What makes real estate run so smoothly in the US and Canada?
By Susan Fogel
This is a long article, but a must read if you are in the process of buying a home in Mexico
Escrow and title companies!
What is an escrow agent and what do they do? And why do you need to use them in your Mexico real estate transaction? For the same reason you use them in the US or Canada: safety for your funds, security of title, and ease of disbursing all funds at closing. Escrow services work for buyers and sellers.
Letâ€™s start with security of your funds. In the bad old days of real estate transactions in Mexico, the buyer would hand their deposit to their agent or seller. In the first instance, your money may be safe if your agent is trustworthy and doesnâ€™t co-mingle your funds. In the second, your money can be spent the day you hand it over. If you see the seller driving a shiny new pickup only hours after he accepts your offer â€• beware. Why is this bad? Perhaps you cannot close the transaction or the â€œsellerâ€ may not have been the legal owner or there may be issues with where the property starts and ends (metes and bounds) or there may be repairs beyond what you are willing to deal with. How do you get your money back if the seller has it? Even if the seller didnâ€™t spend it, how do you get it back? Most likely you cannot.
If youâ€™re the seller, you are protected from tire kickers. Most listing agreements state that if the buyer backs out of the transaction for reasons not outlined in the purchase contract, then you, the seller can keep the deposit money, less the agentâ€™s commission. If you have accepted an offer and the funds do not arrive in escrow within the prescribed time, you can cancel the deal. You do not have to chase down the buyer and beg them to pay. You simply inform escrow that since no money has arrived from the buyer, you are canceling escrow. It is rare for a buyer to make a bogus offer where an escrow company is involved. There is too much work involved and, of course, the funds must be wiredâ€”no checks, no cash.
How does an escrow company protect your funds? Easy! Once the seller accepts your written offer, you are expected to wire 10% of the price to escrow. You must complete â€œescrow instructionsâ€. This is a set of forms that instructs the escrow holder to act as a neutral third party and to hold your money until closing. If something occurs that is the fault of the seller, you will receive all of your money back, less $550, which is the escrow fee. The escrow funds are held in dollars in a US FDIC bank.
â€œNeutral Third Partyâ€ is a very important term. This is the definition of an escrow agent. This means that a shifty agent or powerful seller cannot bribe or threaten the escrow holder to release your funds without your permission and without meeting all of the requirements of the transaction. The escrow agent only acts on the instructions of buyer and seller and all instructions are signed by both parties. And the escrow agent has copies of the passports of both parties to compare signatures.
Costs of escrow services are borne by the buyer. If you are the seller, you have security and no escrow fees. If everything is going according to plan and the house meets your expectations, the closing attorney at the escrow company starts the process of moving the papers: permits and fideicomiso through the system.
This brings us to the second reason for using an escrow company and their closing and title services: Security of title, otherwise known as title insurance. This is available in Mexico and is worth the money (about US$5.00 per thousand of value). On a $200,000 home, the cost of title insurance is $1,000. This is a small price to pay to sleep well at night, knowing that your title is clear even if someone shows up claiming to be a long-lost relative of the original owner seven generations back and demanding that you vacate â€œtheirâ€ property.
The title arm of the company searches the public records to ensure that there is no cloud on the chain of title to your property. When they issue the title policy to you, they are assuming the risk and, if someone does try to steal your property, the title companyâ€™s lawyers go to work on your behalf.
Do not be dissuaded from buying title insurance. Sometimes the title search can slow down the transaction. This is rare, but it has happened because somewhere in the transfer of title, someone did not pay close attention and something was missed. The title insurance company needs to be sure that all previous owners have had their interests in your property terminated. Wouldnâ€™t you rather pay a little money and spend the time now then pay dearly later? As a seller, wouldnâ€™t you want to walk away with a clear conscience?
Do not believe that the â€œcertificate of no liensâ€, a required form, is as good as title insurance. The certificate of no liens states that, as of a certain date, no one has made claims on this property. This form has a short shelf life of 30 days. When a transaction takes longer than expected, this certificate must be renewed. The notaria will expect to see a current certificate of no liens. You can see that if it expires in a month, that on day 32, someone can lay a claim on your property. Title insurance insures your property for as long as you own it.
And the third reason: Disbursement of funds. In Mexico, there is a saying, â€œPaper Talksâ€ and nowhere is it more talkative than in a real estate transaction involving at least one foreigner. The buyer and seller complete a disbursement instruction form. This tells the escrow agent how much money to expect to receive and how much money to send to each person involved in the transaction. A seller can instruct the escrow agent to pay off credit cards, send some funds to the Cayman Islands and some to a US account, and the remainder to a Mexican account. The Realtorâ€™s commissions and the notario fees will be paid via the disbursement instructions.
There are several title/escrow companies offering services in Mexico but only Stewart Title Latin America has offices here. Also, there are some closing attorneys offering escrow services. If you use them, be sure that they are holding the funds in a US account and that escrow and disbursement instructions are used.
Escrow services in Mexico are fast and efficient and most forms can be handled electronically. Unlike the US or Canada, buyer and seller will sign at the notarioâ€™s office, not the escrow office, so it does not matter that Stewart Title Latin America is located in Cabos San Lucas. They know all of the notarios, Realtors, and bank fiduciarios.
Susan Fogel is the broker/owner of Prestige Property Group La Paz.
She is the author of the e-book: Margarita Mind: How to Avoid It: A Guide to Buying Mexico