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.”

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Brian Flock, a Mexidata.info guest columnist, is a degreed and certified real estate broker in Baja California, Mexico.  Founder of the Baja Fair Trade registry, he may be contacted at Baja Ocean Realty, by e-mail, or call (619) 793-5224.

Richard Mockabee of MexQuest Mortgage Corp. may be reached at (831) 247-4093 or Rich@MexQuestMortgage.com.