The Quest for Foreclosure Bargains in Mexico’s Touristic Communities (Mexidata)
By Brian Flock
· Buyer Tips to Clarify Conventional Wisdom about Distressed Properties
Buyers today have been regularly trained by the United States (US) media to be on the lookout for foreclosures as one of the staples of getting a great deal in the current real estate market. Yet buyers taking that conventional wisdom south of the border can be frustrated to find the absence of true foreclosures in Mexico’s touristic real estate market.
However, such buyers can in fact find great real estate deals in the purchase of contracts originally bought by other investors in completed or nearly-completed developments.
In order to understand why foreclosures are rare in Mexico, it’s important to know that extremely few commercial loans exist on Mexican touristic properties in comparison to the available inventory. There are no official statistics on how many properties are financed with a commercial lien, yet it must be fewer than 5% of properties based on professional experience. In contrast, nearly 70% of all homes in the United States are financed according to the US census.
The few commercial loans that exist tend to be held by the most qualified buyers, with the majority having FICO credit ratings of 680 and above with at least 20% (and often 30%) down. Therefore, these people are much less likely to backslide on their debt than borrowers with a lower score and with less money down as they could not only lose their principle but would further sacrifice their credit score in the US.
Most of the properties in Mexico that are listed as foreclosures are much better described as distressed contracts. The “sellers” of these units were in fact originally the contracted buyers for their respective properties. They don’t truly own the property; they simply have rights to require title to the property once they have met their contractual obligations to the seller (or developer as the case may be).
Distressed contracts can be an excellent value yet require special care in order to protect the new buyer’s interests. The original seller must be involved in the transaction, making it a three-way deal which can complicate matters.
For example, a developer may not be inclined to support a resale contract because this could compete directly with the developer’s remaining inventory; it could cause the recognition of income and associated income taxes; or might require the payment of construction liens by the developer from an already strained operational budget.
Alternatively, the original buyer of the property may have unmet contractual obligations to the development and be forced to come up with additional cash.
Distressed contract buyers can get a great deal and manage their risk by following the following tips:
1. Identify a quality development that has a track record of delivering title to other buyers that have paid for their properties in full.
2. Get acceptance of the offer and terms from both the current seller and the original seller/developer. Remember that this is a three-way transaction.
3. Once there is an agreement on the offer, check on property liens before spending additional money on closing costs. (Note: Certain liens can easily become show stoppers to a closing.)
4. Find a trusted representative to handle your closing, most especially a person or service that has recently done a closing at the development in question.
5. If the property is free of liens (or the liens are all considered manageable), handle the purchase funds through a third-party escrow account that will only release funds at closing. This will require that the new buyer, the previous buyer, and the original seller all sign the escrow instructions.
6. Purchase title insurance at closing before a Mexican Notary Public. This will require that you send a copy of the signed title to the title insurance company on the day of closing. Remember that the original seller (and not the person reselling their contract) must sign your title in front of the Notary.
7. Sign off on escrow disbursement instructions only after the Notary confirms that the title has been properly transferred. Again, this will require the signature of the new buyer, the previous buyer, and the original seller.
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Brian Flock is a degreed and certified real estate broker in Baja California, Mexico. He may be contacted at Baja Ocean Realty or (619) 793-5224.