By Mario Restrepo
When considering buying real estate from a developer in Mexico, it is important to understand the differences between how you might be accustomed to buying new construction in your country of origin, and what is common and legal in Mexico. Specifically, there are financial and title transfer considerations that you should take into account when buying new construction here in Mexico.
For example, In the USA, in order for a developer to get building permits, financing must be obtained to guarantee a completed project. Then the pre-sales of units can begin.
In Mexico however, outside financing for a project does not have to be obtained before pre-selling units, and buyer’s cash can be used for construction. This of course puts buyer’s deposits at risk if there is a mismanagement of funds or construction.
Sometimes clear title is not obtained by the developer before putting their units on the market. And if clear title to land doesn’t past to the developer, then it is possible that they won’t be able to transfer title to the final buyer at closing.
There are many excellent developers here in Mexico with a clear history of delivering completed units in a timely manner. This article is only meant to help you ask questions to lead you to the best developers, and to give you insight as to the possible safety of your investment and to what you are really buying.
In addition, Mexican architecture is one of the reasons why Mexico is such an excellent travel destination, as well as a real estate investment destination. I feel that the most under appreciated artist in the world is the Mexican mason. And I fully recommend you buy real estate in Mexico, for your family to love and enjoy, and as a sound investment.
Let’s begin.
Is the developer willing to use an escrow company, or do they want your ‘good faith’ deposit placed directly into their accounts?
Many developers in Baja, and Mexico in general, 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, which puts them in a position of strength with the buyer. Top developers who don’t use escrow companies will refund buyer money if something doesn’t go according to contract, or even if the buyer changes their mind within a certain amount of time.
If you find a developer willing to use an escrow company however, it is a sign that they are doing good 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 whenever it is indicated to do so in the escrow instructions. Escrow instructions are usually drawn up by the buyer’s lawyer, and/or developer, and tends to put the developer and buyer at positions of equal strength.
Some developers find that using escrow is good marketing for them. It shows that the developer wants a fair playing field for everyone, and that the developer is much more willing to be transparent about their business.
A developer without a good track record, or any track record, who is not willing to use an escrow company, is a warning sign.
Does it specify in the contract when construction on your unit and building will start? And if construction doesn’t start by a specified date, how can the buyer get their money back if they choose to, if an escrow account is not used?
Most contracts with developers stipulate that they will deliver a completed unit to the buyer on a specific date. Most contracts however don’t stipulate that construction on your building and unit will begin at a specified time. So if construction on your unit starts six months late, this might be an indicator that it is time to get out of the contract. Include these terms in the contract so you money will be released to you if you choose. Otherwise your money can be tied up for years, until the end of construction.
If the delivery date of the new condo or home is late, are their any concessions or refunds if an escrow account is not used?
If a buyer can not come up with the rest of the money owed on their unit when their unit is delivered in a timely manner, it is possible that they will loose their deposits with the developer. But if a developer delivers late, are there any concessions offered the buyer for the delay in delivery time?
Is the land already paid for and is it free of liens?
This questions starts with the whole process of learning of the financial strength of the developer. If the developer does not already own the land free and clear, and has borrowed money to purchase the land, then they are in a much weaker financial position to finish the project. This is a red flag. A developer should be able to show your lawyer that they currently have clear title to the land they are building on.
Is financing for construction from outside banks? Or is financing for construction from buyer deposits and hard cash?
If the financing for construction is 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, a buyer may have a hard time getting their money back since their money is tied up as cement and rebar. For example, a project whose financing is driven by sales in a slow market may not be able to deliver all amenities and units as originally anticipated. This type of financing is common and legal in Mexico. So if you choose to buy from a developer who uses buyer’s money to build, you must make sure that they have an excellent track record in delivering units, or are willing to use and escrow company to monitor the transfer of buyer funds to the developer. An enormous plus would be if the developer had a bond which would protect buyers if terms in the contract where not delivered by the developer.
However, if you find a development that you like that has outside financing and will complete their project with or without the buyer deposits, then you are a step ahead of the game.
When will title be conveyed? 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 want to know if the developer has title to the land they are building on now, and that there are no liens on the land. You want to know that they will be able to deliver clear title to you on the date they deliver the unit. If you get an answer such as “don’t worry, you’ll save money but not having go to the notario,” or “this is how we do business here in Mexico,” then that might be an indicator that you need to do more research because it is possible that they will not be able to deliver title when they deliver the unit.
You want to make sure the building that houses your unit will not be used to finance the developer’s next project or building. Because then you will not get title when the keys are delivered to you, and that you will not be able to get your unit financed, or refinanced. If you don’t have title, it will be very difficult for you to sell your unit, unless you sell at a deep discount.
A developer with big projects going up doesn’t necessarily mean they are doing good business. You want the contract to address that you will be getting a 100% refund if the developer can’t deliver title within a given time frame.
You also want to know that there are no tax liens.
If there are amenities included in the development, when will they be delivered and usable?
Meaning, will the amenities be complete in order to sell more units and for you to enjoy, or will the sale of future units be needed in order to finance the promised amenities. Amenities sell, and cutting corners does not. Knowing this will simply give you more insight about the financial strength about the developer.
Who is the developer? Where are they from? What projects has the developer delivered in the past? Where I can see these projects?
These basic questions will help you recognize who are the new builders who are trying to get a project done with out much 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.
Can you take the contract with you and have it reviewed by an attorney before you purchase?
You want make sure the contracts you are obligating yourself to are reviewed by an experienced Mexico real estate attorney. You want your attorney to write up addendums to the contract that protect you, and will refund you money if the project doesn’t go as planned. You want your attorney to point out the pros and cons of the contract, and the red flags.
There was an instance where a developer was offering financing to buyers. So a buyer could pay down their note with the developer, but the developer could still foreclose on the unit for non-payment, as the note was not attached to the unit, nor was it recorded. This of course, is an extreme example.
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