Financing Your Property Purchase in Mexico
Financing for foreigners purchasing real estate in Mexico is extremely limited. Mexican Banks do not lend money to foreigners, whether they are permanent or temporary residents, unless they have a minimum of two years of banking history with them. Normally a foreigner would open an account with a Mexican bank, wait 6 to 9 months using the account diligently, then apply for a credit card with a small credit limit, increase said limit over time, and, if they are punctual in paying their credit balance, they may be considered for a mortgage loan to purchase property. Furthermore, the debt-to-equity ratio and interest rates will be less advantageous than what is offered to nationals with a good credit history.
That does not mean that Mexican banks are discriminating against foreigners. It is simply that they need to establish the credit rating of their client and they cannot rely on reports provided by credit bureaus in other jurisdictions. Also, in general, mortgage loans are considered an exceptional mode of financing available to only the highest credit worthy customers.
This leaves private equity financing, which is not generally available, and when it is the interest rates claimed are huge, sometimes as high as 24%, making the acquisition not feasible.
If you are the seller of real estate in Mexico and your buyer doesn’t have all the funds necessary to acquire your property, what are the alternatives? If you can afford to finance part of the sale price then consider seller financing which, surprisingly, is more advantageous to the seller in Mexico than it is in other jurisdictions.
Here’s how it works: The legal figure in Mexico is “fideicomiso de garantía” or guarantee bank trust in English. The seller transfers the use, management, and exploitation of the property to the buyer and acknowledges receiving partial payment of the purchase price. However, the seller does not transfer the ownership rights in full to the purchaser until the balance of sale in the terms agreed by both parties is paid.
In a regular bank trust the seller would transfer without any reservation of ownership rights to the buyer, however this figure’s main purpose is to secure or guarantee the payment obligations contracted through the internal financing between buyer and seller.
In other jurisdictions it would be considered a balance of sale price on the transaction. The seller would sell the property, transfer title and have a claim against the buyer for the balance of sale price. That claim would be secured by a mortgage on the property. However, if there is a default then the seller needs to sue the buyer in court to realize the security as any other financial institution to realize the security of a mortgage loan. This can take years and with very expensive legal fees.
With the guarantee bank trust in Mexico the seller does not transfer the ownership rights in full and remains as the first beneficiary of the property until the balance is paid. Legally he remains partial owner of the property although he transfers possession, use, management and exploitation rights to the buyer. The deed of sale stipulates that the buyer can occupy the property and act in all respects as the owner but the title remains with a lien until the balance of sale price is paid to the seller. If there is a default on the payment, the deed of sale provides for the mechanism to recover possession of the property through the addition of a reversion clause in the bank trust that allows the seller to restore his ownership over the property in full if the conditions agreed are not met.
If the full purchase price of the sale of your property is not an immediate necessity, consider owner financing. It is a secure way to quickly sell your property. The benefits are that you can sell at higher than market value because you are providing the financing; you will receive an interesting return on the balance of sale (average 8 to 10% interest); your investment is secured as you can take back the possession of the property and, finally, if there is a default, the buyer loses the capital they invested in the property to acquire it thereby generating a considerable gain to the seller who recovers the property.
If you are the seller, an important factor before contemplating owner financing is to make sure that you are properly represented for the sale. Regard should be made as to insurance and other liabilities in case of damage to the property, payment of public service utilities, repair and maintenance and inspection of the property by the seller. Mexlaw has considerable experience in these types of transactions. We can properly review and draft the agreement to ensure that you are protected in the event of a default. Contact us to learn more about owner financing.