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Did You Know Escrow Is Not Required in Mexico?

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Did you know escrow is not required in Mexico? Unlike the U.S. and Canada where a third party is used to hold funds, the choice to use escrow in Mexico is negotiated between buyer and seller.

Here is the way it works for Mexican homebuyers: If a buyer wants to purchase a property, he/she gives the seller a deposit, directly. When the buyer has all his/her funds, the two parties go to the notary and the deed is signed. Many times, there is no mortgage or trust, so what funds the buyer needs to pay, are paid directly to the seller with no third-party escrow.

The difficulty arises for non-Mexicans when they have to purchase within a fideicomiso trust for property near the ocean front in Mexico. The trust application process takes longer and is a condition of the sale, so giving money directly to a seller is a concern on the part of the buyer.

If escrow is used, it can be a Mexican bank, which has a permit from the Mexican government, or an approved escrow company outside of Mexico. Since Mexico does not recognize escrow as a need, laws are not specific to it. So, even though escrow companies may be working in Mexico, legal jurisdiction can vary from only-Mexico to locations in the U.S., also.

In the U.S., there are more laws specifically addressing escrow and more experience in settling disputes. For this reason, you may want to weight the differences in jurisdiction. Jurisdiction will be available based on where the escrow company has a legal presence.

It is important to know that in Mexico, the title escrow company performs a limited function. It only holds the purchase funds (for a fee) and disburses them when the principals sign a disbursement letter directing how the proceeds are to be paid by wire transfer.

A VERY IMPORTANT fact in Mexico is that because of the lack of escrow laws, the escrow agreement needs to be negotiated as the offer is negotiated.

Agreements that address purchase funds, default and other conditions need to be agreed upon and put into the escrow agreement. The escrow company will have to also agree to the changes in their standard form. A good decision is to put deadlines and prior agreed upon return of funds or payment of funds for default for specifically named parties.

The escrow holder does not pay bills, pay prorations or create the disbursement document or closing statement for the buyer and seller. If it is necessary to enforce certain terms of the sales contract these terms must be agreed to by the buyer and seller, as well as the escrow company.

One thing is clear: Do not use a real estate agent, real estate company or a notary to be the escrow holder of your funds. The anti-money-laundering laws require a lot of documentation to establish the identities of the buyer and seller, as well as where the source of funds for purchase is from. Beware of schemes to get the buyer and seller to change the bank account numbers at the last minute. The funds could be diverted to a private account not associated with the transaction.

Because there are fewer laws about escrow, it is also easier for unscrupulous persons to register as an escrow company that does not have a genuine escrow account. This means funds may be put into an “escrow account¨ that is also the business account of the principal owners of the escrow company. This makes it difficult to get the money out because other laws will come into play, such as privacy of the individual.

A business license does not suffice to prove an escrow company is legal and operating ethically. Do not be naïve. Do not expect your real estate agent to be up to speed on this. Mexico still does not require agents to be licensed. Get involved with the person in the escrow company. Meet them online, if not possible in person. Communicate with them. Explain to your agent your position.

This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas.  I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.

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