We often get asked the question, “Is escrow required for home buying in Mexico.” Escrow, as we know it in the U.S. and Canada, is not required in Mexico. The choice to use escrow is negotiated between buyer and seller. Using a third party to hold funds is what most Americans and Canadians believe is the proper way to purchase or sell a property.
A Mexican national has a different experience. A third-party holding purchase funds is a risk to a him/her. His/her experience is the opposite: 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 in our market when they have to purchase within a fideicomiso trust for property near the ocean front. 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 with a permit from the Mexican government, or an approved escrow company outside of Mexico. Here is where the differences lie between Mexico and the rest of North America.
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 where problems will be solved can vary from only Mexico to also include locations in the U.S.
In the U.S., there are more laws specifically addressing escrow and more experience in settling disputes. For this reason, you may want to weigh the differences in jurisdiction. Jurisdiction will be available based on where the escrow company has a legal presence.
It is important to know in the case of escrow in Mexico, the title escrow company performs a limited function. It only holds (and charges a fee) the purchase funds 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 to understand 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 into the agreement.
The escrow holder does not pay bills, pay prorations or enforce the terms of the contract unless the terms are in the escrow agreement, or create the disbursement document or closing statement for the buyer and seller.
One thing is clear: Do not use a real estate agent, real estate company or notary to be the escrow holder of your funds.
Because there are fewer laws about escrow, it is also easier for unscrupulous persons to register as an escrow company although they do not have a genuine escrow account. This means funds may be put into a ´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 as other laws will come into play, such as privacy of the individual.
A business license does not qualify a business or person as an approved escrow company to take the money of buyers and do something with it. The bottom line here is do not be naïve and do not expect your real estate agent to be up to speed on this. Mexico still does not require agents to be licensed, so do your due diligence when selecting a real estate partner.
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.