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The Home Building Process Is Different in Mexico

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Terrace in Puerto Vallarta
Credit: Harriet Murray

If you are looking for a place to buy in in this country, you should know that the home building process is different in Mexico. Perhaps the best way to explain the differences is to compare how things work in the U.S. and Canada compared with Mexico.

U.S. and Canada

A developer borrows money based on conditions of the lender.
Feasibility or viability of the project is based on data: sales prices, sizes, number of bedrooms and features. Lenders can also require other data such as absorptions of similar properties, what amount of inventory is for sale.  Will the project come on stream at the time it can be sold and absorbed?  Will the projections of sales pay for the mortgage and interest? Will there be profit for the seller after he pays all costs?

The permits and requirements will determine within a range what can be built and if it matches the project goals of the developer and his team.

The foundation, construction, finish-out and use of the land will be under the approval and jurisdiction of health, safety, lender underwriting, as well as construction requirements, and in some cases, many other state and federal laws. For example, making properties handicapped accessible may be required.

The plan ¨as approved¨ and ¨as defined legally¨ will create a binding and legal entity. This entity cannot be changed easily and must be in compliance with city codes or face the risk of being shut down.
The project will also be affected by forces out of its control. This includes natural disasters, monetary problems of the country where it is being built, financial stability of the buyers’ income, as well as the financial and security climate of the area and the reputation of the country.

Foreclosure is a process to take over a project that is in trouble and to finish it if needed (from insurance pay-out and more financing). The Canadian and U.S. business system for foreclosure involves many private and public entities who together work to finish the project and determine a course of action to sell the property, with a low interest mortgage if necessary, in order to take the property ¨off the books. ¨

The lender and the government have the ability to hold inventory off the market and release properties for sale over a period of time, so not to flood the market and force prices lower. This gradual release brings some stability to the market.

Mexico

The first thing you should know is that the cash and mortgage market come from the buyers most of the time. Recent sources of money in this market have included private investment funds and bank loans for a percentage of new projects.  At this moment, the majority of new construction of condos is bought for cash (from the buyers) and the developer is building with these funds.  If there is no lender involved, there will be fewer professionals who have used due diligence to determine the viability of the project and the experience and financial strength of the developer builder. This leaves buyers with the responsibility to conduct due diligence on their own. A good agent and attorney, as your team, is highly recommended.

The project will be permitted by the city or municipality.
Developers may request deviation from building requirements, if there are other examples of what they want to do in that neighborhood. The developer may appeal to the municipality for a permit to be bigger or taller even if the permission affects the views of persons above the project.

In Jalisco, the condo regime that establishes the legal entity, is done after construction is completed and an occupancy permit is granted. In Nayarit, the condo regime or legal entity has to be established first in order to obtain the building permit.

The project will also be affected by forces out of its control. It will be affected by the ability and decision of the developer to provide funds sufficient to finish the project for the buyers, who have become investors. Natural disasters, security, world economics can affect the demand for the development. During this pandemic, developers have for the most part continued or have started new projects. Caution is advised.

Vet the builder and the real estate agent you choose. The listing office or agent represents the seller, and in this case, you should have a buyer agent, if you establish that they have the experience to know how to protect your interests. And you, as the buyer, should have a local bilingual attorney here to evaluate the developer´s purchase contract, and make sure you have rights stated in your contract.

Differences between the Mexican pesos versus the U.S. dollar or Canadian dollar historically have given the developer many pesos to pay for construction (and to have a cushion against cost overruns or delays)

Currently, in order to offer more people, the chance to buy, prices may be in pesos, typically at a fixed rate designed to give the buyer a discount. This is another incentive for the buyer to cash foreign currency and have a surplus of pesos to help pay for the property and closing costs.

If there is no loan on the property, there will be no foreclosure. The project will need funds of the developer or additional funds from some source in order to be completed. This will be the problem. If a project is shut down by authorities for irregularities, it may be delayed or never finished.  There is no precedent for the city or state to become involved in the condition of an unfinished property, even if it is unsafe or deteriorating. This will be a case for lawyers working to represent their clients. If you have paid directly to the developer, and they will not return your money, does your contract give you recourse?

It is interesting to note that we have current projects because of Mexican developers. They have come into our market and built new properties without using the American and Canadian process to establish if there is a need or demand.

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 conduct his/her own due diligence and review.

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