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Purchasing Real Estate in Puerto Rico 
By Frank Lopez, Esq. – Real Estate Broker Lic. 9026 and Attorney/Notary Lic. 16724

Introduction

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:

1.    Copy of your appraisal

2.    Copy of your title search

3.    Copy of your land survey, in the case of a home sale

4.    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

5.    Copy of the Home Owners certification with zero balance, or evidence of withholding as with the property taxes

6.    Copy of the purchase deed signed at closing, which you will need to switch your utility services in your name

7.    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 since 2001 with F. L. Realty, and previously was a loan originator with Banco Popular for 2 years and a mortgage broker for 5 years.

Financing in Paradise: The 1,2,3’s of Real Estate Lending in Puerto Rico

 By: Frank Lopez

One of the most frequently asked questions by our clients who wish to purchase real estate in Puerto Rico is whether they should limit themselves to buying a property on a cash basis, either by refinancing existing properties back in the mainland or any other source, or venturing into the local mortgage lending jungle. Although it may seem a daunting challenge at first glance, the truth of the matter is that with a minimum of due diligence performed by a buyer, it will soon seem like a very plausible option.

 Puerto Rican mortgage lending falls under the domain of the United States Department of Housing and Urban Development (HUD), the Federal agency responsible for national policy and programs that address America's housing needs, improving and developing the nation's communities, and enforcing fair housing laws. For this reason, many of the products available for clients seeking to secure a loan on our island will seem very familiar to anyone who has secured a loan in the continental United States of America.

Types of Loans

Agencies such as the Veterans Administration, which guarantees their loans (commonly known as V.A. Loans) up to 100% of the sales price of the property, should it fall within their lending criteria of course, are readily available to  former armed forces  and some Federally employed personnel who have a valid Certificate of Eligibility in place.

Federal Housing Administration loans (commonly known as F.H.A loans) are also available within our jurisdiction. The reason why FHA loans are so popular is because borrowers that use them are able to take advantage of benefits and protections unavailable with most traditional mortgage loans. Loans through the FHA are insured by the agency, so lenders tend to be more lenient in their approval criteria. The lending loan to values are also very high topping out at ninety seven percent (97%) of the sales price or appraisal value, whichever is the lesser of the two. This allows buyers to come in to the transaction with a very small down payment, making the purchase very affordable.

Buyers must keep in mind that these types of loans are available only for purchase of existing homes that are destined for primary residence use, so second home usage will not apply for this lending product. In our area, the only condominium which qualifies for either VA or FHA loans is Isabela Beach Court, located in the area known as Villa Pesquera, located in the municipality of Isabela, Puerto Rico. Most homes within our area should qualify for either program, depending on condition, location and configuration, as well as construction materials used for their edification.

There are other products also available such as Rural Development loans, which carry many limitations and are better tailored for lower income applicants and more rurally located properties.

Other lending products available are loans backed by Fannie Mae and Freddie Mac, both of which were created by U.S. Congress. These products are known as Conventional loans, which can be used for second home properties. Their typical loan to value is Eighty percent (80%), even though combined with Private mortgage insurance, a buyer may be able to secure up to ninety five percent (95%) loan to value financing for a purchase. This can prove a more costly option, but more often than not, it is the most popular one with our stateside buyers for Second home purchases.  

Another product available to buyers are Non-Conforming loans, which are offered by every mortgage bank on the island. These loans are essentially ones that do not conform to standardized lending parameters established by government backed loans (such as FHA, Fannie Mae, etc.), be it due to credit issues, condition, or destiny of the property as far as usage (commercial or investment property, among other circumstances). The loan to values are typically lower, and interest rates and closing costs are slightly higher, making this a more expensive “out of pocket” alternative.

Cooperatives

A lesser known, but extremely convenient product, especially for land, mixed material construction or wooden homes, is the available lending products offered by locally privately owned Cooperatives. These banks are owned by stockholders who are required to become members in order to qualify for their products by way of purchasing a nominal amount of stock with the institution. These banks are under the supervision of the Corporation for the Supervision for Insurance of Cooperatives in Puerto Rico (COSEC). They have their own particular lending criteria which is analogous to lending parameters for most federally insured loan products, but in some instances can be somewhat more flexible or creative in how they grant approval for loans.  We highly recommend these institutions when a client is requiring land financing, as their loan to values are up to eighty five percent (85%) with very low interest rates and terms up to twenty five (25) years for repayment. They also offer very convenient products for land and construction financing in tandem. We highly recommend the Cooperativa de Credito de Ahorro de Isabela as well as the Cooperativa de Rincón.

Types of Lenders

Lenders in Puerto Rico can be grouped into three (3) basic categories.

There are the primary lenders, which have the ability to originate, process, approve and close their own loans. Among these you may find Banco Popular de Puerto Rico, First Mortgage, and Scotiabank. In our opinion, applying for a loan with this type of lender may prove more convenient as they often have a wider array of products available to borrowers, have more locations throughout the island as well as the tendency to be more technologically inclined. The possible downside of using these lenders are that service can at times be impersonal and very bureaucratic, due to their employee hierarchy and large volume of business. 

The second tier of lenders are those which have the capacity to  originate, process and  close  mortgage loans, but who do not have the capability to approve them.  These institutions offer very similar products to the primary lenders, but are slower in their approval time as they depend on the approval of a primary lender who will eventually approve and fund the loan. The service side of a loan application with these lenders is typically better than with the larger banks, and rates are almost identical in most cases. The downside, as mentioned, is the length of time required for approval, as well as the criteria imposed by the primary for said approval, which could be stricter than usual given the fact that the loan was originated and documented by a secondary lender. RF Mortgage and SunWest are examples of secondary lenders.

The third category of lenders are Cooperatives, which we have already discussed previously in this article.

It is always recommended that you become well acquainted with the array of mortgage products readily available to you either online, in newspapers or with your Real Estate professional prior to engaging on the search for your desired property on our beautiful island. This will maximize your opportunities of eventual approval, as well as refine your property search criteria considerably and make it a  more efficient and enjoyable experience.

Feel free to contact us at F.L. Realty for any questions you may have in regards to financing, property search or legal aspects of buying your dream property in La Isla del Encanto.

About F. L. Realty

Our Services:

Buyers agent

Sellers agent

Long term rentals

Vacation rental management

Real Estate Financing Consulting

Real Estate Attorney and Closing Notary

General Legal and Notary Services

Contact:

Frank Lopez- Real Estate Broker, Attorney
(787)466-6749
frankjkd1@yahoo.com

Kelda Goerte- Real Estate Salesperson
(903)-227-0932
kelda_goerte@hotmail.com