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Escrow in México

Security in ownership transfer

 

mexican land buildingWhile Mexico has clearly made great strides in ratifying ordinances that attempt to govern the country’s individual states’ real estate and finance industries, enforcement of relevant law fails to insure that personal integrity and adverse consequences govern the actions of those involved in property acquisition. And while the proliferation of American financial institutions south of the border clearly evidences a softening of their individual and collective fiscal policy, “old habits are hard to break”. The idea of a formal “escrow”, while gaining acceptance, remains a distant second to the “30% handshake” where the buyer gives the seller 30% of the asking price up front in cash even before due diligence is commenced. The seasoned investor will insist that a formal American escrow be implemented to safeguard his or her end of the deal and not be dissuaded by the “assurances” of the seller or his or her agent.

-Escrow and Other Controls

Prior to about 2014, the common-place practice for real estate transactions was to have buyers simply hand anywhere from 10-30% of the sales price to the seller in exchange for a simple preliminary purchase and sales agreement. Now all of this may sound fine and, in the vast majority of instances, it worked…right up until the time it didn’t; the time when not having an escrow in place to handle the exchange of money for the deed made recovering these “down payments” difficult at best and a “lost-cause” at worst; this because the “earnest money” went right into the seller’s account BEFORE beginning any closing procedures or doing any due diligence. With escrow in place however, the buyer retains significant leverage against the seller to help settle any issues which may be at-hand and it provides both parties with additional motivation to close the deal expeditiously.

It should be well-noted though that being new, Mexico has yet to put in place regulatory controls that govern the escrow process and the same is true relative to real estate agents. They too are virtually unregulated so the investor, without the benefit of counsel, is wholly unprotected in a process that involves substantial sums of money. At the very least, anyone considering an investment should inquire of the seller’s agent, verification of insurance covering the seller and his or her representatives for errors and omissions, cyber crime and general fraud with a phone call placed to their carrier for verification before any money changes hands.

Where escrow is employed in Mexico, as in any international transaction, the investor can expect to be provided with a “KYC” or Know Your Client form from the seller.  While foreign to most Americans investing in domestic property, the KYC form in Mexico is mandatory as it helps the government’s fight against money-laundering.

As with US-based escrow companies, Mexico-based companies do not provide legal advise nor do they negotiate the terms of the purchase and sales agreements between investor and seller. Rather they operate at “arms-length” coordinating and facilitating the proper and lawful exchange of assets pursuant to the terms and conditions outlined within the escrow instructions themselves; instructions previously agreed to in writing between the parties.  And, as in the US, if a dispute arises between buyer and seller, again, pursuant to the terms and conditions of the escrow which will usually contains a “mediation clause”, the company’s agent may, but is not obliged to, attempt to negotiate resolve. Failing resolution however, again, as in the US, the escrow company is left with little recourse other than the filing of the dispute with the court as an “interpleader” action where the court will decide the matter IF the transaction is subject to US law which most times it is not because of the “calvo clause” restricting judicial review to Mexican jurisdiction. This is why the prudent and experienced investor always requires a US-escrow company to handle escrow responsibilities.

Finally, investors experienced in US real estate are typically familiar with such things as agency, transfer and disclosure statements and natural, environmental, death and common interest disclosures. Mexico however typically fails to observe such protocols and as such, these issues should be raised with the seller or the seller’s agent. For these and other reasons, the investor should always insist on US-based companies that are subject to US jurisdiction should issues arise. Remembering that the “calvo clause” restricts all maters relative to the property itself to Mexican jurisdiction, no such restriction exists with respect to the acquisition of the property save for the employment of a Notario to to facilitate the transaction.

Investor Takeaways

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Inquire of the seller's practice of employing escrow

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Is escrow US or Mexico-based

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Inquire of E&O, criminal and cyber fraud coverage & verify

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Note that Mexican escrow & ral estate agents are unregulated

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Insist on US-based escrow company subject to US laws

Final Considerations

The very fact that neither the real estate nor escrow industries in Mexico are regulated means that none of the conventional safeguards to which Americans are accustomed are in place to protect the investor; and if recourse is available, it will be according to the Mexican judicial system. Investors are advised  to well-consider this fact understanding that, in such an unregulated system, while the vast majority of the transactions  go well, the only way for the investor/buyer to be assured of protection is to be represented by competent counsel which The AmesGroup provides free of charge to its clients.

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