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Tuesday October 17 2017
Buying New Construction: 9 Questions to Ask the Developer
Author:
Mario Restrepo, Nuwire


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When considering buying real estate from a developer in Mexico, it is important to understand the differences between how you might be accustomed to buying new construction in your country of origin, and what is common and legal in Mexico. Specifically, there are financial and title transfer considerations that you should take into account when buying new construction here in Mexico.

For example, in the USA, in order for a developer to get building permits, financing must be obtained to guarantee a completed project; then, the pre-sales of units can begin. In Mexico however, outside financing for a project does not have to be obtained before pre-selling units, and buyer’s cash can be used for construction. This, of course, puts buyer’s deposits at risk if there is a mismanagement of funds or construction.

There are many excellent developers here in Mexico with a clear history of delivering completed units in a timely manner. In addition, Mexican architecture is one of the reasons why Mexico is such an excellent travel destination, as well as a real estate investment destination. I feel that the most under appreciated artist in the world is the Mexican mason. This article is only meant to help you ask questions to lead you to the best developers, and to give you insight as to the possible safety of your investment and to what you are really buying.


Some Key Questions for Developers

Is the developer willing to use an escrow company, or does it want your ‘good faith’ deposit placed directly into its account?

Many developers in Mexico are not accustomed to using escrow companies. They don’t see the benefit in it, as they prefer to have the buyer’s money deposited in their accounts, giving them in a position of strength with the buyer. Top developers who don’t use escrow companies will refund a buyer’s deposit if something doesn’t go according to contract, or even if the buyer changes his mind within a certain timeframe.

If you find a developer willing to use an escrow company, it is a sign that they are doing good business. Buyer money deposited with an escrow company is commonly transferred to the developer either upon delivery of the unit, during completed phases of construction, or whenever it is indicated to do so in the escrow instructions. Escrow instructions are usually drawn up by the buyer’s and developer’s lawyers, and tend to put both parties at positions of equal strength.

Some developers find that using escrow is a good marketing tool for them. It shows that the developer wants a fair playing field for all involved, and that the developer is willing to be transparent about its business. A developer without a good track record -or any track record- who is not willing to use an escrow company may be a warning sign.


Does it specify in the contract when construction on your unit and building will start? And, if construction doesn’t start by a specified date, how can the buyer get his money back if he chooses to if an escrow account is not used?

Most contracts stipulate that a developer will deliver a completed unit to the buyer on a specific date. However, most do not stipulate that construction on your building and unit will begin at a specified time. So, if construction on your unit starts six months late, this might be an indicator that it is time to get out of the contract. Include these terms in the contract so your money will be released to you if you choose; otherwise, your money may remain tied up for years, until the end of construction.


If the delivery date of the new condo or home is late, are their any concessions or refunds if an escrow account is not used?

If a buyer cannot come up with the rest of the money owed on his unit when it is delivered in a timely manner, it is possible that he will loose his deposits. In case a developer delivers late, there should be concessions offered the buyer for the delay in delivery time.


Is the land already paid for and is it free of liens?

This question starts with the process of learning the financial strength of the developer. If the developer does not already own the land free and clear, and has borrowed money to purchase the land, it is likely in a much weaker financial position to finish the project. A developer should be able to show your lawyer that it has clear title to the land it is building on.


Is financing for construction from outside banks? Or is financing for construction from buyer deposits and hard cash?

If the financing for construction is from buyer deposits and not outside financing from banks, then buyers should do some due diligence before putting down a deposit. If something goes wrong with the project, a buyer may have a hard time getting their money back since their money is tied up as cement and rebar.

For example, a project whose financing is driven by sales in a slow market may not be able to deliver all amenities and units as originally anticipated. This type of financing is common and legal in Mexico, so, if you choose to buy from a developer who uses buyer deposits to build, you must make sure that they either have an excellent track record in delivering units or are willing to use an escrow company to monitor the transfer of buyer funds to the developer. An enormous plus would be if the developer had a bond which would protect buyers if terms in the contract where not delivered by the developer. However, if you find a development that you like that has outside financing and will be completed without buyer deposits, then you are a step ahead of the game.


When will title be conveyed? Will completed buildings be used to finance other building or projects? What liens will there be on my unit and building in the next 12 months?

You want to be certain that the developer has title to the land it is building on now, and that there are no liens on the land. In addition, you want to be sure that they will be able to deliver clear title to you on the date they deliver the unit. If you get an answer such as “don’t worry, you’ll save money by not having to go to the notario,” or “this is how we do business here in Mexico,” it may be an indicator that you need to do more research because it is possible that the developer will not be able to deliver title when they deliver the unit.

Assure yourself that the building that houses your unit will not be used to finance the developer’s next project or building. If this occurs, you will not get title when the keys are delivered to you, and you will not be able to get your unit financed or refinanced. If you don’t have clear title, it will also be difficult for you to sell your unit unless you sell at a deep discount.

Even if a developer is building large scale projects, is doesn’t necessarily mean it is performing good business. The purchase contract should address that you will receive a 100% refund if the developer can’t deliver title within a given time frame.


If there are amenities included in the development, when will they be delivered and usable?

Meaning, will the amenities be completed in order to sell more units and for you to enjoy, or will the sale of future units be needed in order to finance the promised amenities. Amenities sell, and cutting corners does not. Knowing this will simply give you more insight about the financial strength about the developer.


Who is the developer? Where are they from? What projects has the developer delivered in the past? Where I can see these projects?

These basic questions will help you recognize who the new builders are who are trying to get a project done without much experience. It doesn’t mean that they won’t do an excellent job in delivering quality units, but it is useful information that can be used to base your investment decisions.


Can you take the contract with you and have it reviewed by an attorney before you purchase?

You want to be sure that the purchase contracts are reviewed by an experienced Mexican real estate attorney. Your attorney should write up addendums to the contract that protect you, and will refund you money if the project doesn’t go as planned. You want your attorney to point out the pros and cons of the contract, and the red flags.
Even though some answers to these questions may sound as if Mexican developers do not deliver what they say, this is not the case; most live up to their promises. It is simply to provide you with some advice as to what to look for when you purchase property in Mexico. I fully recommend that you buy real estate in Mexico, for your family to love and enjoy, and as a sound investment.

 

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