Foreign investors purchasing or selling real estate in Mexico are often confused by Mexico´s awkward—if not downright clumsy—system for closing real estate transactions, especially regarding payments and disbursements.
In countries in which buyers and sellers of real property can depend on an efficient escrow system to handle transfers of money and documents, newcomers to Mexican real estate transactions will think they´ve returned to the kindergarden schoolyard where neither child in an exchange will let go of what is in his or her hand until the other lets go first. Mexico has no legal equivalent to an “escrow.” so you can´t put something “in escrow” and let an honest third party hold it until the other party complies with its obligations so the escrow agent can release the money, the deed and other disbursements at the “close of escrow.”
Mexico does have the fideicomiso, or trust, which foreigners buying in restricted zones, such as beach areas, may be familiar with. But a trust is not the same as an escrow. Only authorized banking institutions may act as trustees in Mexico, making the use of a fideicomiso for most real estate transactions simply unaffordable and altogether too bureaucratic.
Brief Background on Real Estate Transactions in Mexico
In Mexico, real estate purchases and sales are required by law to be handled by a notary public. But a notary public in Mexico, as is also the case in other civil-law countries, is nothing similar to the notary publics of common-law countries. In Mexico, a notary is a specially-trained lawyer, who has a government grant or permit to perform certain quasi-governmental functions. In some ways it is a class monopoly, because only notaries can perform or certify certain operations, including real estate purchase and sale transactions.
In contrast, a notary in common-law jurisdictions, such as the United States, is any lay person who has simply registered with the state to be able to check the identification documents (typically a driver´s license) to ensure that the individual who signs a document has identified himself or herself as that person. Nothing more! They can´t draft contracts, or real estate deeds, or certify the “legality” of some document, or give legal advise. They are frequently secretaries (often in banks), but are definitely not lawyers, and their functions are much more limited than a civil-law notary.
A common confusion for foreigners occurs when something legally must be certified by a notary for legal effects under Mexican law. Many foreigners from common-law countries simply go to a local notary and have the document “notarized” by a bank secretary. Legally, under Mexican law, such a notarization is not valid, because it was not “legalized” by the equivalent of a Mexican notary. We will have a future article on how to legally “notarize” documents abroad for use in Mexico.
In any real estate transaction the monetary payment is always the most sensitive part of the closing. It is quite common for a seller to say, “I´m not signing anything until the money is in my account.” And for buyers to say, “I´m not depositing anything in the seller´s account until he signs the deed.” In one typical case, the buyer would not agree to go to the bank and deposit the money in the seller´s account and then go straight (we´re talking 5 minutes) to the notary´s office to sign the paperwork. And the seller would not agree to sign in the notary´s office and go straight (same 5 minutes) to the bank with the buyer to make the deposit. Back to the kindergarden schoolyard.
Unfortunately regarding money, notaries in Mexico only take care of ensuring that government taxes are paid (income tax on gains, property taxes, and transfer taxes) and do not act as escrow agents and will not hold and disburse money paid. With the monopoly-like government grant enjoyed by notaries, having them act as escrow agents on real estate and other transactions, would be the obvious solution to the kindergarden schoolyard situation.
Another critical issue overlooked by current Mexican law is the disbursement of real estate broker commissions. Notaries will not protect real estate brokers´ interests (unless as a favor out of personal friendship), so instead of all fees and commissions being paid “at close of escrow,” real estate offices often have to keep dogging sellers for payment of their legitimate and hard-earned commissions. It is not uncommon for sellers to “take the money and run” and never pay the real estate commission.
So how can buyers and sellers ensure the other party is complying with the terms of the agreement before the parties sign away their rights? It´s a challenge because nothing in current Mexican law helps. You have to be creative and work around the problem—to everyone´s satisfaction, which is not a simple task.
Possible solution #1:
In this age of technology and ubiquitous computers and tablets, one solution I have used is for the buyer to make a bank transfer in the notary´s office via Internet. The seller can call his or her bank, or check online to see that the transfer is in. With the exception of really talented cyber criminals, often it is usually sufficient for the seller to see on the buyer´s computer that the transfer has been executed, even if the transfer doesn´t appear immediately in the seller´s account. Obviously the safest solution would be to verify that the fund have actually been credited to the seller´s account before signing the deed.
Possible solution #2:
For this you need a really trustworthy notary (that´s right, just because they have a government-granted monopoly doesn´t mean they are automatically competent or honest). If you do not know the notary well enough to “trust” him or her, then you can put the terms and processes of payment in the promissory purchase and sale agreement or even the offer and acceptance and insist that those terms be put in the text of the final deed, called an escritura in Spanish.
Here´s how it works:
Only the seller signs the escritura, and the notary will program the signing of the buyer at a later time or date, once the seller advises the notary that the funds have been received (actually credited to his or her account).
If the funds are never received, or the check bounces or whatever happens that the payment is not completed, the buyer can never sign the deed documents and the transaction is never completed (in legal terms the right to the property never vests in the potential buyer).
But if the funds do enter the account, the buyer signs the deed, and the deed is registered in the public registry and the transaction is completed with full transfer of ownership rights to the buyer.
The advantage this has for the buyer is that it protects buyers from the unlikely but possible tragedy of paying a seller and then the seller dies (heart attack, gets hit by a bus, whatever) before signing at the notary´s office. Then the entire process would be held up until a court (known in some jurisdictions outside Mexico as “probate courts”) determines the rights of families and all related parties. And if the seller didn´t have a valid will, orthe family contests the will, the poor buyer who paid may wait a very long time to get his or her money back.
And for the seller, this protects against bad checks and promisses never kept.
I recommend hiring a competent lawyer to draft the text of the payment terms that the notary must follow. You can ask the notary to draft it, but notaries almost always use form texts for everything, and anything unusual may not get done. If your legal Spanish is good enough to proofread the draft of theescritura to ensure the payment text is included, then you might ask the notary to do the work.
Horror Stories Regarding Payments
In one case I saw that a certified check actually bounced. It was from a secondary financial institution rather than a prominent bank. But it did happen.
Also, certified checks from reputable financial institutions can be forged.
Foreigners often trust too much whatever any notary or real estate agent or other party might say. Recently a “friend of a friend” asked me for help in the sale of a property. He had already signed the escritura, and even though he hadn´t received the payment yet, the buyer was anxious to get into the property, so he signed a temporary rental agreement with the buyer to give him possession. All documents had already been signed, the escritura was sent for recording in the public registry, and the buyer had possession of the property. But the seller never got his money. By the time he contacted me, it was too late for a preventive solution. First of all, a residential rental agreement does not really protect a seller. If you´re unlucky, it can take up to three years to evict a tenant in Mexico (there will be more on this in future articles). And secondly, the transaction was already done. All the documents were signed. The cat was already out of the bag. The only solution now would be to sue for the nullification of the transaction. And while possibly the best option, a lawsuit also could take years to conclude.
Recommendations:
In real estate transactions you must be sure you have competent and honest counsel, beginning with the real estate agent you work with. Because of inadequate or often no regulations in Mexico regarding real estate agents, if you are to trust the advise of your agent, be sure he or she really knows Mexican real estate law and practice, real estate taxation, real estate financing and Mexican business customs.
Then be sure you use a competent and honest notary who will be able to accurately calculate your tax impact from the transaction and who will diligently work with you to ensure that your priorities in the transaction are protected.
Educate yourself about business in Mexico. That is what Business Mexico Online is all about, but we are but one source of information for you. You are investing your money in Mexico. You need to know as much as you can about the environment you are investing your money in.
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