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Uncertain about investing in Mexico, Part III

C reating Certainty Investing in Mexico, Part III

Buyer and Sellers Deserve Correct Answers

 

Wayne Corcoran

Chief Operating Officer

Realty Executives Mexico

Member of AMPI

VP of MLS

 

  My article, published in the April 2008 edition of the Rocky Point Times, focused on ownership and title risks. I provided a Buyer’s Checklist that buyers and real estate professionals could use to help reduce the risk, where real estate purchases are concerned. The Checklist will be updated every month with new information, as I receive additional input from real estate professionals in Puerto Peñasco. The Checklist, as well as all of my articles, can also be found on our website at www.realtyexecs-mexico.com. We want all buyers to be educated, ask the right questions, and know they are getting the right answers.

  This month I am focusing on the financial risks related to your real estate purchase because, after all, it all boils down to protecting your money. In addition to being able to get proper title on your property, you also need to find the right way to safeguard your money. In addition to doing your homework to find the right property to buy, you also need to understand how, and if, your money is protected. Each purchase can have unique risks and the methods used to reduce financial risk  should be chosen based on the amount of risk and / or money involved.  Three key methods for financial risk management include; choosing reputable companies to work with, escrow accounts and the use of construction bonds.

 

  Let’s start with your deposit or earnest money. Most sellers request about 5% of the property price as a deposit when you make an offer. This money tells the seller that you are a serious buyer and will most likely follow through with your commitment to purchase. Where your deposit money is held is the first risk. For short-term sales, like the resale of a house or condo, using a real estate company that follows AMPI’s (Asociacion Mexicana de Profesionales Inmobiliarios) ethical standards will help protect your deposit. Your risk is lower on a short term sale, but you need to ask if your deposit will be held in a separate earnest account.  Ensure that your money is not delivered to the seller until you have rights of title of the property in your name. If you use a Notario, a reputable real estate company with licensed agents, and an escrow company, this risk can be managed.

 

  For sales with a longer closing time, like buying a condo in a project that is under construction, your earnst money and initial deposit risk is higher and should be protected in an escrow account  with the “Letter of Instruction” written to protect you (Escrow companies must distribute the money based on the letter of instruction provided by the developer, so this can vary with each escrow agreement). If you are unsure whether the letter of instruction is written to protect you, please consult with a lawyer or a trained real estate professional.  If the project can be funded without your deposit money escrow accounts are a good risk reduction strategy.

 

Typically, for long term sales like for most developments, financing depends on sales where your funds are used for construction which greatly increases your risk. If you invest in a project where your money will be used for construction and is not fully protected in an escrow account the only true secure approach in this case is using a construction bond.  For these longer-term sales you have several additional questions you need answered before you sign any contract:

- How is the project financed is a key question, will the developer disclose what percentage of the financing comes from the developer, investors, financial institutions, and buyers?  From this you can see what portion of the risk the end buyer (you) has.

- If a financial institution loan is involved, ask what conditions are attached - all banks have their own conditions and terms. (eg: the bank will contribute $1 for every $3 the developer invests; or maybe they will provide the loan when sales have hit a certain percentage.) Even developers safeguard their investments and may not invest more money if sales are slow.

- If the project fails to be adequately funded are the investors left with anything real?

- Is the project far enough along to have created equity that the investors get a share of if the project fails to be completed? Generally, the further along the project is, the lower the risk of you losing your investment.

- Are there other investors ahead of you as beneficiaries (like banks)?

- So, how do you protect yourself if the developer does not meet their stated commitments?

- What if the project is delivered a year past its due date, can you get your money back or are there interest penalties?

- When a project is moving along, selling units, and bringing in cash, it’s easy for a developer to back their commitments. But what happens when the sales slow down? Can the developer still meet all of their commitments? Another good question to ask is whether or not they planned ahead for slow sales periods or if they assume sales will stay brisk?

- If the project fails completely, you need to know what the developer has to lose as you should not have more to lose than the developer or financial institutions backing the project.   

 

Traditionally, buyers can reduce their risk and increase their protection by choosing a development that has a strong reputation for delivering on its promises. Check that the developer has built a similar size project and that the contract is written to give you recourse if commitments are not met. The only true secure approach in this case is securing a construction bond. With a construction bond the developer warranties your investment against other properties based on performance commitments. Bonds are seldom used because they are very expensive and the developer carries the entire risk making the project not profitable. But there is a way to reduce the cost of these bonds by buying smaller dollar value bonds and renewing them matching the project progress. You will need to see that the bond is written to compensate you (a project may have a bond in place that is not payable the City of Puerto Peñasco) if contract commitments are not met. It is possible for projects to get bonded which will help manage your risk. Times have changed and the developer who looks out for the buyers’ interest, and helps to reduce their risk, should be rewarded with your business.

 

I happen to have firsthand knowledge of bonds as I have one for the house I am building in Laguna Shores. My contractor has a performance bond, which cost just over $5,000.00 USD, and took several months to get. My bond is for one-quarter of the construction value and is renewed at each phase, which is approved by me, the owner of the development. The bond is taken out for a specified amount and if commitments and obligations are not met, I receive the difference between the work that has been completed and the bond amount. In other words, I receive compensation for the amount of work that has not been completed. When obtaining a bond, make sure that every obligation and commitment is spelled out clearly and precisely so there are no questions in the end.

 

  If you are financing or acquiring a loan to complete the purchase of your property, take a close look at the conditions of the loan to make sure you can live with the consequence the lender builds into the contract to protect themselves. If you are getting a loan from the seller, again, make sure the contract is written to equally protect you.

 

Remember to match the level of financial protection with the level of risk you are exposed to.  Of course I would like to see everyone go through a licensed real estate professional, but if you choose to go it alone please use the Buyer’s Checklist – it will save you a lot of headaches and get you off on the right foot. If you are currently working with a real estate agent and do not like the answers you are getting, it may be time to seek the advice of a licensed real estate professional.

 

Wayne Corcoran MBA PMP, is the General Manager/Broker of Realty Executives in Puerto Peñasco, Sonora, Mexico and the Chief Operating Officer for the master franchise Realty Executives Mexico. He brings over 30 years of risk based business management to the firm and can be reached at (011-52-638) 383-5856 or at their new office located in Plaza del Mision on Blvd. Fremont just past the turn off to Las Conchas.

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