Thinking of buying a pre-construction condo in Mexico? Real estate here is mainly cash-only, so there are a few things you should know about the financing of new development projects in Mexico compared to the U.S. and Canada.
U.S. and Canada
A developer borrows money based on conditions of the lender.
Feasibility or viability of the project is based on sales prices, sizes, number of bedrooms and features. Lenders can also require other data such as absorptions of similar properties and 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/she 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.
Success or Failure of the Project
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 low interest mortgages 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 the market will not be flooded and force prices lower. This gradual release brings some stability to the market.
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 are bought for cash from the buyers. The developer builds 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, as well as the financial strength of the developer builder. This leaves the buyer with the responsibility to conduct due diligence on his/her own. Make sure you have a good agent and attorney on your team.
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 site 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 in order to obtain the building permit.
Success or Failure of the Project
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 and world economics can affect the demand for the development. During this pandemic, developers, for the most part, have continued or have started new projects. Caution is advised.
Make sure you 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, your local bilingual attorney in Mexico should be able to evaluate the developer´s purchase contract to make sure you have your rights stated in the developer contract.
Differences in the Mexican peso 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. And there also is another incentive for the buyer to cash foreign currency and have a surplus of pesos to help pay for closing costs. Some developers are offering up to 22 pesos for the U.S. dollar. If the exchange rate gives you even more, such as 23-to-24 pesos, you have a surplus to use for buyer closing costs. Resales of homes or condos also may be fixed in pesos.
Foreclosure from Stopping the Project
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 of lawyers working to represent their clients. If you have paid directly to the developer, and he will not return your money, does your contract give you recourse?
It is interesting to note that we have current products because of Mexican developers. They have come into the market and built without using the American and Canadian process to establish there is a need for new product. This may also be the case, if no third-party lender is involved.
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.