THE ROLE OF THE ESCROW ACCOUNT IN MEXICAN REAL ESTATE TRANSACTIONS
By Pedro Perichart Perera, Partner of P&H Closing Services
If you ask a standard Mexican citizen: “what is an escrow account?” he or she will probably not have a clue of this concept. The reason is because in Mexico, real estate transactions close at the Notary Public’s office, when the public deed is signed and the buyer delivers a check to the Seller for the purchase price balance. All payments are done directly from Purchaser to Seller.
However, American and Canadian citizens are used to paying the purchase price to the Seller indirectly, through a neutral third party escrow account. This means that the purchase price is paid like this: first deposit when signing the purchase agreement, subsequent deposits when certain conditions are met (e.g. rooftop of the house is finished, services are in place, title insurance commitment is issued, survey is performed successfully, etc.), and the final deposit is made when the home is substantially completed and delivered. All the funds are deposited into an “escrow account”, with an Escrow Agent, in accordance with the provisions of an Escrow Agreement fully executed by the parties. The Escrow Agreement regulates the timings and conditions required for each deposit and each disbursement. Escrow Agents charge an “escrow fee” ($500 – 750 USD) for opening, administering and releasing the funds according to the disbursement instructions signed by the Seller and Purchaser.
Foreigners who purchase second-homes or land in Mexico often wish to integrate the U.S. escrow process to the closing of the real estate transaction. They usually succeed in tourism destinations where foreigners have a strong presence and the closing process is more complicated due to the “restricted zone” issue. For example, in Los Cabos, as the purchasers and real estate brokers are predominantly foreigners, the U.S. escrow process is very well known and implemented by attorneys/closing agents.
Some tips regarding “Escrows” in Mexico are:
- ALWAYS use a U.S. based Escrow Agent. The most popular, respected and knowledgeable in Mexican affairs are Armour Secure (formerly Fidelity Title), Secure Title (formerly Stewart Title Latin America) and AMX Title. Even if Mexican banks have similar figures to the “escrow account” (i.e. custodial account, deposit account, etc.), none of them are based on a mutually agreed Escrow Agreement, plus they are slow and not very dynamic.
- AVOID depositing more than 30% of the purchase price directly to the Seller/Developer’s bank account. The Escrow is gradually being accepted by Mexican sellers/developers; however, the idea of “financing” construction with the aggregated down payments of the purchasers is still rooted.
- NEVER deposit ANY funds into the Real Estate Agent’s bank account, no matter how well reputed the Agent is and regardless the “name” given by the Agent to such account (i.e. trust, escrow, good-faith, etc.). Doing so is risky and it also creates confusion during the closing process.
- BE AWARE that many developers are using Escrow Accounts just as a marketing tool, but if one reads carefully the purchase agreements, the money is deposited into the Escrow Account by the Purchaser, and the developer is authorized to release the funds in its favor. This mechanism nullifies the main purpose of the Escrow figure, which is to safeguard the purchaser’s money until the transfer of ownership takes place.
- RESEARCH the different options of Escrow Accounts. It is typical that some Developers have special deals with U.S. Escrow Agents, and also there are some special Escrow Agreements for transactions involving financing. You might also want to open an “interest-bearing” Escrow Account if your money will sit there for a long period of time.
- LOOK FOR the best Escrow Fee. You can save a couple hundred dollars by getting different quotes from different Escrow Agents.
- ASK your local attorney/closing agent to explain you the advantages and disadvantages of each Escrow Agent. Each one is suitable for different purposes.
If you are planning to buy a piece of real estate in Mexico, the ideal mechanism is to deposit 100% of the purchase price in an escrow account. If such mechanism is not accepted by the seller/developer, then you should try to negotiate to use a combination of direct down payment to the developer and leave the balance of the purchase price in an escrow account. This will protect you from any abuse and will guarantee your purchase.