Panama: Safety nets - Gail Geerling, Success in Central America

Safety nets

Two simple words separate First World property purchases from Central American property purchases: Safety Nets.

Those of us from the first world – North America and Europe in particular - have become so accustomed to safety nets our governments design to protect us as consumers, that we take them for granted even when outside our home countries.

The danger in assuming these Safety Nets is that many of them are either completely unknown in Central America, or if known, considered by locals to be completely irrelevant.

Take the Escrow system, for example. I’m speaking here of the particular definition of Escrow which involves a property purchase contract, as opposed to a homeowner’s tax and insurance escrow. In other words, it’s the Escrow whereby the sales agreement and property payment are deposited with a neutral third party, or the Escrow Agent. The agent delivers payment to the seller upon fulfillment of all terms and conditions of the written sales agreement.

Since most closings in Central America happen in an attorney’s or developer’s office - as opposed to a Title Company - purchase money is often paid directly from buyer to seller at or before closing.

In many cases, due to distance issues, the buyer gives a Limited Power of Attorney to someone else to represent them at closing, and the buyer is simply told how and when to wire money to the seller’s account. Here is where disaster looms…

The challenge - and the danger - with this system is that there is no neutral third party to check that all terms and conditions within the contract are met.

Many times (especially on pre-construction or off-plan properties) when money is paid directly to the seller or developer without an escrow agent as intermediary, the seller simply does not deliver what the contract promises.

In some instances it has happened that the seller delivers a property other than the one specified, or has had to be chased to deliver title documents at all!

Of course, the buyer is several thousand miles away, and assumes the Safety Net. So imagine his consternation when he discovers that government Consumer Protection Agencies are few and far between down here - and in most countries they don’t exist at all. Where they do exist, they may have very limited powers to effect a resolution.

While it’s not unheard of to use an escrow agent in Central America, it is rare. The service is not usually offered automatically, sometimes because the property agent himself may be ignorant of it. While payment delay is minimal using an escrow agent, some sellers (especially in rural areas) don’t understand the system, and decide that it’s easier to walk away as opposed to getting their cash from a third party.

Some Central American banks do not even have such a thing as an ‘escrow account’, or it is called something different such as a ‘sequestered account’ and does not function the same as escrow.

So what’s an unsuspecting foreigner to do?

Fortunately, title insurance companies have stepped into the breach and are now offering escrow services. Pricing for the service varies depending on location and company, but establishing an escrow account with a title insurance company is well worth the relatively minimal cost.

Never forget that Safety Nets are a uniquely first world concept. Verbal promises and reassurances from a seller or attorney hold no weight under most Central American legal systems. Create your own Safety Net when purchasing a property in Central America, by using an Escrow Agent.

NB: Remember that the escrow agent can only deliver according to the terms of contract- so take care when reviewing your sales agreement. Seek advice from someone with experience in the real estate field in the area where you intend to purchase. It’s just one more Safety Net!

Gail Geerling

Gail has lived nearly fifteen years in Central America, managing and consulting for real estate development projects in Belize, the Bay Islands of Honduras, Nicaragua and Panama. Her ‘Success in Central America’ program teaches some of the most valuable insights gleaned during her time in the region, giving her clients the ability to choose a clear direction forward and follow through to their own success.