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Baja Real Estate Reform

Changes are coming, but be cautious of investing in projects unbuilt or under construction

A pair of recent real estate investment and home ownership events in Tijuana and Rosarito drew a crowd of professionals and potential buyers and investors. The two-day Tijuana event was organized to attract investment for combination hotel, housing, and marina projects. It was hosted by the Baja California Secretary of Tourism and brought together a wide variety of experts in real estate development along with a number of U.S., Canadian and Mexican developers sharing experiences and successes in the Baja California peninsula.

Developments in various stages of planning and construction were included from both Baja California states. Mega projects in San Felipe, Mulege and Loreto Bay were impressive. A great deal of emphasis was rightly placed on safe buying. U.S. title companies were there, as were lenders who unveiled new longer-term financing programs.

For individuals looking for a vacation or retirement home, a three-day event in Rosarito Beach was especially popular. It showcased 30 developments from Tijuana to Ensenada, providing information about lots, condos and houses. A separate safe buying conference included attorneys, title insurance executives, real estate brokers, bank trustee service providers and construction companies.

The most interesting aspect of both events was the sincere attitude of the Mexican developers in their desire to get their act together to protect U.S. citizens who are buying property in Mexico.

The Baja coast developers have formed an association and have agreed to abide by a code of ethics and to make available title insurance to buyers. Hugo Torres, owner of the historic Rosarito Beach Hotel and a beachfront developer, is at the forefront calling for legislative reform. He is joined by other regional developers such as Luis Bustamante, and Diane Gibbs, principal of a respected real estate brokerage.

Torres has met with Baja California state officials promoting the need for laws requiring specialized education and the licensing of real estate practitioners. The neighboring state of Sonora already has such laws, and Torres idea is being met favorably by Baja state legislators. Other reforms under discussion are regulations of the now-unregulated escrow companies that are the cause of much concern.

Among those pushing for the reforms is the AMPI (Asociacion Mexicana de Profesionales Inmobilarios), something equivalent to the Board of Realtors in the United States. Belonging to the organization requires specific levels of education, experience and signing an agreement to abide by a code of ethics. All these steps are in the right direction and ultimately will lead to a better-regulated industry that will protect the best interest of sellers and buyers.

But going there and being there are two very different measures. Until legislation, and- most importantly — the culture of dealing with reform become second nature, red flags still signal caution.

Since we began pushing the idea that title insurance was essential for U.S. buyers as their best protection against the potential loss of their home investment, great strides have been made by the title firms and Mexican real estate developers. It must be remembered, however, that a title policy is only as good as the marketable title that is insured. If there are exemptions from coverage, such as an ejido claim (a constitutional right to cultivate the property) or defects on the title of record, the insurance is meaningless.

At the real estate broker level, Gibb's office offers strong and assuring policy. Her offices will not represent any development or individual property that does not qualify for title insurance. All brokers should act accordingly.

However, buyers should still be cautious when new developers represent that they have a master title insurance policy. This is not the same as policies that protect an individual buyer's investment. It remains up to the prospective buyer to check with the title insurance company before completing the purchase.

By far the biggest issue is the question of deposits toward the purchase of a home, particularly those being or not yet built.

Unlike California, construction financing in Mexico is not readily available and when available the interest rates are prohibitive. So it is customary for developers to finance construction projects through nonrefundable deposits or full prepayment from buyers.

In Mexico this is an acceptable practice but not in California, as it is the buyer that is placed at risk. Assuming no title problems, the issue is one of completion and satisfactory delivery of the finished residence. What happens if the developer does not finish the residence per specifications? Or within the time allowed? Title insurance does not cover either eventuality.

Such nonrefundable deposits or full payments when used to finance the development fall under provisions of the California Corporations Code and the Federal Securities Act. This means that Mexico-based developments must comply with proper securities registration, or get an exemption, if they are marketing and soliciting sales in California.

The securities laws, which define a buyer’s deposit as an investment contract, mandate full disclosure of use of funds, buyers risks, as well as information and background on the principals involved in the project. In this manner, buyers will be fully aware of the risks faced by making such deposits on pre-construction purchases.

The issue of an investment contract a security when buyer proceeds are used by the owner or developer to finance a project, is an important one to watch out for. It may come to play this month in a preconstruction auction, or marketing, in San Diego of a residential project in Ensenada. Will the buyers be placed at risk by financing the project? If so, will state or federal regulators seek to apply and enforce applicable securities regulations? Potential buyers should not count on the intervention of any government agency. The best solution remains doing your own research.

Patrick Osio Jr. can be reached at patrick@transbordercommunications.com