Monday, March 3, 2008

Mexico Real Estate: Balancing Dreams with Investment Security

By Brian Flock

When making a real estate investment decision, agents encourage you to consider factors such as location, ocean views and swimming pools. When purchasing Mexico real estate, these factors influence you to fall in love but they should be tempered with an analysis of the investment security. Be sure to understand and compare the relative investment security of each potential deal based on seven factors:

1. Registered Title

A title duly registered with the Public Registry of the municipality is legally stronger than possession. This is part of why the Public Registry exists – to broadcast property claims to the general public and thereby extend broad legal protections to the owner. If a property is properly registered in your name, no one else may sell it or encumber it without due judicial process. This is only possible with existing properties that are already registered with the city.

2. Title Insurance

Title Insurance is the best tool to truly protect your initial investment dollars and you can only get insurance at the moment you take title. Contrary to common myth, a Notario Público (Mexican Notary) is not responsible for your investment in a property. If a notary overlooks something on a title search and someone with a better title sues, your investment is only covered with title insurance from such companies as First American Title, Stewart Title, and Land America.

3. Physical Possession

Physical possession is an important concept in Mexican law and evictions are complicated, but possession is only practical after the unit is completely built. In the case of raw land or lot sales, you should be able to take possession from the moment your contract allows you to do so. The most common way to take possession of raw land is to build a fence and post private property signs.

4. Full Escrow

Some of the more progressive sellers are moving towards an escrow system that is similar to the US. In these cases, deposits are stored in escrow accounts which the developer can use as evidence of financial commitments with construction lenders, who in turn loan the developer money. Well-known in the US, this type of transaction secures 100% of the investment subject to the escrow terms and the money is not released until the title is transferred.

5. Performance Bonds

A performance bond is a surety bond issued by an insurance company to guarantee satisfactory completion of a project by a builder and is usually backed by substantial seller collateral. If the builder fails to satisfy the conditions in the “insurance” contract, the client is guaranteed compensation up to the amount of the bond. It is recommended that any such contracts be contingent upon transfer of title, not just completion of the project as liens may still delay title transfer after completion of a project.

6. Voucher Control

Voucher control is a compromise of escrow whereby a professional voucher control company releases buyer funds based on project milestones. For example, when a steel structure is completed, the developer may request a portion of buyer funds to apply towards the construction. The assurance to buyers is that the deposited money will not be spent on anything other than the completion of construction milestones. This is a more secure solution compared to complete, unrestricted use of down payment funds by the seller for preconstruction sales. Don't consider Voucher Control a "guarantee," but it is considered a sign of good faith on the part of the seller of a preconstruction project.

7. Cash Down Payments

Cash is the lifeblood of all construction. The least expensive form of cash to a seller is of course your cash. Your cash allows a seller to build your future home and they usually succeed. But it is essential to be aware that cash down payments are the most liquid and least secure type of investment. With cash payments and no title you are buying a promise instead of a property title. (That is not to say that cash down is always a poor investment. This investment concept can work well with a reliable developer and increasing market values. The opposite is true in a declining market and for a developer with unsound business practices.)

When you are paying cash without title, be especially aware of the reputation of the seller. Weigh the resulting trust with the cash that you will need to place in the investment.

Let good sense have its due place alongside the excitement of seeking your dream home along Mexico’s shores.

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Brian Flock, a contributor to http://www.mexidata.info, is a licensed California broker (01870163), as well as a degreed and certified broker in Mexico. He is a realtor and a member of both SDAR and AMPI Rosarito. Mr. Flock may be contacted at Flock Dream Homes (www.flockdreamhomes.com), brian@flockdreamhomes.com, or (619) 793-5224.