US & Canada
In the US and Canada, a developer borrows money based on the conditions of the lender. Feasibility or viability of the project is based on data: sales prices, sizes, number of bedrooms, features. Lenders can also require other data such as absorptions of similar properties, what amount of inventory is for sale. Will the project come on stream at the time it can be sold and absorbed? Will the projections of sales pay for the mortgage and interest? Will there be profit for the seller after he pays all costs?
The foundation, construction, finish-out, and use of the land will be under the approval and jurisdiction of health, safety, lender underwriting, as well as construction requirements and in some cases many other state and federal laws. For example, making properties handicapped accessible.
The plan ¨as approved¨ and ¨as defined legally¨ will create a binding and legal entity. This entity cannot be changed easily and must be in compliance with city codes or face the risk of being shut down.
Success or failure of project in the US or Canada
The project will also be affected by forces out of its control. This includes natural disasters, monetary problems of the country where it is being built, financial stability of the buyers’ income, as well as the financial and security climate of the area and the reputation of the country.
It is a process to take over a project which is in trouble and to finish it if needed (from insurance pay-out and more financing). The Canadian and USA business system for foreclosure involves many private and public entities who together work to finish the project and determine a course of action to sell the property, with low-interest mortgages if necessary, in order to take the property ¨off the books. ¨
The lender and the government have the ability to hold inventory off the market and release properties for sale over a period of time, so not as to flood the market and forced prices lower. This gradual release brings some stability to the market.
Recent sources of money in this market have included private investment funds and bank loans for a percentage of new projects. At this moment, the majority of new construction of condos are bought for cash (from the buyers) and the developer is building with these funds. If there is no lender involved, there will be fewer professionals who have used due diligence to determine the viability of the project and the experience as well as financial strength of the developer builder. This leaves the buyer the responsibility to conduct due diligence on his own.
The project will have to be permitted by the city or municipality. Developers may request deviation from building requirements, if there are other examples of what they want to do in that neighborhood. Or the developer will appeal to the municipality for a permit to be bigger or taller if the site does not take the views of persons just above the project.
In Jalisco, the condo regime which establishes the legal entity is done after construction is completed and when an occupancy permit is granted. In Nayarit, the condo regime or legal entity has to be established in order to obtain the building permit.
Success or failure of project
The project will also be affected by forces out of its control. It will be affected by the ability and decision of the developer to provide funds sufficient to finish the project for the buyers, who have become investors. Natural disasters, security, world economy can affect the demand for the development.
Monetary differences in the Mexican pesos versus the US dollar or Canadian dollar historically have given the developer many pesos to pay for construction and to be a cushion against cost overruns.
If there is no loan on the property and the project stops, there will be no foreclosure process. The project will need funds from the developer or additional funds from some source. The problem will be to finish the project and how the funds will be provided. There is no precedent for the city or state to become involved in the condition of an unfinished property, even if it is unsafe or deteriorating.
In the most recent example of new construction, and its high popularity with buyers the past 5 years. It is interesting to note that we have current product because of Mexican developers. They have come into the market and built without needing to prove to a third party (lender) there was a market for a new real estate product. The engine driving the train the past five years has been the successful sale of over 900 new condos in a popular part of town.
The current developers (and those coming), as well as the city, are responsible to stay on top of the issues and not overbuild products or corrupt the infrastructure.
Puerto Vallarta Real Estate Blog published every week –
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This article is based upon Flex MLS reporting, legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his own due diligence and review. If you have any other questions, contact me through my website.Harriet Murray