The Process of a Real Estate Transaction

by John Fleming

The purchase of real estate in Mexico is not the same as in the U.S. Unfortunately many problems have arisen from the fact that people don't realize this. Americans often naively expect that buying a property in Mexico is just like buying one at home. Mexican sellers don't know what Americans are used to and are puzzled by some of their expectations.

When Puerto Peñasco was a small fishing village, everybody knew everybody else, and reputation was all. Transactions could be consummated with a handshake--no need for a written contract. But when Americans started coming in and buying real estate from Mexicans, the situation changed. Not only did sellers and buyers not know each other, but they were often operating on a whole different set of assumptions. Problems were sure to arise.

I thought it might be educational for both Americans and Mexicans to describe the entire process of a typical home sale in the U.S. and compare it with Mexican practices, as I have observed them in Puerto Peñasco. The process described here is the way I go about it, having been a real estate broker in Arizona for over 20 years. Of course individual transactions will vary, but this is a fairly standard scenario.

Licensing

In the U.S. real estate agents and brokers must be licensed. In Arizona each office has a designated broker who is legally responsible for all transactions. Agents are responsible to the broker. To get a license, agents must undergo a criminal check, take a prescribed number of hours of course work, and pass an exam. To become a broker in Arizona, an agent must have been active for at least three years, take more required course work, and pass another, much more difficult, exam. Agents and brokers take more hours of required course work to renew their licenses every two years. Other states have similar educational requirements. Brokers are audited regularly by the state Real Estate Commission, and those found guilty of illegal and unethical practices can be fined substantial amounts, lose their licenses or have them suspended, and have criminal charges pressed against them.

In Mexico there is currently no government regulation of the real estate industry and no licensing requirement. In Puerto Peñasco most of the people selling real estate are Americans, and their qualifications range from years of experience as brokers or agents to the ability to nail two boards together and put up a sign. The state of Sonora is currently working with the state of Arizona and the Arizona-Mexico Commission to develop a licensing program which will provide more accountability for clients and more protection for the public.

Realtor Associations

In the U.S. the National Association of REALTORS® and affiliated local REALTOR® Associations that promote professional standards among their members by offering courses, seminars, and printed materials to help the member agents. Local Associations of REALTORS® cooperate to sell real estate. Realizing that they can best serve their clients by advertising their properties to as many other agents as possible, they operate a Multiple Listing Service (MLS), which is an agreement among member real estate companies and agents that they will cooperate with each other in listing properties for sale, showing each other's properties, and sharing commissions.

Mexico has a national professional association, Asociación Mexicana de Profesionales Inmobiliarios (AMPI), which promotes professional standards and ethical conduct. It is still quite new and has few members among the local real estate community. I understand that it is much more active in other Mexican cities. In Puerto Peñasco there is no MLS and virtually no cooperation of any kind among real estate companies.

Listing

In the U.S. each MLS maintains a computerized data base of properties listed for sale by all its members. When agents list a property, they fill out a form that includes a great deal of information about it and enter the data into the system. Other members have access to the data base through computer programs. So all members of the service can find out whatever they want about all listed properties.

Since there is no MLS in Puerto Peñasco, it is not easy to get information about listed properties or even to find out what properties are listed. If a client wants, for example, a 3-bedroom house on the beach, the agent will have to rely on an informal network of contacts or perhaps drive down all the beaches in the area and count For Sale signs. There is really no way to ensure that a search is comprehensive.

Showing

MLS members purchase keysafes, which they usually use on homes listed for sale. Keys to the property are placed inside a keysafe hung on the door, and agents have special keys that are programmed to open it. This keeps the sellers' homes secure but provides access for member agents.

Since there are no keysafes in Puerto Peñasco, agents for buyers have to find sellers or caretakers and get the keys from them to show a property. Since many sellers are not full-time residents, it may be difficult to locate someone who has a key.

Commissions

In the U.S. sellers usually sign what is called an Exclusive Listing Agreement, which means they are obligated to pay the agreed-upon commission to the listing agent, no matter who sells the property--the listing agent, another agent, or even the sellers themselves. The amount of the commission is included in the price of the property.

Most listings I have seen in Puerto Peñasco are not exclusive, which means that if the seller sells directly to a buyer, the listing agent gets no commission. Agents are reluctant to give out information about the properties they have listed, fearing rightly that buyers or other agents may go directly to the sellers to make an offer, thus depriving them of their commission.

Many Mexican listings are what in the U.S. we call pocket listings. There is no signed contract between the seller and the real estate agent. The seller just says, in effect, "If you find someone who wants this property, you have my permission to sell it." The agent says, in effect, "OK, I'll put this in my pocket and if I hear of anyone who wants to buy it, I'll let you know." This can do a disservice to the seller because the agent has little motivation to advertise the property widely and will probably not attract many buyers.

The standard practice in the U.S. for sharing commissions is as follows: at closing the company that has listed the property for sale receives 50% of the commission agreed upon; the company who brings the offer from the buyer receives 50%. Each company then shares further, giving the individual agent 50% of its half.

Here's how it might work in practice. Let's say a house is listed by Henry Smith of Happy Realty for $100,000 with a commission of 7%. Martha Baker of Felix Realty brings in a full-price offer from the buyers, which is accepted. When the transaction is closed, Happy Realty will receive $3,500 and will give Henry a check for $1,750. Felix Realty will receive $3,500 and give Martha $1,750. This sharing procedure is standard practice, but the percentages will differ in each case because they are all negotiable.

In Mexico there appears to be no standard practice for paying commissions. Many sellers set a price on their property that does not include a commission, expecting either that the buyers will pay it or that their listing agents will increase the asking price to make sure they receive a commission. Since there is no cooperative agreement to share commissions, the details of each transaction have to be negotiated individually.

Selling

1. When I work with sellers in the U.S., I start by doing a comparative market analysis to see what comparable homes have sold for in the recent past. By using the MLS computer data base, I can easily get this information. I try to come up with an average price for comparable homes. But any given home may be above or below average, depending on such factors as location and physical condition.
2. My next step is to visit the sellers in their home. We spend time talking about their purposes in selling and their financial needs. They show me around the house, pointing out all its best features and any problems that may exist. They are obligated, as I am, to tell prospective buyers about any defects they are aware of. We try to arrive at a fair asking price based on all these considerations. I have the sellers sign an exclusive listing contract and fill out a form giving information about the property.
3. Now I enter all the data into the MLS computer system. I get a set of keys from the sellers and put them in a keysafe on the front door or in another convenient place so that any member realtors can have access to the house. I put up a FOR SALE sign. If it seems advisable, I arrange for an Open House to attract potential buyers and other real estate agents. I may also advertise in the local newspapers, in realty magazines, on the Internet, and through a flyer distribution service. I also contact all of my friends in the real estate business.
4. When a buyers' agent brings in an offer, I discuss it with the sellers, explaining anything that may be confusing. If it is for less than the full price or unsatisfactory in any other way, they may write a counter offer. If the sellers decide to accept the offer, I have them sign it and return a copy to the buyers. This makes it a legally binding contract. Typically buyers and sellers do not meet and do not discuss prices and terms except through their agents.

Mexico

In Mexico most of the above procedure is impossible. Agents usually meet with sellers and may or may not get them to sign a listing contract, although they typically put up a sign anyway. I have discovered that it is not uncommon for sellers to ask agents for an advance payment on their sale or a bonus for signing a contract.

Buying

1. My first step when we work with buyers is to sit down and counsel with them for an hour or two. I find out what their needs are, what they want in a house, where they want to live, how much money they have, what financing they will need and can qualify for, whether husband and wife have the same aims, and anything else that will help me find them the right house at the right price. Some agents start taking people out and showing them houses right away, but I have found that the counseling session saves time in the long run. I don't waste time showing buyers houses that they can't afford, for example, or showing properties to couples that are fighting each other.
2. The next step is for me to go to the Multiple Listing Service's computer program and search for any houses in the right price range and the desired area. I can search for things like number of bedrooms, number of baths, garages, swimming pools, and so on. This way I can compile a list of between 10 and 20 properties that seem to be suitable.
3. Now I need to look at the homes. I have found that by doing this myself before I show them to the buyers, I can narrow the search. Some properties can be scratched off the list immediately if I discover, for instance, that they are in exceptionally bad condition or that there is a run-down property across the street that will lower values.
4. Having narrowed my list to a number suitable for viewing in one trip--from 6 to 10, say--I make appointments with the owners or their agents (if the house is occupied) and take the buyers out to see them. I note their reactions to each one. Buyers may not realize until they view several homes that, for instance, they don't want their kitchen at the front or that they definitely need an entry hall. By taking note of their reactions, I will know what not to show them if any future visits are necessary. Very often buyers find the house they want to buy on their first trip. If not, I repeat the process until they do.
5. The next step is for the buyers to make an offer. In Arizona we have a 10-page purchase contract to be filled out and signed. It covers almost every conceivable detail of every possible transaction. On it the buyers indicate the price they are offering and how it will be paid. In most transactions a large part of the money will be financed and so the offer is contingent upon the buyers obtaining that financing. When they make an offer, the buyers have to include what is called earnest money, a substantial sum to indicate that their offer is serious. The money does not go directly to the sellers, but is deposited with an escrow company.

Mexico

1. Because there is no MLS, most of the above procedure is impossible in Mexico, although the counseling process is, or should be, even more important. American buyers must realize that agents need to take more time to find suitable properties for them to look at.
2. When an offer is accepted, buyers may give earnest money directly to the sellers. This expectation can be shocking to American buyers who are used to the practice of no money changing hands until the final closing of the transaction.

Escrow and Closing

1. After acceptance of the offer, the contract and the earnest money are deposited with an escrow service, a neutral third party that will process the entire transaction. If the buyers require financing, they start the process of obtaining it. The relevant documentation will also be deposited in escrow. Usually escrow is handled by a title insurance company, which will check to make sure the title is valid and can be transferred free of any liens and encumbrances. All closing costs are calculated by the escrow company and itemized on the closing documents.
2. After all of the paperwork necessary has been received from both buyers and sellers, they will go in to the escrow company, and sign everything required. The sellers deposit a cashier's check for the required amount. Usually buyers and sellers go separately on the same day.
3. The transaction now has to be recorded with the County Recorder, which may take another day or two but can sometimes be done on the same day. Until recordation has taken place, the transaction is not officially closed. After recordation, the sellers receive their check for the full price minus the costs of the sale and any liens that were outstanding. The buyers get the key to their new property, signifying official possession.

Mexico

1. In Mexico all real estate transactions are finalized by a notario, a lawyer with special expertise, who combines some of the functions of a title company, an escrow service, and a tax collector. It should be remembered that he is not a neutral party, but represents the government of the state.
2. The practice of title insurance is relatively new in Mexico and not usually part of the transaction. The notario will check the current title but often does not go all the way back to original and all subsequent owners, and so buyers cannot be absolutely sure that their title is free of clouds or liens.
3. Closing costs in Mexico are substantial, sometimes as much as 15% of the cost of the property. Foreign buyers must pay a number of costs, including purchase of a bank trust (fideicomiso) which gives them all the rights of ownership.
4. Often buyers and sellers meet with the notario at the same time to sign all the required documents. The transfer of money to the sellers does not take place in front of the notario but is handled outside by the buyers or their agents. Financing has been virtually unknown for real estate transactions in Mexico; it is all done on a cash basis.
5. Transactions are officially recorded in Mexico just as they are in the U.S.

New Subdivisions

In the U.S. homes in new subdivisions are typically sold by an on-site real estate agent. The process is similar to that described above, but if buyers go around house-shopping without an agent, they may not realize that the site salesperson is representing the developer's interests only. Most developers will pay a commission, so it doesn't cost buyers any more to have their own agent, someone who represents their interests. This concept, called buyers' brokerage, is becoming increasingly popular in the U.S., not only for subdivision homes, but for resale properties as well.

In Mexico new subdivision properties are sold in much the same way, but it is even more important for buyers to have their own agent because the laws and practices are different from what they are used to. Moreover, many large developments have had their own problems with Mexican laws and regulations, and it is important for buyers to be aware of the potential for trouble.

Past History and Future Trends

Americans have been vacationing in Puerto Peñasco since its beginning in the 1920's. But most of them came and went and did not buy property. The first large-scale influx of American buyers was in Cholla Bay, which has grown in a somewhat haphazard way over the course of the last several decades, with no regulation and lots of irregularities. There were problems because many Americans didn't realize that they had built houses on land they had leased, not purchased; they had not obtained bank trusts; or they had violated Mexican laws or customs in other ways.

Then in the 1970's Las Conchas was started. From the beginning it had rules and restrictions aimed at avoiding some of the problems Cholla Bay had encountered. And, by and large, it has done so. Deed restrictions and an active neighborhood association have kept the subdivision growing in an orderly fashion, thus enhancing values for the mostly American residents there to whom conformity in a residential community is a priority.

In the 1990's, with the phasing out of the fishing industry and the government promotion of tourism, Puerto Peñasco became home to a number of large planned residential developments. Some of these have been built already, but many are still in the planning stages, although building lots have been sold based on their expectations. Nearly all of the developments have had problems with title or with government regulations, causing delay in their planned openings.

Financing has been available for some of these developments, but many Americans have financed their vacation homes by taking out home equity loans on their property in the U.S., thus enabling them to pay cash in Mexico. Recently several American lending companies have made it possible for buyers of Mexican properties to finance their purchases. One key is the Title Guaranty Deed, which has a foreclosure provision similar to the American Deed of Trust. Lenders can now foreclose within 90 days and get their security back. Another key is title insurance, and this concept too is becoming more widely known in Mexico. Since it protects buyers and sellers alike, it is sure to be used increasingly in the future.

Appraisal is also coming to be an accepted practice. Without the computer data base American realtors are used to, it is more difficult to fix a fair price on properties, but appraisers are building up their own databases, and the states of Arizona and Sonora are cooperating to facilitate computer access to property registries in both countries.

All of these developments are making it easier for more Americans to buy property in Puerto Peñasco, but they must never forget that they are obligated to follow the laws of their host country, Mexico. Knowing what to expect and what pitfalls to avoid should make it more comfortable for them. Knowing American practices should make it clearer to Mexicans what to expect from Americans and why they act the peculiar way they do.

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