As the escrow flies south

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

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

Foreigners who purchase second homes or land in Mexico often want toincorporate the US escrow process into their Mexican real estate transaction.This tends to be easier in areas where foreigners have a strong presence, andin "restricted zones" where the closing process is more complicated. Forexample, in Los Cabos, where most buyers are foreigners, escrow is common andused 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. Themost 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 basedon a mutually agreed escrow agreement; additionally, their processes can beslower moving than the US institutions'. Plus, they are not very dynamic. 

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

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

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

5. RESEARCH the differentoptions available to you. Some developers have special deals with US escrowagents, and there are some special agreements for transactions involvingfinancing. You might also want to open an "interest-bearing" escrow account ifyour money will sit there for a long period of time. 

6. LOOK FOR the bestescrow fee. You can save as much as a couple of hundred dollars by shoppingaround.

7. ASK your localattorney/closing agent to explain the advantages and disadvantages of eachparticular escrow agent. Each is suitable for different purposes.

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

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