FINANCING A PIECE OF OLD MEXICO

FINANCING A PIECE OF OLD MEXICO

by Risa Kottabi and Dan Monroe

You’ve now been to Rocky Point and you know that you have to own a piece of the magnificent real estate of Puerto Penasco.  You are not alone.  Hundreds of Americans are buying into this growing community.  If you are among the fortunate people who have already acquired real estate in Puerto Peñasco you know that most of the transactions require substantially higher cash down payments than comparable transaction in the United States.  For newcomers to the area you will quickly learn that in most cases financing is not even mentioned in the purchase contract.  It is assumed that the buyer will pay the earnest money at the time the offer is accepted by the seller and the remainder of the purchase price will be paid, in cash, at closing.  For those of you who don’t have enough cash to pay for the entire purchase price up front at closing this article is for you. 

When you are thinking about purchasing property in Puerto Penasco it is important to be armed with as much knowledge as possible and to know all of your options BEFORE you commit to your purchase.  The options for financing are somewhat more limited that what Americans are accustomed to.  Financing is available but the question is do you know how and when financing can be obtained for property in Mexico?  Some surprised buyers quickly learn ( for some too late!) that banks in Mexico will not lend directly to a foreigner, even if you are from the United States!  Financing is available.  You just need to know how to access it.  You need to know how the type of financing affects your interest rates.  You also need to know that the type of financing you use may affect the status of your title pending paying off your financing.

Here are some common and some not so common ways to obtain the cash necessary for your purchase of real estate in Mexico:

Seller Carry-Back Financing:
Your dream house is waiting for you in delightful Puerto Penasco.  Unfortunately you don’t have enough cash to pay off the full purchase price at the time you buy the property.  You are absolutely not alone.  Lots Americans fall in love with the beauty and tranquility of Puerto Penasco but simply don’t have the cash required to buy that perfect house.  The most common solution used to solve this dilemma is seller carry-back financing.  It is often used with resale homes.  Many individual sellers will “entertain” offers where the seller actually finances (or “carries back”) a portion of the cost of the acquisition.  The seller accepts a portion of the purchase price in cash at closing and agrees to terms whereby the balance of the purchase price is paid to the seller by the buyer in installment payments over some period of time.  Therefore the seller becomes the “bank” or “lender”.   Experience shows that in most deals of this nature the seller demands at least 50% down at closing and will require that the unpaid balance of the purchase price will currently accrue interest at rates ranging upwards of 12 %.  But such terms are negotiable.  [Keep an eye out for the 5 year stop payment (balloon payment) that the seller usually demands.]   Keep in mind that bank trusts cannot be processed until the loan is completely paid off.  That is important because the seller usually demands the right to retain the title to your property until the entire purchase price is paid off.  Because of the very nature of the financing involved you may wish to go over the details of your intended purchase with your Realty Executive agent before purchasing with carry-back financing.

Developer Financing:
Right now on Sandy Beach there are over 30 towers in some form of vertical development.  That number does not even include the new residential developments and condo towers that we see popping up in the Mirador and Las Conchas areas.  Most of the towers and larger home developments have developer financing available for buyers.  Developer financing is quick, easy and readily available right onsite in the sales office.  This is nothing more than seller carry-back financing but done by sophisticated large developers on a commercial basis.  Your developer may provide you with a discount if you come in with all cash.  So you may want to check other sources of financing first.  Developer financing has opened doors for investors so they can now leverage their money and diversify their portfolio into new properties.  Some of these loans do not even require you to qualify for the loan (called “no-qual” loans).  This gives the person with a less-than-perfect FICO score rating the opportunity to purchase what they could not finance in the U.S..  But, buyer beware, (remember caveat emptor?) these often have higher interest rates can cost you substantial money if you plan on holding on to your investment long-term.  Make sure you investigate other financing options because you may just be able to obtain money from outside sources.  These other sources may provide you a lower interest rate.  For a comparison of rates you can check with your Realty Executive Agent. 

United States Lenders:
Yes, some American lenders have become “sold” on Puerto Penasco.  With the growing stability in the Mexico real estate market American lenders are seeing the advantages of lending money on properties located in our delightful community.  Now, with as little as 20% down, you can get interest rates at or below 8% with amortized loans stretching over 20 years.  Rates need to be checked before you make your offer since they tend to fluctuate.  Lenders are now even branching out and offering many different loan types including the ever popular construction loan just like is available in the U.S..  For more information on who to contact in the United States about financing, ask your Realty Executives Agent for the names lending institutions and individual lenders that will best suit your needs. 

Using Your IRA:
Yes, your IRA.  A rapidly increasing number of Americans are starting to figure out that a Self Directed IRA can be a valuable source of cash for the down payment or purchase of their Puerto Penasco dream home.  While investments in IRAs cannot be used to buy such things as collectables, they can be used to buy real property – even real estate in Mexico.  With the appreciation occurring with Puerto Penasco real estate this vehicle allows you to direct your IRA investment account “down South”.  Once again, your Realty Executives agent can assist you in making your IRA work for you while making your Puerto Peñasco purchase the most enjoyable part of your investment portfolio.

Home Equity Line of Credit and Mortgages:
There is the old standard and reliable means to get the cash for your down payment or the cash you need to pay the entire purchase price of your Puerto Penasco purchase.  You simply do a refinance on your existing home or other property in the United States.  The costs are minimal and can be deducted as a second home.  A variation of a refinance is to obtain an Home Equity Line of Credit (HELOC).  HELOC’s allow for a line of credit loan on your property in the U.S. to be used to acquire your Puerto Penasco real property.  You may even be able to borrow up to one hundred percent of the value of your home.  While the interest rate varies from bank to bank you will find that American financial institutions offer exceptionally good interest rates on HELOCs.  Your Realty Executive Agent has dealt with coordinating such financing for your Puerto Penasco purchase.  Feel free to ask for free advice on the subject.

Other Ways of Financing:
Americans are creative.  Innovative ways have been used in certain situations where people see the true value of owning property in Puerto Penasco.  People borrow from friends and family.  They form mini cooperatives where two and three or more families join together to buy a fantastic and unique property and share it among themselves on prearranged terms.  Some people work out trades of their American property and or services for a position in the property they want in Mexico.  Americans are famous for solving problems in order to accomplish what they want. Americans want a piece of Puerto Penasco!  Where there is a will there is a way to do it.  Just ask your Realty Executive agent and (s)he can assist you in being creative.    

These are some of the methods investors are using to purchase real property here in one of the most remarkable and peaceful places in the world.  When you have found your dream vacation or investment home, but you are a little short on cash, contact your Realty Executives Investment Specialist to find out which financing option will work best for you.  For more specific information on who to contact for the lending resources please contact and visit with Risa Kottabi at  risakottabi@gmail.com   

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