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Baja California real estate: Reform is coming, but…..

By Patrick Osio, Jr./HispanicVista.com

   November 13, 2005

 

  

                     The two real estate investment and home ownership events held in Tijuana and Rosarito Beach in Baja California’s Pacific Coast during October 6, 7, 8 & 9 were highly successful. The two day Tijuana event to attract investment for combination hotel, housing, and marina projects organized and hosted by the Baja California Secretary of Tourism brought together a wide variety of experts in real estate development along with a number of US, Canadian and Mexican developers sharing experiences and successes in the Baja California peninsula.

 

Showcase developments in various stages of construction and sales included both Baja California states. Mega projects in San Felipe, Mulege and Loreto Bay were impressive. A great deal of emphasis was placed on “safe buying” with availability of title insurance provided buyers by US based title insurance companies, and even long term financing programs were unveiled.

 

Of particular interest to Americans from Southern California, Nevada and Arizona was the Rosarito Beach 3 day event as this was a combination showcase of 30 developments from Tijuana to Ensenada of lots, condos and houses either oceanfront or with ocean views; and conferences designed to provide information on how to safely buy. Here again, presenters included attorneys, title insurance executives, real estate brokers, and bank trustee service providers, and construction companies.

 

To this writer the most interesting aspect of the events was the sincere attitude of the Mexican developers in their desire to “get their act together” to protect US citizens buying property in Mexico. The Baja coast developers have formed an association and have agreed to abide by a code of ethics and to make available title insurance to buyers.

 

Hugo Torres, owner of the historic Rosarito Beach Hotel and beachfront developer, is at the forefront calling for legislative reform. He is joined by other well known regional developers such as Luis Bustamante, and Diane Gibbs, principal of a real estate brokerage firm with impeccable ethical credentials.

 

Torres has met with Baja California state officials promoting the need for legislation requiring specialized education and the licensing of real estate practitioners. The neighboring state of Sonora that has worked well with Arizona real estate authorities already has such laws, and Torres’ idea was met with a high degree of favor by Baja state legislators. Other reforms under discussion are regulations governing escrow companies that as of now are not regulated and the cause of much concern in some cases by unscrupulous American expatriates setting up scam operations in Cabo San Lucas and other resort areas attracting heavy traffic from the US.

 

AMPI (Asociacion Mexicana de Profesionales Inmobilarios), an almost equivalent of the US’s Board of Realtors, requires a degree of education and experience for membership plus the signing an agreement to abide by a code of ethics. A number of Baja real estate practitioners are already members and there is a significant movement to require membership throughout Mexico.

 

These are all steps in the right direction and will ultimately lead to a well regulated industry that will protect the best interest of sellers and buyers.

 

But, going there and being there are two very different measures.

 

Until legislation and most importantly, the culture of dealing with reform becomes second nature, there are still red flags requiring caution.

 

Since this column and other writers began pushing the idea that title insurance was a must for US buyers as their best protection against the potential loss of their home investment, such as the fiasco experienced in Punta Banda where the Mexican Supreme Court found that the developers were not the rightful owners, which in turn forced around 200 Americans to lose their homes, great strides have been made by the title insurance companies, and the acceptance of such need by Mexican real estate developers.

 

It must be remembered, however, that a title policy is only as good as the marketable title that is insured. If there are exemptions form coverage, such as an ejido claim (a Constitutional right to cultivate the property) or defects on the title of record, the insurance is meaningless. So even though the title company may be of US origin, buyers must ask what ‘exemptions’ are contained in the “fine print” of the policy before making a decision to buy or not.

 

At the level of real estate brokers, Diane Gibbs’ office has the best and most assuring policy: Her offices will not represent any development or individual property that does not qualify for title insurance assuring a 'clean' title. That’s how ethical and consumer friendly brokers should act. However, caution should still be observed when new developers represent that they have a “master” title insurance policy. This is not the same as “individual” property policies that should be obtained by each buyer in a project. Here again, check with the title insurance company before completing the purchase.

 

But by far presently the biggest issue is the question of deposits towards the purchase of a home, particularly those still under construction or not yet built.

 

Because, unlike in the United States, in Mexico construction financing is not readily available and when available the interest rates are often prohibitive, it is customary for developers to finance construction projects through non-refundable deposits or full payment from buyers.

 

In Mexico this is acceptable practice but not in most places in the US, as it is the buyer that is placed at risk. Assume that there is availability for clear title to the property so that title is not an issue; the risk is then one of completion and satisfactory delivery of the finished residence. What happens if the developer does not finish the residence as per specifications within the time allowed?  Title insurance does not cover that eventuality.

 

In California, such non-refundable deposits or full payments when used to finance the development fall under provisions of the California Corporations Code (jurisdiction of CA Dept. of Corporations not CA Department of Real Estate) law and the Federal Securities Act. This means that the seller even though located in Mexico but marketing and soliciting sales in California must comply with proper securities registration, or exemption from registration, under the respective securities acts. The securities laws, which define a buyer's deposit as an investment contract, mandate full disclosure of use of funds, buyers’ risks, as well as information and background on the principals involved in the project. In this manner, buyers will be fully aware of the risks faced by making such deposits on pre-construction purchases.

 

The issue of an investment contract - a security - when Buyer proceeds are used by the owner/developer to finance his construction, may come to play in the current auction of a proposed pre-construction residential project in Ensenada being promoted in Southern California. Will the buyers be placed at risk by financing the project?  If so, will California (the California Corporations Commissioner) or Federal regulators (the Securities and Exchange Commission) seek to apply and enforces applicable securities regulations?

 

Non-California residents should check with their state regulators as to what regulations in their state regarding ‘deposits’ as above described are.

_______________________________________________________

Patrick Osio, Jr. is Editor of HispanicVista.com (www.hispanicvista.com). Contact at PosioJr@hispanicvista.com

 

 

(The opinions expressed by Patrick Osio, Jr. are solely his and do not necessarily reflect those of HispanicVista.com, editorial board of advisors or it’s contributing writers.)

Patrick Osio, Jr. has written a short but intensive manual on the Mexican perspective on numerous issues between our two countries. The manual is an in depth primer on the culture and protocol for better understanding Mexicans that in turn allows establishing personal and business relationships, and how to avoid the most common faux pas that can ruin relationships and business deals.

The manual is available through Electronic delivery for $9.95 making it possible to download the manual to save on your hard drive, printing its entirety or particular sections while reaping considerable savings over printed copies.