Monday, May 12, 2008
Mexico Real Estate
The
Nascent State of Real Estate Mortgages in Mexico
By Brian
Flock
● Overcoming Obstacles
and Looking to the Future
The entry of US lenders into Mexico several years
back resulted in a huge influx of real estate investment in many areas. Yet for all the increased investment activity, relatively
few of these mortgage transactions have actually been closed. Instead, a host of middle-class buyers with home equity in their
primary homes took advantage of low interest rates and no-fee loans to lock in their piece of Mexico. At the same time, new
mortgage companies in Mexico found themselves facing unfamiliar real estate practices, and they have continually tried to
adapt to service the market.
The recent US sub-prime market debacle, the drop in
US home prices, and the resulting exit of a couple of key US lenders have changed the Mexican real estate market. With much
home equity evaporating in a declining US home market, buyers are understandably more cautious and have more limited purchasing
options. Those who desire to buy in Mexico are left with two borrowing options: commercial lending from the remaining lenders
or seller-backed financing.
Commercial
Lending
As with real estate agents, Mexico does not have licensing
requirements for mortgage companies and agents. There are many lenders and the landscape is ever changing with new lenders,
lenders who take a pause in certain regions, and others who quit lending completely.
There are several factors that can ultimately affect
a buyer’s ability to obtain a commercial loan in this environment.
Real estate agents may avoid important issues when
obtaining a listing or at closing time. For example, the seller might be encouraged to close at a price lower than the actual
price in order to avoid taxes. This common practice in Mexico will reduce available credit that the buyer can obtain from
US financing because finance companies will only lend based on the recorded sales price, regardless of how much was actually
paid.
Real estate developments and individual sellers are
notoriously slow to deliver documentation to lenders. This is somewhat understandable considering the bureaucracy of the Mexican
legal system, so this paperwork process should be built into sales planning. These delays can also be due to the fact that
the seller does not have the ability to transfer a clean title.
Borrowers need to take responsibility to put time
limits on the process and to actively keep the lending process moving once started. Borrowers would be wise to put a financing
contingency in their purchase contract such as “subject to lending approval at X% for Y years.” This can avoid
unfortunate situations where the buyer loses deposit money because they could not qualify for a loan.
Seller-backed
Financing
In areas of Mexico particularly affected by the US
credit crunch, such as Baja California, seller-backed financing is becoming an important tool to enable sales. Through guaranteed
bank trusts (Fideicomiso en Garantía) – the same instrument utilized by commercial
lenders – buyers can obtain the property that they want, and the sellers receive the certainty of income by retaining
primary interest in the property.
Seller-backed financing eliminates certain fees and
can provide more flexible terms. On the down side, sellers usually require a higher down payment, often 50%, whereas commercial
lender programs tend to be 25% to 30% down.
The fact remains that in a slow market with changing
lender practices seller-backed financing may be the only way to enable a specific transaction. Such sellers need to come to
terms with the fact that they could have the unpleasant duty to foreclose on a non-compliant buyer. The good news is that
the guaranteed bank trusts make this process as smooth as possible and avoid lengthy court cases.
The long-term solution is likely to be that US-backed
lending will further adapt to meet the market needs.
According to Richard Mockabee, loan consultant
for MexQuest Mortgage and a long-time property owner in Mexico, “One reasonable way to look
into the future is to look at the past. Mortgage financing in Mexico is inevitable, and Mexico is seeing the same cycle as
the early years of US mortgages. Mortgages are the natural evolution since baby boomers have used credit all of their adult
lives.”
——————————
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.
Richard Mockabee of MexQuest Mortgage Corp. may
be reached at (831) 247-4093 or Rich@MexQuestMortgage.com.
