As the escrow flies south

Seven top tips that will protect your largest investment in Mexico

By Pedro Perichart Perera Original Print Publication: March, 2009

Ask most Mexican homeowners "What is an escrow account?" and they might not know what you're talking about. That's because in Mexico, real estate transactions are closed at the Notary Public's office, when the public deed for a deal is signed, and the buyer delivers a check to the seller for the purchase price. All payments are done directly from buyer to seller.

In the US and Canada, on the other hand, buyers are used to paying for property indirectly, through a neutral third party escrow account: an initial deposit is made when the purchase agreement is signed; more funds are transferred when certain conditions are met (for example, when the roof of the house is finished, or when title insurance is issued); and the final deposit is made when the home is complete and delivered. All funds are deposited into the account of an escrow agent, in accordance with the provisions of an agreement signed by the parties. This escrow agreement dictates the timing and conditions required for each deposit made. Escrow agents charge a fee (usually $500-750 USD) for opening, administering, and releasing the funds according to the agreed-upon terms.

Foreigners who purchase second homes or land in Mexico often want to incorporate the US escrow process into their Mexican real estate transaction. This tends to be easier in areas where foreigners have a strong presence, and in "restricted zones" where the closing process is more complicated. For example, in Los Cabos, where most buyers are foreigners, escrow is common and used by most attorneys and closing agents.

Here are a few tips for using an escrow account in Mexico:

1. ALWAYS use a US-based escrow agent. The most respected and knowledgeable about the Mexican market are First American, Stewart Title, and Fidelity. Even if Mexican banks have products similar to an "escrow account" (like a custodial account or deposit account), none are based on a mutually agreed escrow agreement; additionally, their processes can be slower moving than the US institutions'. Plus, they are not very dynamic.

2. AVOID depositing more than 30 percent of the purchase price directly to the seller/developer's bank account. The concept of escrow is gradually being accepted in Mexico but many still see the purchaser's down payment as a way to finance construction.

3. NEVER deposit funds directly into a real estate agent's bank account, no matter how good a reputation the agent has, or what they call their account (ie. "trust", "escrow", "good-faith", etc.). Doing so is risky and creates confusion during the closing process.

4. BE AWARE that many developers are using escrow accounts as a marketing tool, but a close look at their purchase agreements shows that they have authorized themselves to release the funds in their (the developer's) favor. This mechanism nullifies the entire purpose of the account, which is to safeguard the purchaser's money until the transfer of ownership takes place.

5. RESEARCH the different options available to you. Some developers have special deals with US escrow agents, and there are some special agreements for transactions involving financing. You might also want to open an "interest-bearing" escrow account if your money will sit there for a long period of time.

6. LOOK FOR the best escrow fee. You can save as much as a couple of hundred dollars by shopping around.

7. ASK your local attorney/closing agent to explain the advantages and disadvantages of each particular escrow agent. Each is suitable for different purposes.

If you're planning to buy in Mexico, the ideal situation would be to deposit 100 percent of the purchase price in an escrow account. If your seller or developer pushes back on this, then you should try to negotiate a combination of giving a direct down payment to the developer, and putting the balance of the purchase price into an escrow account. This will protect you against abuse and will guarantee your purchase.

Pedro Perichart is a founding partner of P&H Closing Services in Cabo San Lucas, BCS. He is a former associate in Solcargo Real Estate and Corporate Law Practice Group where he specialized in real estate cross-border transactions, closing services and international contracting. phcs.com.mx

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Submitted by FronteraEstates on April 23, 2009 - 05:37.

These are good tips for people wanting to start.

On the other hand we still need more companies offering these type of services to Realtor associations and not single clients. Getting the word out and generating word of mouth is still quite powerful.

And also recommending locally established companies would be good, when they get there stuff together.

Looking forward to more posts.

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Submitted by simon on April 24, 2009 - 13:07.

That's a really good point. Does anyone know of companies who are beginning to offer these services?

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Number 2 is very important. Make sure that you never pay more than 30% as a down-payment. If the construction company runs over-budgeted expenses, you may not have a finished property when you wish to move in!

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"ASK your local attorney/closing agent to explain the advantages and disadvantages of each particular escrow agent. Each is suitable for different purposes. "

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RESEARCH, RESEARCH the different options available to you. Some developers have special deals with US escrow agents, and there are some special agreements for transactions involving financing. You might also want to open an "interest-bearing" escrow account if your money will sit there for a long period of time.
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