Archive for the ‘Real Estate’ Category

Real Estate Financing In Mexico

Wednesday, August 13th, 2008

Cross-Border Mexico Mortgage Financing – A Silver Lining to a Slower Mexico Real Estate MarketWritten by Matthew A. Miller, President and CEO of ConfiCasa Mortgage International

Since its introduction in the early part of 2005, the cross-border Mexico mortgage market — mortgage financing for foreigners purchasing vacation, retirement and investment homes in Mexico — has been compared by many realtors and developers to riding a roller coaster.  But now, a greater number of those individuals are looking at the cross-border mortgage market to help strengthen the slower real estate market.

The recent U.S. downturn, comprised of the U.S. housing bust, housing and corporate credit crunch, high gasoline prices, weaker U.S. dollar, and inflationary pressures, has taken a toll on the cross-border Mexico real estate market.  Such effects started to appear as early as last fall and continued to grow throughout the early parts of the summer, with little signs of letting up before the upcoming busy season beginning November 2008.  While prices for real estate properties in the resort areas of Mexico have not receded significantly, prices have not appreciated at the high historic levels once seen in years past.  Most notably, the overall velocity of sales over this time period has decreased considerably from years prior throughout most of the resort areas of Mexico, including Los Cabos, Puerto Vallarta and Cancun/Riviera Maya region.

Local developers, realtors and buyers who have typically shunned cross-border Mexico mortgage financing in the past are now beginning to embrace it.  Several reasons have forced these groups to take a second look.  From the realtor and developer side, financing options are one of the few tactics which help bolster sales in a slower market without sacrificing profitability.  This could not have been more apparent in the U.S. real estate boom over the last decade and, as in the U.S., the availability of mortgage financing should translate into more sales in Mexico.  The main reason for this is a simple finance principle; leverage provides buyers with greater purchasing power and greater returns. With sales volume still depressed as the busy season approaches, realtors and developers are looking to push financing options as a tactic to increase sales.  After all, pushing financing is far better for their bottom line than other popular tactics such as offering developer incentive or lowering prices.

From the buyer’s perspective, the attractiveness of mortgage financing goes even deeper.  The recent U.S. downturn and uncertainty from the upcoming U.S. presidential election have drastically eroded U.S. consumer confidence, making U.S. buyers more cautious. Intuition would suggest that a more cautious buyer prefers to lever up larger purchases in order to hold cash and maximize liquidity in the unlikely event it is needed.  Further, the U.S. home equity line, which historically has been tapped by the cross-border Mexico real estate buyer, has become more difficult and expensive to obtain.  And rising interest rates on U.S. mortgages in addition to the elimination of certain types of loan documentation in the U.S. (stated and Alt-A) have made cross-border Mexico mortgage financing look more attractive than in years prior.  Lastly, many potential buyers who have put large deposits on a Mexico property or have been seeking a Mexico property for some time are becoming more stretched financially due to underperforming investments and lower household income, all effects of the U.S. downturn. Often these buyers need additional help to secure their retirement, vacation, or investment property in Mexico and are likely to now turn towards a Mexico mortgage loan. All these scenarios have translated into U.S. buyers looking more favorably at cross-border Mexico mortgage financing. 

Demand stemming from the changing U.S. economic climate is not the only reason for buyers and industry players to recently turn to Mexico mortgage loans for their Mexico real estate purchases. Once plagued with negative media attention as the result of (i) numerous Americans and Canadians losing their real estate properties in the late 90’s, (ii) misconceptions regarding whether foreigners are legally allowed to own property (they can – see inset), and (iii) the fallout out of a couple cross-border Mexico lenders as well as the inability for some lenders and mortgage brokers to effectively close loans, the cross border Mexico mortgage loan market is finally seeing significant changes that have been ignited by greater demand.

Several positive changes have already been executed and continue to be underway in the cross-border Mexico mortgage industry.  A broader array of financing options is now available, thanks to new lenders entering the market, including Deutsche Bank and Lehman Brothers.  Additionally, mortgage brokers such as ConfiCasa Mortgage International (www.conficasamortgage.com) have implemented smoother loan processes with better communication, greater transparency and faster closing timelines. A smoother process has resulted from several years of experience for the earliest entrants like ConfiCasa, who continue to focus on implementing ways to create a financing process that more closely mirrors that of the U.S. and Canada.

With so many more heads turning towards cross-border Mexico mortgage financing, the industry is finally looking to shed its roller-coaster like past and seem more like a smooth and predictable merry-go-round.  And that is becoming a silver lining for everyone!

 

Boxed Inset 

Many Americans and Canadians have a common misconception that it is illegal for foreigners to own property in Mexico because of article 27.1 of the Mexican constitution, which prohibits foreigners from acquiring direct ownership of lands or waters within a zone of approximately 66 miles from a foreign border or approximately 33 miles form a coast, known as the “restricted zone”.  However, in 1993, Mexico adopted the Foreign Investment Law (FIL), which amends article 27.1, allowing foreigners to own residential property in the “restricted zone” exclusively through a “Fideicomiso”.  A Fideicomiso, (which continues to be one of the most commonly misunderstood legal instruments in residential real estate), is a trust agreement where a bank serves as a trustee, and has a fiduciary obligation to the buyer, or “beneficiary”. The beneficiary of the trust (the buyer) retains and enjoys full rights of ownership of the property, including the right to use, mortgage, lease, modify, and sell the property as desired. Despite the beneficiary of the trust having the same absolute rights as if owned directly (fee simple) in the United States and Canada, the indirect ownership (trust) structure, renewable every 50 years,  naturally confuses most buyers and unfortunately results in the common misconception that foreigners are prohibited from owning a piece of the Mexican dream.

Matthew Miller is the President and CEO of Conficasa Mortgage International, LLC a cross-border Mexico mortgage company specializing in financing Mexican properties for Americans and Canadians. You can contact him at mmiller@conficasamortgage.com or through the Company’s website at www.conficasamortgage.com.

Coastal Real Estate Prices

Sunday, February 3rd, 2008

There is a genuine land rush going on anywhere near the beach in Mexico. Prices are rising very fast, with village after village near the major tourist areas experiencing price escalations that are sometimes hard to believe. The coast line north of Puerto Vallarta, mostly in the state of Nayarit, has been designated as the next major area of development by the Mexican government, and the cost of ownership has skyrocketed. Not surprisingly, rumor has it that ex-president Fox owns a good chunk of that coast acquired before leaving his six-year term, which may be a factor in why it has been targeted (ya think?).

I have seen houses selling for $500,000 – $700,00 that would have been $50,00 ten years ago and $20,000 ten years before that . A little village 1 ½ hours north of PV is selling ocean lots (just the dirt) for $400,000. If you do find something for a steal, it’s probably ejido land, which legally can’t be transferred to a private party until it becomes regularized….a daunting and complex procedure. Developers are buying up large tracts of land for future development. The same thing is taking place on the Riviera Maya, the Los Cabos region, just south of Tijuana in Baja Norte, Zihuatenejo/Ixtapa, and Puerto Penasco (Rocky Point) and other beach locales. Much of what is not in the cross-hairs is still ejido land.

Are there still deals to be found? Yes, but you really have to scratch and search. A more compelling question is where will it go from here? Will the declining prices in the U.S. filter down to Mexico? If so, by how much? Rationally, I have to believe that there will be a price adjustment, but a lot of the buyers these days are coming from all over the world, which might keep prices rising.

So, where does the smart money go now? Don’t tell anyone, but I like the area around Manzanillo, a town that has stayed below the tourist radar due to a lack of flights into their airport from the U.S. The town itself is not the best, but the surrounding areas, in the state of Colima, is as beautiful as Mexico gets…and you’ll pay less than ½ the price of today’s hot markets.

Real Estate Blowback

Thursday, December 6th, 2007

The 3rd annual Mexico Resort Development Conference has just concluded in La Costa, near San Diego, with some new, but not surprising, revelations. For many years these type of affairs have been very upbeat cheerleading sessions designed to synergize the attendees into prolific deal-making. Many of the industry’s heavy-hitters were in attendance, including Jack Nicklaus, the number one golf course builder in Mexico.

But this year there was a different tone, as the inevitable U.S. real estate meltdown has drifted across the border, with reports that sales are sugnificantly down and at least 30 on-the-drawing-board housing and resort projects will probably not be built. The predictions as to when things will turnaround range from 1 – 5 years, which is a long time for people who like to see hammers swinging.

I do believe that the number of gringos retiring and investing in Mexico will continue unabated, as the benefits afforded them will remain very enticing. The coming-of-age-in-the-sixties baby boomers are searching for a life more similar to what they remember from thirty years ago at a price that they can afford. Mexico meets many of these requirements, offering small-town, live-and-let-live life-styles without the convoluted, litigious day-to-day b.s. that has tragically become the norm in the U.S.

The real estate downturn in Mexico is not surprising to some of us. I have predicted this for a couple of years. But this is the first time I have seen it acknowledged by the developer class. And my guess is that things are worse than they are admitting to. With housing equity drying up in the U.S., there just isn’t as much available cash to drive the prices in Mexico. And with a surplus of inventory that has accumulated over the past decade from Northern Baja to Riviera Maya, there will be a significant correction. Bottom line: the next few years should be a very good time to buy in Mexico. Just take your time, do your research, and bargain hard.

Trouble In Rocky Point

Thursday, November 29th, 2007

There is a news report out about some investors losing their money in the area known as Rocky Point in Sonora, Mexico near Puerto Penasco. Whether this could have been avoided is arguable, or make that probable. Read the story and you get the sense that some of those who feel duped maybe didn’t thoroughly investigate the situation before handing over their considerable amount of cash to the developers before verifying that the developers had a clear title in place for the land that they were to develop, and the funds to follow through.

Mexico has long been littered with projects that were never completed. However, the foreign investment laws enacted in 1993 that allowed for gringo ownership via a fideicomiso (bank trust) have paved the way for tens of thousands of land transfers with no significant problems. If you follow the best advice and adhere to the laws, Mexico is a safe investment (nothing is 100% anywhere). But one thing is clear to me: you should be extra diligent when investing in any multiple unit, new project. It is imperative to ensure that the developers have all of their financing in place, and clear title in hand. And then there will still be some risk involved. That is the nature of investment and is pretty universal advice no matter the country. There are some flake developers out there…always have been. If it smells at all fishy, or too great, for that matter, take your money off the table and think about it for a while. Do more homework.

There are many reasons that I prefer single-family residences to condo, townhouse or planned community developments.  High on the list is that they are much cleaner deals with the risk factor hugely diminshed. You are dealing with one seller for a property where you can verify the ownership fairly easily. From there the steps required to purchase are very clear with the inclusion of a notario (a special real esate lawyer), as required by Mexican law.

I’ll be following this Rocky Point situation as it develops and let you know what I find.