Seller Financing

The Mexican real estate market has traditionally operated without the wide spread usage of mortgages. With the exception of recent Mexican government programs for qualifying the poor, through the years it has been expected that property buyers pay all cash to sellers. After serious negotiations between the buyer’s and seller’s attorneys, a large amount of deposit between 10-20% of the purchase price would be released to the seller at the time a formal sales contract was drawn up between the two parties with the balance of the cash paid when the notary presided over and witnessed the final transfer of the documents. Traditional Mexican financing could cost a buyer 18-24% or higher, an expense Mexicans regard as high and try to avoid.

US financial institutions considered Mexico a risky country in which to issue loans, thereby avoiding the Mexican market. After the NAFTA agreement in 1993, United States financiers started investing in the Mexican market. Today, with the baby boomers retiring in Mexico, it is possible to obtain a US loan on Mexican property but the rules are strict. Only a few mortgage companies have entered the Mexican market while competing institutions contemplate jumping on the band wagon of lucrative returns.

Conventional US lending institutions in Mexico have strict qualifying guidelines. A buyer needs a high FICA score and at least a 30% down payment are required from the purchaser, while clean title and documentation of ownership are required of the seller. With loan fees, title searches, escrow fees and appraisals that match the selling price, the cost of closing has soared from the usual Mexican closing costs which is estimated to be between 4-6% of the appraised value to 8- 10% of the selling price. Notary fees, based on a percentage of the selling price plus the 2% Mexican government transfer fee based on the appraisal and bank trust fees are unavoidable. Added together, the Mexican fees with the US fees, closing cost soar to outlandish amounts. It is possible to generate closing fees of over $35,000, depending on the value of the property.

Foreign buyers are jittery about purchasing in Mexico the Mexican way without familiar US safe guards and are willing to pay the higher closing costs for peace of mind. Obtaining a mortgage on a property is a familiar concept to a buyer from the US. Paying all cash without a mortgage is unfamiliar to them, a concept that Mexican buyers understand and desire for their own purchases. Property ownership, free and clear of any liens, is a concept that is central to the Mexican mind and culture.

Foreigners may own only the rights to use property that is in the restricted zone through a bank trust for fifty years, renewable for another 50 years. A Mexican bank holds the title in trust for the foreign buyer during that time. There are fees to set up the bank trust and yearly fees to maintain it. The yearly fees range from $350 to $500, depending on the bank. A foreigner can shop the banks for the best rates and rules.

A good Mexican attorney can give protection to a foreigner, the Mexican way, in a closing. Thorough title searches and safe purchases are possible. It is an option for a buyer to purchase on a contract in which the seller carries back financing. Many American writers warn that purchasing property in Mexico on a contract is a NO NO for foreigners. They don’t understand Mexican laws. Yes, a contract is risky if it is issued by someone who doesn’t hold clear title or if it isn’t recorded or written properly. However, if a good Mexican attorney is consulted, the attorney can order a full title search and is capable of protecting a buyer’s rights through a legal and binding contract that can be upheld in a court of law.

The key to success is finding a lawyer who can be trusted. Yes, just as in the States there are unscrupulous lawyers who take advantage of clients. If you find a good lawyer through references and successful experiences, consider purchasing a bank trust property in which the seller is willing to carry owner financing. The seller acts as a lender with terms and interest that are negotiated and agreeable to both buyer and seller.

A seller who finds it difficult to sell property in a weak real estate market can
offer owner financing as an option to attracting buyers to his/her property. He, in essence, becomes the lender or “bank.”

Becoming educated about the process in order to understand the benefits and risks is necessary.

A seller should:
· Scrutinize the buyer’s credit history and financial security before agreeing to carry back financing.
· Obtain a high down payment---the higher the better. The larger the down payment, the lower the risk.
· Clearly stipulating monthly payments with balloon payments in increments during the life of the loan.
· Secure the financing against the property which is collateral for the loan. If the buyer defaults, the seller receives the property back and can sell it again.
· Include a “due on sale” clause in the contract. If the buyer sells it, the seller is fully paid off.
· Control the length of the loan and the percentage of interest. If the seller receives 8% or 9% or 10% on the money, he may want to have a steady income for 20 years at an interest rate that is higher than a yield of conventional investments with far less risk.
· Negotiate the interest rate and the length of the loan to suit his financial needs.
The buyer’s benefits are:
· Ability to double or triple his buying power since up front cash output is less.
· Closing costs are deferred until the loan is paid off. The cost of an attorney to draw up the paperwork in the buyer’s behalf and to record the document will be minimal in comparison to bank trust transfer, closing and loan fees.
· Ability to negotiate the framework of the loan to meet his needs and financial situation.
· A quicker and smoother time frame for a closing and possession date.
· No loan fees to pay.
· No hassle in qualification standards. A seller may not have as strict requirements for qualifying as a conventional lender. For instance, someone who owns his own company may not meet the “years in business” qualification that a lender requires but has an acceptable track record acceptable to the seller.

Both the buyer and seller must:
· Understand the Mexican foreclosure process.
· Use an attorney to represent their respective interests to write up the contract with legal safe guards in place. A lawyer fluent in Spanish and English is recommended.
· Follow Mexican rule of law. Safe guard against fraud, misrepresentation and unscrupulous motives.
· Ratify for authenticity of the signatures before a notary (or corridor). The recording is then done at the “Registro Publico de la Propiedad y del Comercio,” which is a state agency with branches in the state’s cities. It is the equivalent of a County Recorder. Here is where all the legal documents related to properties and businesses get recorded.
· Understand that bank trust transfer is delayed until the final balance is paid.
· Fulfill obligations as stipulated in the agreement.

What does it mean to the seller if the bank trust transfer is delayed until final pay off of the loan? It means the seller remains the owner of the rights of the property through his bank trust but is a lien holder of record. The seller is ultimately responsible for payment of yearly bank trust fees and property taxes, but has turned over the responsibility through a contract to another party. If the other party fails to meet the obligations, the responsibility reverts back to the seller who must fulfill his original agreement with the bank. The property is forfeited to the seller who resells the property to recoup his money with, if all goes well, appreciation.

The transfer of the bank trust occurs when the lien is paid off thereby delaying official transfer of property rights, but allowing for “power of attorney” ownership.

Before the final pay off of the lien, the buyer has rights to possess the property, using it as stipulated in the sales agreement and recorded contract that was negotiated and clearly written within the legal framework of Mexican law.

Mexican real estate law allows for owner “carry back financing.” If executed correctly in Mexico, it is no more risky than in the US. Just as in any country, a seller or buyer needs to seek adequate legal representation and educate himself/herself in the details of the process.