One of the Baja Real Estate Risks one might encounter when buying in
Mexico.
Sal Osio, JD/HispanicVista.com
The Gold Coast corridor – the ocean front from Tijuana to Ensenada – is
experiencing a dynamic growth fueled by California buyer/investors. This month
alone over 600 condominiums were under construction in the Rosarito area. And
over 5,000 units are in the planning stage. I use the term buyer/investors
because the buyer customarily deposits 30% of the purchase price with the
Seller, on a non-refundable basis, during or prior to construction of the
property. The deposit is used by the Seller to finance his purchase of the land
and/or construction of the structure. And, during the course of construction the
Buyer is customarily required to advance additional funds, which, in turn are
used by the Seller to finish the construction.
In short, Buyers finance the acquisition and/or construction of the real estate
they are purchasing. Accordingly, the risk of construction and completion of the
development is on the Buyer. This is a legal and accepted practice in Mexico.
But, not in California.
In California the Seller is required to deposit the Buyer’s funds with a
neutral, bonded, licensed escrow holder. The Buyer’s deposit is refundable at
all times unless and until the Buyer approves the delivery of the completed
residence he is purchasing and is assured marketable title. The Buyer is never
at risk.
In Mexico the Buyer who advances a non-refundable deposit prior to or during
construction of the property he/she is purchasing, assumes the risk that the
Seller will complete the construction and convey the same in the condition
agreed to, free of liens and encumbrances. Among other risks the Buyer is
assuming is the risk that the Seller is the rightful owner of the property and
that he can deliver marketable title.
The loss experiences unwittingly sustained by trusting Buyers are many. And,
these losses are taking place in Baja at this time. The inability of the Seller
to deliver clean title; to set up the fideicomiso (50 year, renewable, Mexican
bank trust that permits foreigners to own real property in the ‘prohibited
zone’); to clear liens on the property; to convey title free of encroachments on
adjacent property or the Federal zone in the beach areas – these are among the
many conditions that prevent a Seller from conveying marketable title to the
property. And in these cases, the Buyer will have to chase the Seller to recover
his non-refundable deposit.
Many prospective buyers are induced to buy property and overcome legitimate
concerns over the non-refundable deposit before title to the property is
transferred based on the Seller’s representation, with the tacit consent of the
title insurance underwriter, that the property is ‘approved’ for title
insurance. There is no assurance, however, that the property will be built in
accordance with plans and specifications, if at all, or that a fideicomiso will
have been formed or that title to the property will be free of liens and
encumbrances. Further, even when the title company issues its policy of title
insurance, the policy will except from coverage defects on the title,
encroachments, liens of record, etc. The title insurance that the Buyer receives
is worthless if there are in fact defects in the title.
Upon registration, California law exempts out of state/country subdivisions,
such as condominiums, from applicable California real estate law. Accordingly,
this exemption dispenses with the protection afforded buyers in California.
However, under Mexican law and California tort law, Californians are afforded
judicial relief in the event of malfeasance, such as misrepresentation, by the
Seller. This, however, is an expensive and protracted process.
A better remedy for U.S. purchasers who fund the non-reimbursable deposits is
under California and Federal securities regulations. The non-refundable deposit
when used by the Seller to finance the development, placing the buyer at risk of
loss (supra), is considered a security under both California law and the Federal
Securities Act. Since the Seller will not have complied with the registration
and disclosure requirements under the applicable securities laws, the Buyer will
have a cause of action in a State or Federal Court, to rescind the transaction,
for damages, and for attorney fees and costs. And, the culpable parties will
include the Seller and his affiliates, such as the title insurance company and
real estate brokers. This is not a novel concept. In the late 70’s and early
80’s the S.E.C. sued the leading Mexican developer of ocean front condominiums
which were sold to Americans. The developer, Pepe Riojas, and his company,
Playasol, were found liable and literally put out of business.
We are all interested and concerned in avoiding losses to innocent buyers and a
black eye to the real estate industry in Baja California. We must avoid the
fiascos of the past such as San Antonio Shores and Punta Banda. The answer is
simple: Sellers should not demand non-reimbursable deposits. Deposits should be
held in an escrow and released to the Seller only upon lien free completion of
the property in accordance with agreed plans and specifications, upon the
formation of the fideicomiso and the issuance of the title insurance policy
conveying ‘clean’ title to the buyer. The professional real estate brokers
should not permit their clients, the prospective buyers, to be placed at risk.
The title insurance companies should not allow developers to imply that they
have title insurance guaranteeing clean title for the benefit of the prospective
buyers. And a word of caution to the insurance underwriters, real estate brokers
and other professionals and institutions which form part of the developer’s
promotion: You may be the ‘deep pocket’ held accountable in a law suit under the
applicable securities laws.
Sal Osio, JD is an inactive member of the California State Bar and an
acknowledged authority on U.S. – Mexico law. He is also the Publisher of
HispanicVista and brother of its editor. Contact at: sposio@aol.com
http://www.hispanicvista.com/HVC/Columnist/sosio/071105sosio.htm