Baja Real Estate New Construction - 8 Questions You Must Have Answered


 

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When considering buying new Baja real estate from a developer in Mexico, it is important to understand the differences between the buying process you are accustomed to and what is common and legal in Mexico.  There are many financial and title transfer considerations that you should take into account.  This article will help you ask questions that will lead you to the best developers and give you insight into the security of your Baja real estate investment.

For example, in the U.S., a developer cannot get building permits until financing has been obtained, guaranteeing the completion of the project.  Then the pre-sale of units begins.  In Mexico, outside financing for a project does NOT have to be obtained before pre-selling, and the buyer’s cash can be used for construction.  This of course puts the buyer’s deposits at risk if there is a mismanagement of funds or construction.

Another thing to consider is that some developers do not obtain clear title for their developments before putting their units on the market.  In such cases, they may not be able to transfer title to the final buyer at closing.

There are many excellent developers here in the Baja real estate community with a clear history of delivering completed units in a timely manner.  Some of these developments are Club Marena, Calafia, La Jolla del Mar, La Jolla Real and Playa Blanca among others.

I fully recommend that you buy real estate in Mexico for your family to love and enjoy and as a sound investment.  Just be sure to begin by asking these 8 great questions.

Who is the developer?  Where is he from?  What projects has he delivered in the past and where I can see these projects?

These basic questions will help you identify new builders who are trying to get a project done but have little or no experience.  It doesn’t mean they won’t do an excellent job in delivering quality units, but it is good information for you to base your investment decisions on, especially if an escrow account is not going to be used.

Is the developer willing to use an escrow company, or do they want your “good faith” deposit placed directly into their account?

Many developers in Baja are not accustomed to using escrow companies.  They don’t see the benefit in it as they would prefer to have the buyers money deposited with them, putting them in a position of strength over the buyer.  

If you find a developer willing to use an escrow company, it is a sign that they are doing good business, that they want a fair playing field for everyone, and that they are willing to be transparent about business.

Buyer money deposited with an escrow company is commonly transferred to the developer either upon delivery of the unit, during completed phases of construction, or when indicated in the escrow instructions.  Escrow instructions are usually drawn up by the buyer’s lawyer, and/or developer, and tend to put the developer and buyer in positions of equal strength.

Not using an escrow company does not necessarily mean that the developer is bad.  There are good developers who don’t use escrow companies but will refund buyer money if something doesn’t go according to contract, or even if the buyer changes his mind within a certain amount of time. 

A developer without a good track record, however, or with no track record at all, who is not willing to use an escrow company is a warning sign.

Is financing for construction coming from outside banks, or is it coming from buyer deposits and cash on hand?

If the financing for construction is coming from buyer deposits and not outside financing from banks, then buyers should do some due diligence before putting down a deposit.

If something goes wrong with the project, buyers may have a hard time getting their money back as it could be tied up in cement and rebar.  A project whose financing is driven by sales in a slow market may not be able to deliver all the amenities and units as originally promised.  This is both common and legal in Mexico. 

Therefore, if you choose to buy from a developer who uses buyers’ money to build, make sure he has an excellent track record in delivering units or is willing to use an escrow company to monitor the transfer of your funds to him.  If the developer has a bond protecting buyers in case the terms of the contract are not delivered, this provides an enormous advantage to the buyer.

If you find a development that you like that has outside financing and will complete their project with or without the buyers’ deposits, then you are a step ahead of the game.

Does the contract specify when construction will start?  And if construction doesn’t start by a specified date, how can the buyer get their money back?

Most contracts with developers stipulate that they will deliver a completed unit to the buyer on a specific date, but most won’t stipulate when construction on your building and unit will begin or end.  Therefore, if construction on your unit starts six months late, this might be an indicator that it is time to get out of the contract.  If you do not use an escrow company, be sure to include these terms in the contract so that your money can be released to you if you choose.  Otherwise your money could be tied up for years, until the end of construction.

When will title be conveyed?  Is the land already paid for?

If you get an answer such as, “Don’t worry, you’ll save money by not having go to the notario,” or “This is how we do business here in Mexico,” that’s probably an indicator that you need to do some more research.

To answer this question well, you must begin with the process of investigating the financial strength of the developer.  A developer should be able to show your lawyer that he has clear title to the land he is building on.  If the developer does NOT own the land free and clear or has borrowed money to purchase the land, this is a red flag.  He may not be able to deliver title upon delivery of the unit. 

Just because a developer has big projects going up doesn’t mean that he is doing good business.  Be sure the contract assures that you will get a 100% refund if the developer can’t deliver title within a given time frame.

Will completed buildings be used to finance other building or projects?  What liens will there be on my unit and building in the next 12 months?

You need to make sure the building that houses your unit has no tax liens and will not be used to finance the developer’s next project or building.  In either case, you would not get title when the keys are delivered to you, and you would not be able to finance or refinance your unit.  If you don’t have title, it will also be very difficult for you to sell your unit, unless you sell at a deep discount.

If there are amenities included in the development, when will they be delivered and usable?

You should find out whether the promised amenities of your community will be completed for you to enjoy at time of delivery or if the sale of future units will be needed in order to finance them.  While the answer to this question will probably not affect your buying decision, it will give you more insight about the financial strength of the developer.

Can you take the contract with you and have it reviewed by an attorney before you purchase?

Definitely!  Unless you have lots of previous experience in Baja real estate, this is a "must" to assure a smooth and secure transaction.  You want make sure the contracts you are obligating yourself to are reviewed by an experienced Mexico real estate attorney.  Your attorney can write up addendums to the contract that protect you and will refund your money if the project doesn’t go as planned.  Your attorney can also point out the pros and cons of the contract and alert you to any red flags that you may have overlooked.

By Mario Restrepo

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