HispanicVista Columnists

Baja Real Estate Risks

Sal Osio, JD/HispanicVista.com

July 11, 2005

 

     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 Buyers funds with a neutral, bonded, licensed escrow holder. The Buyers 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 Sellers 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 70s and early 80s 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.

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