Now Easier for U.S. Residents to Buy in Mexico

Larry Kedzie and his wife are no strangers to home buying.

But the retired Corona couple were taken aback last spring when they decided to buy a home in their favorite vacation spot--Baja California’s Rosarito Beach.

To get a mortgage for their 3,000-square-foot Moroccan-style house overlooking the ocean, “we had to fill out long forms and state everyone we ever had credit with in our entire lives,” said Kedzie, a former regional manager for General Motors’ Frigidaire division.

“It was like buying our first house all over again.”

And rather than the 30-day escrow when Kedzie bought his home in the United States, the Baja deal took more than five months to close and included a number of fees and charges unheard of in the United States.

Yet, the Kedzies, both 63, knew they had little to complain about. At least they could get a mortgage. Just months earlier, loans to buy Mexican residential property weren’t even available.

Instead, the couple would have had to find a seller willing to carry the loan or, more likely, pay all cash.

But as one result of the North American Free Trade Agreement, Mexican property laws were modified to make property purchases there more attractive to U.S. residents, and now several U.S. lenders are making dollar-denominated loans to U.S. citizens buying Mexican property.

But the mortgages don’t come cheap. Because of what lenders see as their increased risk, borrowers can expect to pay interest rates 50% higher than those in the U.S. for a maximum 25-year period and to pay a number of fees and taxes not levied in the United States.

Technically, non-Mexican citizens are barred by the Mexican constitution from owning coastal or border property outright.

Under Mexican law, real estate within 60 miles of the borders or 30 miles inland along the coasts can only be held for the buyer in a beneficial trust, a fideicomiso, typically administered by a Mexican bank.

Though buyers don’t own the property outright, they can treat it like their own--altering, demolishing or selling their property without government or bank interference.

A fideicomiso trust, which has a $500 application fee and similar annual maintenance fee, used to run for only 30 years. But as a part of NAFTA negotiations, trust terms were increased to 50 years, with an automatic 50-year renewal.

As a result, the Mexican trust system, though vastly different from the way land title is held in the United States, does not concern the U.S. lenders making mortgages in Mexico.

“We’re not worried about the fideicomiso system at all,” said John Stewart, president of Metrociti Mortgage Corp. of Sherman Oaks, one of the leading lenders to U.S. citizens in the Mexican market. “The automatic renewal process should relieve any fears.”

Other companies active in providing mortgage loans in Mexico include Collateral International, San Antonio; Irwin Mortgage, Indianapolis; and Intermac, the Woodlands, Texas.

Most of these companies employ bilingual loan officers and work with affiliated real estate brokers in major Mexican cities.

By writing loans in dollars for Mexican property, they hope to bring uniformity and stability to a marketplace that, until recently, scarcely resembled the orderly process that U.S. residents are used to in the real estate market.

Part of the problem stems from the traditional ways of buying and selling property in Mexico. Most real estate is sold by the owner, and transactions are either straight cash deals or loans carried back by the seller. Only 15% to 20% of transactions are done through brokers.

Even those who call themselves real estate agents are not licensed by any governmental agency, said Duane Christie, vice president of Century 21 Mexico.

To change the system, the company has created standardized forms and implemented the U.S. offer and counteroffer procedure.

“We’re also working on a program that will certify all Century 21 agents as being up to our standards,” Christie said.

With cash-only deals long the norm, documents that U.S. buyers take for granted are not always available. “A lot of deals get slowed down because there is no recorded owner and no recorded deed,” said Paul Freudenthaler, director of international operations for Irwin Mortgage.

“People get upset when we tell them that it will cost $5,000 in lawyer’s fees to properly record the deed. And sellers in Mexico are often taken aback when we also insist on title insurance and proof of ownership.”

“We rarely see a transaction in Mexico that does not have a title problem,” agreed Kevin Garcia, CEO of Intermac.

Sellers in Mexico, which has a 2% real estate transfer tax, often do not record their property sales or may record them at a lower price to avoid or minimize the tax, Garcia said.

In addition, buyers of condominium units cannot legally obtain title (or a trust) to their new property until the final unit in the development has been sold and registered. Sometimes what looks like a private home can be legally part of a condominium development.

“Never buy property on the promise of a developer that you’ll eventually obtain the trust,” Garcia cautioned. “You could be waiting years until every unit is sold.”

Title insurance, now demanded by U.S. lenders and written by both Mexican and U.S.-based companies, will help solve this problem, lenders say.

Also, U.S.-style escrow companies do not exist in Mexico. Rather, title searches and other legal work is carried out by attorneys designated as notarios, or notaries.

Charging either a flat rate or a percentage of the sale, these government-certified lawyers draw and record deeds and collect the necessary taxes from the buyer. Funds are typically held by the real estate agent until the sale is concluded.

“Expect to pay 15 separate fees to buy property in Mexico,” Garcia said.

Closing costs include a typical 3% origination fee, plus courier fees, two recording fees and charges for trust set-up, Mexican transfer tax, notario publico services, the trust permit and special certificates.

On top of the fees, which can be three times as high as in the United States, the loans themselves will cost more.

Loans are typically available for up to 25 years, and current rates for Mexican property offered by the major U.S. companies range from 10.1% to 10.5%, fixed.

For a $100,000 loan, monthly payments, excluding taxes, would be $944. But in this country, the same loan at today’s rates would cost $706, or $2,856 less per year.

In addition, closing costs in Mexico will total about $11,000. But fees for that same loan in the United States would be $2,000 to $2,500.

Lenders say their higher rates are justified because of what they call the greater risk of doing business south of the border and because of the additional costs of maintaining offices in Mexico, sending faxes and making international phone calls and in tracking down the necessary paperwork.

“It can take from 60 days up to four months to close a property purchase in Mexico, compared to a typical 30 days in the States,” said Mike Hart, vice president of Collateral International.

One transaction in Cozumel required Hart to wait one month to get the necessary documents from one bank and three more months from another.

To close a sale in Puerto Vallarta, Hart had to make three trips to the resort town.

“I was ready to sign the fideicomiso, but the notary ran out of official numbered paper. He went to Guadalajara to get some more, but two weeks later he still didn’t have any. So I switched notaries.” What was to be a September closing became a Thanksgiving one.

Yet none of these problems seem to have deterred U.S. citizens from searching for retirement or vacation homes in Mexico.

“The average [U.S. buyer] coming down to Mexico to buy property doesn’t know what’s happening,” said Mexican home buyer Larry Kedzie. “But if you do your homework, you’ll realize how important it is to follow all these procedures.”

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Mexican Mortgage Makers

Metrociti Mortgage Corp., Sherman Oaks, (800) 464-2484.

Collateral International, San Antonio, (800) 370-1130.

Irwin Mortgage, Indianapolis, (800) 284-4462.

Intermac, the Woodlands, Texas, (800) 727-3037.

Tips for Buying in Mexico

Here are some tips that can help make a Mexican home purchase go smoother:

* In Mexico, it’s buyer beware. “A lot of people leave their brains at the border,” said Paul Freudenthaler, director of international operations for Irwin Mortgage.

“We’ve seen people give six figures in cash to a perfect stranger and write out the deal terms on a napkin.”

* Don’t expect the seller to make repairs. “If you’re buying a condo and you need repairs, you may never see the developer after the sale,” Freudenthaler said. “It often comes down to the seller saying, ‘Do you want to buy this home or not?’ ” said Century 21’s Duane Christie.

On the other hand, if work is needed, “in Mexico, labor is cheap,” noted Baja homeowner Larry Kedzie.

* If you’re dissatisfied after the purchase, don’t even think about suing. “The rules of procedure are very precise, but they may have nothing to do with the evidence,” Freudenthaler said. “Your case can be thrown out for the lack of a form.”

* Find a reputable architect or contractor to inspect your home before the purchase. Professional home inspectors are virtually nonexistent.

* Because there are no statutes mandating earthquake-resistant construction, obtain earthquake insurance, which is available from Mexican insurance companies.

* As real estate agents do not need to be licensed, confirm that you are working with a reputable one.

Because certain cities do not use a multiple listing service, confirm that your agent is not promoting just the properties he or she represents to avoid splitting the commission.

* Be aware that what you see may not always be what you get. Electrical outlets that appear to be grounded and polarized, for example, may have that type of faceplate but may not actually be connected to a grounding point. Confirm that utilities are properly hooked up to the proper meters.