals can come and go quickly, and if the property is priced to sell and there are multiple agents showing the listing, then you need to be in a position to execute. If you are already comfortable with a good lawyer, you don’t have to waste any precious time searching for an acceptable attorney while the seller entertains other offers.
If you are looking into purchasing property here in Panama, you are most likely to encounter the following situations:
•    Individual owner selling an existing property owned under their own name
•    Individual owner selling an existing property owned under corporation
•    Individual owner selling a pre-construction property owned under their own name
•    Individual owner selling a pre-construction property owned under a corporation
•    Developer selling the rights to purchase a property in construction
Each of the above warrants its own list of “things to watch out for “, and I’ve run into a myriad of problems and situations that you as a potential property owner need to keep an eye out for. Let’s break them down, shall we?

Individual owner selling an existing property owned under their own name
In this example, you as a buyer will be purchasing an existing property from a seller that owns said property under his/her own name. (For the purpose of simplicity, we are going to assume the “property” that is being purchased is either a condo or home, because land has it’s own headaches and warrants a separate list of dos and don’ts. We’ll save that for another report…).
In all instances in Panama, the seller is responsible for any taxes incurred in the sales transaction, which amounts to 10% capital gains taxes and a 2% transfer tax ( in the case of an individual selling property under their name ). It is also customary for the seller to incur the costs of forming the purchase contract. Oftentimes, the first step is taking the property off of the market through the form of a good faith deposit. A small “ deposit agreement “ needs to be drafted up stating that the specific terms of the contract will be determined within a certain timeline, and that the monies transferred shall be used to take the property off of the market. 99% of the time, this money is non-refundable unless the seller backs out.
There are a number of things your attorney will need to research to make sure that the property in question is in good standing. Due diligence and contract formation usually can take anywhere from 5 – 15 billable hours, and most attorneys in Panama charge anywhere from $50 - $150.00 per hour.
A few items that your attorney will be performing due diligence on:
Title Search- all real properties (i.e. houses or condominium units in a P.H. which stands for Propiedad Horizontal) have a registered and unique Finca number. This process will also verify that there are no liens, encumbrances, or law suits registered to the property through the department of Public Registry. Also take note that title insurance is very new to Panama and because of this, prices are high and options are limited.   

Paz y Salvo documents- these are the documents that prove that the unit and building are in good standing in terms of utilities, building fees, etc.
Your attorney will also make sure that the seller is in fact the owner and is the only person that can sell the property, among a litany of other things that are too detailed to go into in this report. 
Building Inspection- there are several firms that specialize in building inspection, most of whom charge by the square meter for the property that will be inspected. Rates typically vary from anywhere between $1.00 - $2.50 per square meter, depending on the location of the property in question ( in-town or out of town ) and the scope of the inspection. You can also work with your inspector in terms of requirements: if you want a full structural and foundation inspection (in the case of a home) or just a physical plumbing/electrical/structural inspection in the case of an apartment.
Once you’ve completed the due diligence and property inspection, you are almost home free! Upon signature, you are required to register the property under the new owner with the Registro Publico, which will cost anywhere from $500 - $5,000, depending on the value of the property.  Once the property is transferred, monies are sent and it’s official!  You will need to notify the building of the change of ownership.  .

Individual owner selling an existing property owned under the name of a corporation
Most of the same will hold true as in the example above in terms of due diligence on the property. The added due diligence will be regarding the corporation for sale. Your attorney will first need to verify that the seller is representing the corporation that holds the property for sale. In most cases, the seller either sits on the board of directors or is the sole shareholder of the corporation. After that, your attorney will verify with the government bodies that said corporation is in good standing and does not have any outstanding debts or claims against it.
If you are purchasing property for visa purposes, the Panamanian government does not recognize property owned under corporation as an acceptable means to qualify for the $300,000 economic self solvency visa. You MUST purchase the property under an individual’s name and not the shares of a corporation that holds that property. One possible option in this case is by moving said property to a foundation, which can in most cases be used to qualify. Another option would be to move it out of the corporation and sell as an individual.
The contract to purchase will be a “Transfer of Shares “agreement, essentially transferring ownership of the shares of the company that owns the property from the existing shareholder to the buyer.
In a Transfer of Shares situation, the seller incurs only a transfer tax as opposed to a transfer AND capital gains tax. The transfer tax is a bit higher : 5% as opposed to 2% on the total value of the sale.

Individual owner selling a pre-construction property owned under their own name
This situation arises when you wish to purchase a property that has not been completed yet. Be very careful in these situations for a number of reasons.
First of all, the seller in this case is an individual that has signed a promise to purchase agreement with a developer and has probably put down some sort of deposit towards the final price of that property (which has also been stipulated in the contract). Here are a few issues you need to address with the agent representing the seller before you even consider purchasing this type of property:
•    Are there any restrictions on transferring, assigning, or otherwise passing on any of the rights to purchase to a 3rd party (in this case YOU, the buyer) stipulated by the terms of the contract that the seller signed with the developer?
•    Are there any penalties or additional costs that are associated with a transfer or reassignment of rights (some developers try to squeeze you for a second commission or Fee to authorize the transfer)?
•    The seller’s agent MUST furnish a copy of the contract that was originally signed. Keep an eye out for cost of materials increase clauses and maintenance fund contributions, which are other costs that you as the new owner will have to incur at the time of the property being delivered.  Remember, you as the new owner will be held responsible for all of the terms of the contract and CANNOT change anything once you take over the contract.

Price- A few words about how the price is derived on any pre construction “reassignment.“ Let’s take an example: The seller purchased a condo unit through a developer and now a similar property is valued at $250,000. The seller is offering his unit for $140,000. Let’s say that the seller purchased his unit for $100,000 and has put down 30%. Your payment to take over the contract will need to be profit + deposit, or in this case $40,000 (profit) + $30,000 (deposit). So your payment of $70,000 goes to purchase the rights to buy what was once a $100,000 that is now valued at $250,000. On paper, it looks like you’re getting a pretty good deal!
Risk vs. Reward – Keep in mind that if this project goes belly up and the developer has to return your money, then you will only be receiving the deposited amount on the contract, so your risk is much higher purchasing in these types of situations. In other words, you wouldn’t get your full $70,000 back if you purchased the unit above. You’d only get the amount that the original buyer put down which was 30% of his original purchase price, or $30,000.  In theory, you are “ saving “ $110,000 off of market value in the example above, making it appear to be an exceptional deal.
Due Diligence is the same as if you were to be purchasing directly from the developer- investigate their past work, the stage of completion, % sold of the building, and all of the other things you would have been looking into. Also get verification that the seller is current with the developer in terms of payment timeline. The last thing you want is to take over a contract that is at risk for default because the seller is behind on their payments.

Individual owner selling a pre-construction property owned under the name of a corporation
This is very similar to the situation above, with the exception being that there is the contract is between a corporation ( S.A. or Sociedad Anonima ) and the developer. 
If the original contract contains any prohibitory or punitive wording about transferring or reassigning rights, be very careful. Whenever you are thinking about taking over the contract on a pre construction project, it is imperative that you as the buyer demand a letter from the developer acknowledging the transfer of rights from the old owner to the new, even though the corporation ( the buyer ) remains the same.
Some smooth talking real estate agents will try to convince you that there is no risk associated with this type of reassignment, and that the developer doesn’t have to approve the sale.  “ They don’t need to know about this transaction .“  “It  is a private matter “ they will tell you. “No one needs to know about this except the buyer and the seller “. Wrong!
So where is the risk?  Standard protocol dictates that you dissolve the board of the original corporation and form  your own board and appoint a new legal representative.  The corporation name changes, but nothing else remains of the original entity.  This CAN POTENTIALLY cause a red flag with the developer at closing time because the original legal rep signed the contract and they can cancel the contract if there is any clauses forbidding transfers.  This will leave you out $70k, with no recourse with the seller who has already spent your money on a trip around the world.   
It’s an easy fix: just get the developer to draft a letter acknowledging the transfer of rights. The seller may have to pay a “ kickback “ to the developer in the form of additional $$$, but that needs to be reflected in your purchase price and is something that the seller’s side must sort out in advance.

Developer selling the rights to purchase a property in construction
This case arises when you are ready to purchase a property that is still under construction directly from the developer.
There are a few things to watch out for when purchasing directly from the developer:
•    Get as much put into the contract as possible in terms of finishing quality of the building materials. Your agent is promising you granite counter top and marble floors? Put it in the contract! Two swimming pools and a roof top roller skating rink? Put it in the contract!
•    Be mindful of “ materials cost increase clauses “, contained  in almost every preconstruction contract. If the project is 80% completed, have the contract removed. If the project is just getting started, then make sure it is below the standard rate of inflation in Panama, which at the time of publication was right around 7%.
•    Make sure that the maintenance fees are clearly stated in the contract.  Take this with a grain of salt as it will probably change after year ONE when the developer hands off the property to the home owners association.
•    Completion timelines are generally un-enforceable because as we all have seen, construction projects inevitably get delayed all around the world. Panama is no exception. One obvious thing to check out is the jobsite- hopefully it will be swarming with workers as opposed to a ghost town.

The process of buying real estate in Panama is a complicated one, primarily because this country is so new to the real estate industry. Where at home we are often comforted by decades of documentation and easily-accessible historical evidence with regards to property, Panama has no such thing. Therefore, doing your research and paying the utmost attention to detail can make or break a transaction (trust me, I’ve seen many go both ways). There will be a lot of movement in the Panama real estate market over the next few years, and more than ever the nuances of the purchasing process will be emphasized. Build a solid team, heed sensible advice, and keep an eye out for the red flags.