Puerto Vallarta Real Estate Articles

To hold purchase funds in an escrow account is more rare in Mexico than you would think. In the past, the seller received a deposit and the balance of the funds directly. It has been against the law for a third party to hold funds for another (escrow) unless the party has a permit from the government to hold such funds.

Escrow account numbers are issued on an individual basis, and take time to be set up. Certain Mexican banks and American title companies are licensed to hold escrow funds for Mexican purchases. US dollars are held in the United States or in Mexico, depending on whic company is handling the escrow. There is a specific, detailed escrow contract, which must be signed before the account can be opened. The seller is the beneficiary of the account.

It is wise to negotiate time-lines in an offer, which allow sufficient days to open an escrow account. You need to be able to wire the funds within the deadline agreed upon.

Mitch Creekmore, Stewart Title Insurance, on Mexican Escrow: "If a purchaser is willing to give money to the seller or the agent in a real estate acquisition, be prepared not to get it back! There can be no truer words to live by in Mexico. Unfortunately, it is a sad reality. To the well-buying public, this truism and catastrophic consequence, the unthinkable event, has reared its ugly head in Mexico in 2002. Purchasers in a particular Mexico market - the particular market not being the issue - deposited funds in good faith and entrusted these moneys to the agent's "broker trust account." One would think that the term trust would imply some sort of confidence and security in the deposit vehicle, yet in this case, it was an oxymoron. The stark reality is that the money is gone, and it's a huge amount of money we're speaking of. The agent is gone as well, having fled Mexico and leaving these unprotected "good faith" buyers to ponder what now. Their sole remedy and recourse to date has been to file complaints with Mexico's consumer protection agency, "PROFECO." The likelihood that any of them will recover any of their money is slim and none, and slim already left Mexico!

The best and most favorable manner to handle earnest money and escrow deposits involving Mexican real property transactions is with a U.S. title insurance company who has a fiduciary obligation and responsibility as the "escrow agent." Some agents and developers in Mexico do not like to utilize escrow accounts in the United States for one simple reason: they do not control the money! Understanding that there is a total lack of construction financing in Mexico, an overall level of illiquidity in lending of any type, and the subsequent upfront deposits required by many developers to begin construction notwithstanding, there is still no reason why third party escrows should not be used to protect the foreign buying public. Or for any buyer! The prevailing concept of "passing the money" when the seller and buyer enter into a promissory agreement is antiquated, self-serving, and at best a huge risk for purchasers. As in the United States, consideration or the purchase price due - less any earnest money deposit - should be paid when a buyer is able to receive a protocolized deed by the notario publico and the transfer of the real property interest. It should not be when the buyer can get the keys to the condo or "possession" of it.

The ultimate benefit of third party escrow is the basic fact that an escrow agreement exists, fully negotiated and mutually agreed upon between the seller and the buyer. It is a "stand alone" document that instructs the escrow agent precisely in the manner in which the escrowed funds are to be deposited, handled and ultimately disbursed. The escrow agent is bound to the stated terms of the agreement and has a fiduciary obligation to follow the letter of the agreement. It is not subject to interpretation or conjecture, nor is the escrow required to interpret how money will be handled per a purchase contract.

Moreover, the escrow deposit can be put in a federally insured depository with the establishment of a money market interest bearing account. The subsequent accrued interest can be designated for the benefit of the seller or the buyer. But at all times, the parties know where the money is. It is verifiable once the account has been opened and it is always referenced directly to a guaranty file as maintained by the escrow agent with full disclosure of all salient facts and account numbers.

If a dispute arises between the parties concerning the disposition of the escrowed funds, the escrow agent has the responsibility and obligation to "interplead" the funds with a court of competent jurisdiction. But at no time will the money be released to anyone without the written mutual consent of the parties.

The new buzzword floating around the market suggesting the concept of "bonded escrow accounts" is just that: a buzzword that has no meaning or existence. Title companies may bond an individual that works for the company as a title officer, but they do not bond individual depositor accounts. At the end of the day, escrow accounts tied to executed escrow agreements are the most secure, negotiable and protective manner in which to insure the integrity of any purchaser's deposit. "

Note: Mexican bank trusts operate in the same general way as described below.

Linda Neil with the Settlement Company on publicly registering a purchase of real estate in Mexico:

Unwarranted Assumptions

"Mexico has a complex and complete legal system and a court system based on models that go back for centuries. Many U.S. and Canadian citizens, however, have a very poor understanding of how the Mexican system works and make assumptions about the process of buying real estate that can lead to costly and troublesome errors. Some of these are:

· Giving money for the purchase of property to a complete stranger without an office or established business
· Trying to buy property in a restricted area without securing a fideicomiso (bank trust)
· Purchasing a property not registered in the local public registry or land titles office.
Registration

The purchase/sale document signed by buyer and seller is generally legally valid between the parties to the transaction. It does not, however, provide valid notice to third parties unless it is recorded in the Public Registry Office of the municipality in which the property is located. Many foreign buyers, not realizing the importance of registering their purchases, mistakenly leave their property in the name of a developer, a Master Trust owned by a development company, or a seller. This can happen because some Mexican banks believe that having the transfer of property recorded by them is sufficient. Or sellers who sell with a down payment and the balance to be paid over a term of years may prefer to keep the title in their names and transfer it only when the entire price has been paid. But unless the deed is recorded, purchasers may have no legal remedy if a company goes bankrupt or a seller dies; their investment may be lost. Here is where an escrow company could help by making sure recording takes place in all cases.

According to Linda, anyone buying with financing should insist upon a transfer of title and registration of a mortgage or pledge, which gives rights in the property as security for payment of the remaining purchase price. If the buyer defaults, the seller conducts a proceeding similar to a judicial foreclosure in the U.S. or Canada. It is troublesome, as is any foreclosure in any country in the world. This procedure protects the buyer and seller, and also the lender, who will have an established legal remedy in case of default."

This article is based upon legal opinions, current practices and my personal experiences in the PuertoVallarta-Bahia de Banderas areas. I recommend that each potential buyer conduct his own due diligence and review. Linda Neil, Mitch Creekmore and John Fleming have supplied information in this article.