Escrow as we know it in the US and Canada is not required in Mexico. The choice to use escrow is negotiated between buyer and seller. Using a third party to hold funds is what most Americans and Canadians believe is the proper way to purchase or sell a property.
A Mexican has a different experience. A third-party holding purchase funds is a risk, to a national. His experience is the opposite: If a buyer wants to purchase a property, he gives the seller a deposit, directly. When the buyer has all his funds, two parties go to the notary and the deed is signed. Many times, there is no mortgage or trust, so what funds the buyer needs to pay, are paid directly to the seller with no third-party escrow.
The difficulty arises for non-Mexicans in our market, when they have to purchase within a fideicomiso trust for property near the ocean front. The trust application process takes longer and is a condition of the sale, so giving money directly to a seller is a concern on the part of the buyer.
If escrow is used, it can be a Mexican bank which has a permit from the Mexican government, or an approved escrow company outside of Mexico. Here is where we are now aware of differences in escrow in Mexico and the rest of North America:
There are No Laws in Mexico Governing Escrow
Since Mexico does not recognize escrow as a need, laws are not specific to it. So, even though escrow companies may be working in Mexico, legal jurisdiction where problems will be solved, can vary from only Mexico to include locations in the USA.
In the USA, there are more laws specifically addressing escrow and more experience in settling disputes. For this reason, you may want to weight the differences in jurisdiction. Jurisdiction will be available based on where the escrow company has a legal presence.
It is important to know in the case of escrow in Mexico, the title escrow company performs a limited function. It only holds (and charges a fee) the purchase funds and disburses them when the principals sign a disbursement letter directing how the proceeds are to be paid by wire transfer.
A VERY IMPORTANT fact is to realize, that because of the lack of escrow laws, the escrow agreement needs to be negotiated as the offer is negotiated.
Agreements which address purchase funds, default, and other conditions, need to be agreed upon and put into the escrow agreement. The escrow company will have to also agree to the changes in their standard form. A good decision is to put deadlines and prior agreed upon return of funds or payment of funds for default for specifically named parties.
The escrow holder does not pay bills, pay prorations, enforce the terms of the contract unless the terms are in the escrow agreement, or create the disbursement document or closing statement for the buyer and seller.
One thing is clear: Do not use a real estate agent, real estate company, or notary to be the escrow holder of your funds.
Because there are fewer laws about escrow, it is also easier for some unscrupulous persons to become registered as an escrow company, which does not have a genuine escrow account. This means funds may be put into an ‘escrow account’ which is also the business account of the principal owners of the escrow company. This makes it difficult to get the money out as other laws will come into play such as privacy of the individual.
A business license does not qualify as an approved escrow company to take buyers money and do something with it. Do not be naïve. Do not expect your real estate agent to be up to speed on this. Mexico still does not require agents to be licensed.
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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