How to Lose Money in Mexican Real Estate

How to Lose Money in Mexican Real Estate

I have had at least two people come in to see me each week due to problems purchasing real estate.  There are a few common themes and many times problems can be avoided if one is careful from the start.  There is an old saying here in Mexico, “Don’t leave your brain at the border.”  The frenzy to buy and failure to look for “red flags” and do due diligence brings back memories of former Federal Reserve Board chairman Alan Greenspan comments about “Irrational exuberance.”

With the recent spike in prices in real estate values many people have jumped on the bandwagon to buy real estate or be an agent and sell it.  Purchasers and sellers need to know that here in Mexico there are not government protections as many assume or enjoyed in their home countries.  There is generally no title insurance or escrow accounts nor any licensing for people to sell real estate and no disclosure laws.  Anybody who is over 18 can print business cards and say they sell homes or land and there are no training requirements, not even to have finished elementary school nor be able to read or speak Spanish, the language of the country and the language in which all the documents and deeds are written in.

There are many real estate agents who have been in the industry for years, speak and read enough Spanish to be able to check out documents if not native speakers and make sure things look good enough to be able to put a home on the market or write an offer.  

Then there are others who like the idea of earning a large commission of thousands of dollars on a single transaction which may be enticing where the minimum wage is less than $5.00US a day.   Some may look the other way when problems arise or convince their clients to take actions that may guarantee the sale and their commission but not protect the client in the event things go wrong and while the seller or real estate company is holding a deposit customarily equal to 10% of the sales price.

Here in Mexico litigation can take years and that assumes you have a competent attorney, prepared your lawsuit well presenting all evidence in the initial filing which proves the case and have an attorney who can participate in the case and monitor it during 2-3 years in the trial court and then 1-3 years or more for appeals and writ relief.  As real estate litigation takes a long time and needs to be done properly to win, attorneys need to charge a fair amount and damages awards and contingency agreements are almost unheard of so expect to pay $10,000.00 US Dollars to start most cases and then pay 10-30% or more of the amount in dispute once the case is resolved.  While the other side can be ordered to pay your fees, that assumes they are still around or solvent and not hiding assets or gone.  This shows the reality of a high bar to entry when it comes to litigation where small matters, cases worth under $10,000 - $20,000 US Dollars don’t make economic sense to fight as even if you win it could be an exercise in futility.

Here are a few of the problems my firm has seen during the last 30 days:
1) Poorly written purchase agreement listing the wrong property address
2) Poorly written purchase agreement failing to list the bedrooms, bathrooms, measurements and property square footage thereby obligating the buyer to be forced to buy much less than they thought (an unknown).
3) Poorly written purchase agreement failing to have a detailed inventory list of the items included in the sale.
4) Agent convincing buyer not to put in a contingency clause as the seller might not accept thereby placing the buyers entire deposit at risk unnecessarily.
5) Failing to check the inventory at the final walkthrough the day of closing and before funds transferred only to find out seller stole or removed items buyer thought or should have been included in the sale.  
6) Trying to dissuade the buyer from obtaining an opinion from independent counsel on the property documents and referring only the closing notary who only gets paid if the deal goes through.
7) Forcing buyers to use a specific Notary Public for closing even though it is the buyers right to choose.
8) Failing to document any act of breach of the real estate purchase contract so that the buyer will not lose their deposit due to sellers actions.
9) Agents knowingly selling properties in condos or fraccionamientos where the buyers would be in breach of the rules pitting them against the association from the get go.
10) Failing to give clients a copy of every document they signed.
11) Agents selling homes under construction and not having any construction contract with the seller thereby giving the buyer no protection against building defects nor the benefits of warranties under Federal Law of 1, 3 and 5 years.
12) Agents threatening buyers that they will be sued or lose their deposit if they don’t go through with a purchase even if it is due to not having clear title, seller breach or misrepresentations.
13) Notaries and agents encouraging buyers to go through with a sale even though there may be boundary or measurement issues saying “it is an easy administrative fix you can do after closing.”  While not offering to do it nor guarantee the time or money needed to do it.  

The list isn’t exhaustive but just a snapshot of complaints received recently.  Now after scaring your socks off let’s look at some steps that can be taken to avoid the issues listed above.  

The best advice is to trust your gut instinct, if something doesn’t feel right or someone is pressuring you to do something then take a step back.  Are they exhibiting signs of trying to cut corners or any of the above listed complaints?

Do you know the agent and company you are dealing with?  Have they been referred to you by people you know and trust?  Being nice to you isn’t enough as many people have lost money to seemingly nice people.    When they want to sell you a property they will be very nice but when problems arise will they still be as nice and will they pay to fix their mistakes?

1) Poorly written purchase agreement listing the wrong property address
The best way to avoid this issue is to look at the property address when you see the property as well as check the escritura and any utility bills to confirm that the home you are writing the offer on is properly described so you are buying the home you think you are, not the neighbor’s home or one that doesn’t technically exist.  

2) Poorly written purchase agreement failing to list the bedrooms, bathrooms, measurements and property square footage thereby obligating the buyer to be forced to buy much less than they thought (an unknown).
When you see the home count how many bedrooms or bathrooms there are.  Also walk around and measure the property as best you can, in some cases prices are based upon sixe and the size has been miscalculated meaning if you fail to measure then you could be paying too much.  I’m taking about miscalculations of more than 10 or 20%, measurements can vary by how the measuring was done and small variations should not impact the value significantly.  The boundary legal description should also be added and checked, sometimes this is easy to calculate, if the north border is 20 meters, south 20 meters, east 10 and west 10 then you know you have a 20x10 meter parcel that should measure 200 square meters and walking along the 10 meter side you can see if it matches up.  There will be an appraisal done later on but by that time you will have paid a deposit and there will be pressure to close the deal and many people will benefit from the sale and you may not.  There are two magic words that can be added to your purchase contract that will mean you get the square footage you expect or have price reduced.  This is rare to see in a contract and interesting as publicity and marketing have square meters of property and construction but those same numbers rarely find their way to the purchase contracts being used by most people.  

3) Poorly written purchase agreement failing to have a detailed inventory list of the items included in the sale.
Many purchase contracts state that an inventory is attached but in most cases agents forget to make them up or say that it is only for special items.  We have seen sellers loot properties and remove ornate wrought iron fixtures and replace them with plastic ones, take solar systems and replace any item of value with a cheap one.  Best practice is to make a detailed list of appliances or electronics with make, model and serial number and for the rest of the items you can take photos of each room and area with a cell phone and make two copies and paste on legal sized paper and have all parties sign and then have a list of items EXCLUDED.

4) Agent convincing buyer not to put in a contingency clause as the seller might not accept thereby placing the buyers entire deposit at risk unnecessarily.
An agent’s duty is to their client and not their commission.  While a contingency clause could make a seller not accept an offer, it also ensures that the buyer will be able to properly cancel and receive back their whole deposit in the event the property inspection did not turn out as planned or they could not sell their other property or that after a review of the association rules they cannot build or remodel as they had originally planned.  Many companies do not like or use contingencies which risks the buyers deposit and in many cases the real estate company keeps it and says “sue us!”

5) Failing to check the inventory at the final walkthrough the day of closing and before funds transferred only to find out seller stole or removed items buyer thought or should have been included in the sale.  
First thing the day of closing go to see the property armed with the photos you took when you made the offer that are part of the inventory to make sure all appliances or items are still in the home and have not been stolen, removed or damaged prior to you making the final payment and signing the deed.

6) Trying to dissuade the buyer from obtaining an opinion from independent counsel on the property documents and referring only the closing notary who only gets paid if the deal goes through.
No good agent should fear any paperwork being reviewed by a competent attorney.  If the deal is solid then there is no problem.  Notaries can have a large commission riding on the sale and probably have invested time in preparation of documents so they may be reticent when it comes to demanding certain documents that while not essential to the sale, will protect the buyer such as an IMSS finiquito for properties which have had construction done on them within the past 5 years.  An independent attorney will have “no dog in the fight” and their compensation is for reviewing documents and advising you if there are any problems or “red flags” warranting a request for further information of clarification or canceling the deal.

7) Forcing buyers to use a specific Notary Public for closing even though it is the buyers right to choose.
Buyers have a choice when it comes to the notary Public, the special class of real estate closing attorney.  There is a computer program that quotes pricing so prices should be similar.  Sometimes that isn’t the case.  Also a notary may be too lenient on allowing a capital gains exemption or requiring certain documents which could then transfer liability to the new buyer for a problem of the seller.  Some notaries get a majority of their business from certain companies which could mean a significant financial loss if the notary killed deals.  Also some notaries speak English well which helps when buyers are foreigners and buyers should have the deed and documents explained to them by the notary or other competent attorney to be able to adequately explain all the legal effects of the documents and transaction.

8) Failing to document any act of breach of the real estate purchase contract so that the buyer will not lose their deposit due to sellers actions.
Nobody expects problems but a good paper trail including emails AND written agreements signed by all parties for any situation where there is a variance from the contract or change such as closing dates, etc.

9) Agents knowingly selling properties in condos or fraccionamientos where the buyers would be in breach of the rules pitting them against the association from the get go.
Before purchasing in the condominium or development that has an association you should receive a copy of the bylaws and regulations as well as any protocolized special meeting minutes so that you will know rules and responsibilities before you purchase.  Best practice is to make sure you have an official notarial recorded version as many associations have copies floating around that were never approved and others modified their bylaws / regulations during a special meeting.  Don’t accept an excuse that you will get them later or nobody follows the rules so you will not have to as you will be the one faced with fines or conflicts.

10) Failing to give clients a copy of every document they signed.
Any professional will always have 2 or 3 copies of documents when it comes time to sign.  If another signature is needed then signers can be given a provisional copy and then they make sure that the signer has been provided with a final copy signed by all parties.

11) Agents selling homes under construction and not having any construction contract with the seller thereby giving the buyer no protection against building defects nor the benefits of warranties under Federal Law of 1, 3 and 5 years.
Make sure that any new construction had the workers registered with IMSS to avoid fines and penalties down the road.  Also some companies are selling new homes but only do a deed transfer of the land (to save the seller money on capital gains which also prejudices the buyer giving them an artificially low tax basis) and then later finish construction without giving the buyer any contract which means no warranty nor construction standards making any claims to fix substandard of faulty items much more difficult.  

12) Agents threatening buyers that they will be sued or lose their deposit if they don’t go through with a purchase even if it is due to not having clear title, seller breach or misrepresentations.
Everybody wants your money and few deserve it.  If a deal is a bad deal and things were not represented properly then you should get your deposit back.  The seller canceling because of not wanting to pay capital gains, hidden defects that come out in the inspection, removal theft or damage of included items before closing is not the buyer’s fault.  Also if there are title issues or if the price was based off of a home that the buyer thought was 700 square meters but turns out to be 500, then the buyer should be able to cancel without penalty assuming the contract was drawn up properly and all breaches and communications properly documented.  Many times the real estate company has a conflict of interest as they are the ones who keep the buyers deposit if the sale doesn’t go through so they may be in a poor position to decide whose fault the breach was and keep the deposit and then sell the home again and collect another commission.

13) Notaries and agents encouraging buyers to go through with a sale even though there may be  boundary or measurement issues saying “it is an easy administrative fix you can do after closing.”  While not offering to do it nor guarantee the time or money needed to do it.  
Don’t accept an excuse that it is an easy fix after closing.  Nothing is ever as easy as it seems.  While some items can be done through a voluntary jurisdiction action in the courts, if an adjoining opposes then the case becomes contentious and if homeowner cannot be located and alternative methods of service are used, the issue could come back years later meaning thousands of dollars and years in litigation.  Will someone sign an agreement to pay the fees to do it and deposit the entire amount along with some way of guaranteeing paying for any unexpected contingency?  Rarely so therefore beware.  While everybody is your best friend during the purchase process, once the deal is closed and you have a problem, people become too busy and ignore you.

Real Estate in Mexico can be a great investment.  Good weather and low property taxes coupled with a high standard of living compared to other countries makes Mexican real estate very sought after.  Buyers need to put on their thinking caps when it comes to buying real estate and forget the safeguards they are used to in other countries and use the same caution as buying a used car and avoid common problems in order to be able to enjoy your property worry free now and in the future.

Lic. Spencer Richard Mc Mullen is a licensed Mexican attorney (Federal cedula #7928026, Jalisco State cedula #114067) as well as a State and Federal Court authorized expert translator with postgraduate diploma courses in Notarial Law, Condominium Law, Contracts, Civil and Business Procedure, Probate Law and Municipal Law, among others.  He has completed more than 3 years of a registered internship working with a notary public preparing, reviewing and translating hundreds of real estate deeds after a 20+ year career in mortgage finance in the US where he approved loans, did escrows and drew up deeds and mortgage documents for thousands of transactions.  He currently heads up a team of litigating attorneys with offices in Chapala and Guadalajara, Jalisco.  www.chapalalaw.com   376-765-7553, USA 805-683-4848

Thank you for a well written explanation Spencer!!!!

Great article Spencer.

I am too, Sunfan! I asked a couple one day why they bought a house within 36 hrs of arriving in a foreign country - their answer was - "It had lime trees!!!"

Agree, nailed it, Spencer. Please post your article on all the goofy newbie FB sites! Maybe some of them will move to Ecuador instead.

Trailrunner wrote:I am too, Sunfan! I asked a couple one day why they bought a house within 36 hrs of arriving in a foreign country - their answer was - "It had lime trees!!!"

Agree, nailed it, Spencer. Please post your article on all the goofy newbie FB sites! Maybe some of them will move to Ecuador instead.

One can only hope, Trailrunner but many of them fall into the category of not even having a brain when they crossed the border, much less leaving it behind when they did.

I know of someone who bought a place in week 1 then walked away from the $35K deposit because they found something they liked better the next week. They could care less about losing the money.

CanuckBob wrote:I know of someone who bought a place in week 1 then walked away from the $35K deposit because they found something they liked better the next week. They could care less about losing the money.

Jesus! No wonder prices are going up! I've noticed a lot of 'special' types moving in here and throwing themselves and their money around. Rents are now unaffordable for a lot of people.

Met a couple the other day that never visited the area but bought a condo "on-line" so they could move here. First time here was when they moved in.

Wow.
So true, CB.
Had to drive to west Ajijic yesterday and the traffic sucked! It's not even tourist/snowbird season yet. Who are these new faces, new residents? Sunbirds? High season is gonna suck.

Being a home owner, a landlord and a hotel booking manager I have no problem with the current state of affairs. It's all about perspective.

Boy oh boy, the con artists are going to be rich beyond all expectation when the full force of some of these people get here. Then the bitching about how awful Mexico is will start, complete with their own tales of woe about how they were fleeced when it was their own stupidity that caused it. I'll spend more time than ever at home this winter and let the snow birds fight the tidal wave of the entitled.

They way they only take advice from each other makes the above scenario a sure thing because they really don't want to be confused with facts. As good as Spencer's real estate advice is, I doubt some of them will pay any attention.

Had to laugh at one jerk who doesn't live here yet but still tried to educate the person that does the "Best of Lakeside" site where you vote for best hairdressers, restaurants, etc. that he should definitely have a category of best vegan restaurant. Yeah, there are dozens of vegan restaurants here.

Great article Spencer.
In or around October, I will have 6 new apartments for rent. Yes they are located in an all Mexican neighborhood. Yes I love this place. And yes I will have Spencer sign me up for tax matters. And yes its nice to be on the receiving end for once

I suppose this is directed to Spencer:
Your number: 11) Agents selling homes under construction and not having any construction contract with the seller thereby giving the buyer no protection against building defects nor the benefits of warranties under Federal Law of 1, 3 and 5 years.

When you go look at new construction, most would not know to ask if the listing agent and builder have a construction contract. Assuming, you then have a sales contract on such a home, and really don't have that information, HOWEVER, the builder is offering you a Warranty and it is written into the sales contract, then I would think the Buyer would be protected, as long as it is provided at closing.

Would that be a correct conclusion?

You need a written document and many sales they do tricks and sell new construction but the deed is done first for only the land and then they deliver the completed home and few know to get a written guarantee as then later when they find that the builder did shoddy work or used items they took from older homes, i.e. did not use new parts then it is too late. Also many warranties included are much less than the Federal Consumer Protection law which has mandatory warranties but unless you can prove who was the builder then you cannot benefit from the statutory and longer warranty.

Do the Notarios have information on the mandatory warranties in order to compare what the builder provides at closing?

Spencer,
Thank you for the best written summary of how to avoid traps in buying a house I have ever read.  Excellent advice not only for here but any other expat location.  You have provided great help for those who live here.

The advice that Spencer shares is well received and apprecaited...
However, newbies maybe be forgiven if they see advertisements in "reputable" real estate magazines by a certain individual who has been incarcerated,and a dismal record at Lakeside and at the beach and the last I heard is "still in business"..or not

People........do your due diligence on who you are doing business with. You would be careful in your home country, why not here (I hope)? You are risking hard earned money and going with flashy ads, assuming legitimacy, and not asking questions. Catch your breath, take a moment and check things out before you leap into the abyss.

I'd like to take windrider17'S advice but am having trouble findinding how to do my due diligence. I'm a bit taken back by the escrow company that holds the deposit being the same company that is representing us as buyers. We are considering sending a 10% deposit for a property but are feeling nervous about where that goes and what happens if the seller backs out. Anyone have any experience with this?

I have purchased a home here. Which real estate company is handling your transaction? I have purchased a home here and had good experience with the firm I used, so it all depends who it is.

Tara Anderson, my friend Barb Wills has been selling real estate here for a very long time and is very knowledgeable and trustworthy, also fun and service oriented. Nice person too.

Go see her at Fénix. 766 1776 cell: 331 125 8719

Trailrunner wrote:Tara Anderson, my friend Barb Wills has been selling real estate here for a very long time and is very knowledgeable and trustworthy, also fun and service oriented. Nice person too.

Go see her at Fénix. 766 1776  cell: 331 125 8719

Absolutely, no problem there.