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Thursday, Mar 28, 2024
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Prime Property

San Diegans take heed: In the next 12 months, stretches of affordable luxury residential property south of the border could be just a bank loan away.

U.S. citizens who have long dreamed of owning beachfront property in Mexico, but could not secure financing, may be able to make that dream a reality sooner than they once thought.

Several U.S. banking institutions are ramping up their lending programs to serve the growing demand among U.S. citizens to invest in residential real estate in Mexico. According to one expert, in 2005 there is likely to be six banks offering mortgages on Mexican homes, which is significant considering that just three banks were originating such loans at the end of last year.

A good deal of the interest can be attributed to the fact that the residential real estate market in Mexico is quickly heating up.

“It is safe to say that there is a residential acquisition boom going on in Mexico. The investment markets in Mexico today are prolific,” said Mitch Creekmore, vice president and Mexico division manager for Houston-based Stewart Title Guaranty Co.

Creekmore is one of the foremost authorities on Mexican real estate in the United States and established his company’s presence as one of the first title insurers in Mexico more than 11 years ago.

Stewart Title doubled its title insurance orders in Mexico from 2003 to 2004, issuing more than 700 titles on Mexican residential properties last year. The company also tripled escrow services from 2003 to 2004, establishing more than 950 escrow orders in 2004, according to Creekmore.

On March 1, Mexico’s Association of Real Estate Developers said investment in Mexican real estate is likely to expand between 5 percent and 8 percent this year, from about $10 billion in 2004. Adolfo Fastlich, the association’s president, said he expects housing, which accounted for about half of real estate investment last year, to continue to lead the sector, according to published reports.

There is already demand on the part of U.S. buyers, Creekmore says.

According to some estimates, more than 15 million U.S. and Canadian citizens travel to Mexico each year. Of that number, statistics provided by the U.S. Department of State, Bureau of Consular Affairs indicate that as many as 400,000 North Americans have purchased second homes or vacation properties in Mexico, with the majority investing in resort destinations. Creekmore pegs the number of U.S. home buyers now owning property in Mexico at closer to 1.5 million. Of this number, he said a majority of them come from California, and, notably, from San Diego.

The prime development areas include Cabo San Lucas in Baja California, Puerto Penasco on the Sea of Cortez, and Punta de Mita and Puerto Vallarta on the southern Pacific coast, as well as the Costa Maya and Caribbean shore near Cancun and Cozumel, according to David Wiesley, the director general of First American Title Services de Mexico one of the only other U.S. title insurers, besides Stewart Title, to have entered the Mexican real estate market.

Prices range considerably. In the priciest area, which, according to Michael McHatton, a real estate agent for Prudential California Realty in Mexico, is definitively Cabo San Lucas, beachfront lots cost $2 million to $4 million. Small condominiums that do not have beach access can cost $200,000 to $800,000, he said.

Creekmore added that the number of developers North American and Mexican who have initiated large-scale residential projects in the last four years has grown.

Yet, until now, U.S. citizens looking to purchase property in Mexico have had to pay a premium to finance such deals, either through developer or seller financing that requires at least 30 percent down or through expensive, less secure mortgage loans at Mexican banks that can hover around 13 percent, according to Creekmore. Some buyers have also had to take out home equity loans on their primary residences to obtain the necessary funds to purchase a second home in Mexico.


A Changing Market

This is getting set to change, Creekmore said, and San Diegans in search of second homes on the beach could be among the biggest beneficiaries.

“From south of Tijuana down through Rosarito and all the way to Ensenada, San Diegans are becoming ensconced in this market,” said Creekmore. “Their opportunities to move south down the coast will expand enormously.”

Although the availability of title insurance on Mexican homes is slowly growing, enabling increasing numbers of foreigners to enter the Mexican market more safely, Creekmore said that financing is still the biggest obstacle for foreign buyers.

“But because of the level of residential activity, U.S. lenders are becoming more aware of the opportunities,” he said.

Only a handful of banks, including Phoenix-based Marshall & Isley, Houston-based Conficasa Holdings, and Birmingham, Ala.-based Collateral International, now offer mortgage financing to U.S. buyers and developers in Mexico.

Collateral International has launched a well-publicized lending program to U.S. buyers called Mexico-My Dream, according to Robin Reyes, the business development officer for Collateral International’s Mexico program.

Reyes said his bank’s operations in Mexico, which were initiated in 1996 but did not evolve formally into the Mexico-My Dream program until 2004, involve the creation of strategic alliances with Mexican attorneys, notary publics Mexican attorneys who have the exclusive legal authority to authenticate a deed to a property and title agencies, to bring down closing costs for buyers.

Because of this, Collateral International can offer financing to foreign buyers that ranges from around 6 percent to 8 percent. These rates represent a major discount to developer financing, in which the terms begin at around 10 percent on average, and can reach 12 percent or more, according to Reyes.

The only other option for foreign buyers is a peso-denominated loan from a Mexican bank, which offers shorter term financing at a variable rate (hurting the borrower during periods of higher inflation) that begins at a level as high as 13 percent.

Reyes said the advantages of using a U.S. lender, such as Collateral International, to obtain a mortgage rather than borrowing directly from a developer are numerous. They include the fact that: 1) the loan is in dollars; 2) financing terms are longer and can extend up to 20 years, in contrast to developer financing, which typically extends only five years; and 3) the down payment typically requires 20 percent of the purchase price (as opposed to 30 percent, which is common among most developers who provide financing).


Making Dreams Come True

As of this month, the Mexico-My Dream program has grown exponentially, from originating $5 million to $10 million in loans annually, through 2004, to having more than $13 million in loans in the pipeline through the first three months of this year, according to Reyes. In the last six months, the company has intensified the scope of its loan program, incorporating a mortgage pre-qualification application on its Web site, and enabling home buyers to submit mortgage applications online.

Although Collateral International does not have a walk-in office in San Diego, Reyes said San Diego buyers can apply online, and, in some cases, be approved within five to 10 working days.

The idea of U.S. lenders expanding into the Mexican residential market would have been unheard of a decade ago, according to Jorge Vargas, a professor at the University of San Diego School of Law, who specializes in Mexican law.

“It is still a risky venture,” said Vargas. “Previously, U.S. banks were reluctant to lend money for Mexican real estate because the public registry system in Mexico created to authenticate title to property is irregular and still not 100 percent secure. Irregular practices, including bribery of public officials, tainted the Mexican real estate market.”

Even with U.S. title insurers offering security to foreign buyers, Vargas said, the bottom line is that Mexican law still precludes foreigners from having direct ownership rights to the land in certain areas of the country, so a shadow of uncertainty prevails.

Mexican real estate property ownership and investment laws for non-Mexican citizens have evolved since the creation of NAFTA the North American Free Trade Agreement, signed in 1994, which established a free trade zone among Mexico, Canada and the United States and the liberalization of the investment market.

According to Wiesley, of First American Title, “although irregular bankruptcy and foreclosure laws continue to make it difficult for U.S. lenders to enter the market, much has changed since the Mexican government introduced a guaranteed trust law.”

Yet, Mexican real estate laws still substantially differ from the laws governing real estate transactions in the United States.

While foreigners can buy real estate in their own names throughout the country’s interior, they are prevented from purchasing property in Mexico’s restricted zone the area that lies within 31 miles of the ocean and 62 miles from all borders. In this zone, which includes all of Baja California, foreigners can only buy property as the beneficiary of a Mexican bank trust called a “fideicomiso,” according to a Mexican law enacted in 1971.

In this arrangement, the bank technically holds legal title to the real estate in a 50-year renewable trust. When the sale of the land takes place, the title is conveyed to the Mexican bank and the foreign buyer becomes a beneficiary of the trust retaining the right to use, improve, sell and will the property while the bank acts as the trustee.

The bureaucratic and seemingly cumbersome process is the reason why most U.S. and Canadian developers until now have had to “carry the paper” themselves, in effect securing the loans for foreign home buyers, according to Wiesley. He said he has heard of developers carrying up to $12 million in loans.

“These are huge bets,” he added. “You (as a developer) really have to believe in your product.”


More Opportunities

But the market is rapidly changing.

Wiesley, who has operated the Mexico City office for First American since March 2004, said that during the last six months, the number of U.S. banks making exploratory phone calls to his office, inquiring about opportunities in the Mexican market, has increased markedly.

“These banks are even mentioning potential launching dates for the loan programs here,” he added.

Wiesley said there are a variety of reasons why he expects three to four North American mortgage banks to roll out operations in Mexico in 2005. In the first place, he said, critical legislation has provided for the creation of a guaranteed trust for foreign buyers. Title insurance is also easier to obtain, as more U.S. insurers have entered the market. More importantly, Wiesley added, “Foreign buyers have done their homework and see the residential real estate market along Mexico’s coast is booming.

“Finally, economic conditions in the U.S. do not represent the great opportunities they once did. So you have capital searching for investment opportunities, and lo and behold your southern neighbor has them in a market that can justify this risk.”

The consequences of this expansion into Mexico will be profound, not only for the Mexican real estate market, but also for U.S. secondary home buyers, according to Wiesley.

For one thing, the middle-income market in Mexico consisting of homes ranging from $150,000 to $900,000 will experience a notable boom, said Wiesley.

San Diegans could have easier access as well. Wiesley said it would make sense to see some of the pilot loan programs rolled out in San Diego because the banks will primarily target Rosarito and Punta Pe & #324;asco both less than a one-hour flight from San Diego.

Legal experts such as Vargas caution that the Mexican legal system governing such acquisitions continues to suffer from serious flaws.

“The bottom line,” he said, “is that no American investor should invest in Mexico at all unless they have a very competent legal counsel.”

But Creekmore said the availability of title insurance provides the security that gives foreign buyers confidence.

With the advent of new lenders in the market this year, Creekmore said the result will be a more competitive mortgage market.

“Now we could see a more favorable lending structure, including lower interest rates, lower down payments and given the amount of pent-up demand that is out there,” he said, “there is tremendous opportunity.”

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