Punta Banda in Baja California - INVESTING in MEXICO

Arizona Journal of Real Estate & Business (408) 946-5388 1-800-659-8088
December 2000

INVESTING in MEXICO
NOT A "PUNTA BANDA" STORY

By Mitch Creekmore, Stewart Title Guaranty Company

Mexico Division
Once again national headlines this week have run articles filled with the unfortunate news that Americans are going to be evicted from their homes in the Mexican municipality known as "Punta Banda" near Ensenada, Baja California. Though disturbing and sad to say the least, we as Americans must understand that this situation is certainly not the norm, but an aberration in a country that during the past decade has made significant changes to its foreign investment laws. For one fundamental purpose: Mexico's desire to promote, to enhance and to protect foreign investment in the real estate sector.

The looming evictions of American residents at Punta Banda should clearly signal the fact that in any country, including the United States, title discrepancies exist, lawsuits get filed and in some rare cases, buyers lose their property. "Catastrophic failure of title" doesn't happen often, but in the case of Punta Banda, it clearly has occurred. In order for us as Americans to be an educated and prudent buying public, it is extremely important, at least in the opinion of this writer, that we understand the issues concerning the Punta Banda case and owning residential real estate in Mexico from a general prospective. The explicit statement that is being made here is that Americans should not fear buying property in Mexico. Owning a house, a condo or buying a residential lot on the beach can be a secure, legally entitled, publicly recorded and hopefully profitable investment. However, Americans, or any foreign purchaser for that matter, should know Mexico's laws concerning foreign ownership of residential real estate and buyers should always seek advice about title matters on a prospective acquisition from competent sources.

The American residents at Punta Banda are on the one hand, victims of possible fraud and misrepresentation concerning the Ejido Coronel Esteban Cantu's ability to enter into lease agreements for lots within the development known as the "Baja Beach and Tennis Club." On the other hand, it would also appear that many of these same individuals were naïve and "threw caution to the wind" ignoring the warnings and disclosure that the ownership of the land was in dispute and there was pending litigation to resolve the title matter. Some of the residents have publicly stated they knew there was a possible title problem yet still proceeded to invest in the construction of a home. Furthermore, the plaintiffs in this case had given public notice that the ejido did not own the property, which the land was in fact private, and that no one should build on it. At the end of the day, the U.S. lessees must have figured that it would work out to their benefit and they would trust in the assurances they had been given by the developer, Carlos Teran del Rio, and the Ministry of Agrarian Reform. As we know now though, the "catastrophe" did happen, overturning the ownership of the land in favor of the seven plaintiffs who filed the original lawsuit in a Mexicali tribunal court!

In light of the foregoing, why should Americans not fear buying real estate in Mexico? Quite simply, when the Americans at Punta Banda entered into what they perceived were valid lease agreements for their lots fourteen (14) years ago, title assurances and the ownership protections that exist today were not readily available then. Comprehensive title examinations complete with a Mexican legal opinion on the status of title can be rendered by Mexican counsel on any property with no geographic or property type prohibition. Copies of all of the documents in the chain of title can be obtained from the public registry of property for any given parcel or residential unit. Lien certificates, land use permits and subdivision authorizations are examined in the process when a U.S. title insurance company is requested to issue a Commitment for Title Insurance on Mexico Land. Purchasers of Mexican real property can now receive Owner's Policies of Title Insurance that can be issued on both sides of the border from various companies to both U.S. and Mexican buyers. Most title insurance policies today are U.S. contracts of indemnity guaranteeing ownership rights as vested in a fideicomiso (bank trust) for residential property acquired by foreign buyers in the prohibited zone, or for properties held in a Mexican corporation for non-residential purposes, i.e., industrial and commercial. As has been stated in previous articles by this writer, Mexico is not the "Wild West" as many Americans think. Mexico is not at all unlike the United States in that there is a definitive legal framework for the ownership of land by foreigners known as the New Foreign Investment Law (December 28, 1993) and as mandated under Article 27 of the Mexican Constitution. Moreover, there is formality and compliance in the development of real property. Regulatory statues and procedures are mandated on a state by state basis and require a series of official approvals, permits and authorizations coupled with public disclosure and written notification by the governing public agency.

What is unfair about this sad event is the negativity that the resulting evictions create. Many Americans believe that this is the fault of Mexico and that the country is not to be trusted. This is simply not true nor is it just. While there is blame to be shouldered by some unscrupulous Mexican officials and government personnel, there is also blame to be shouldered by the Americans thinking, "it can't happen to me." They were not prepared to walk away from a potentially "bad deal" and figured that it was too good to pass up. We the buying public must use the same prudent logic and business acumen we utilize buying property in the U.S. when contemplating acquisitions in any foreign jurisdiction. That is to say, be knowledgeable of the relevant issues concerning the property and use the available tools that exist. And don't forget that the property can probably be insured with a title insurance policy enforceable under U.S. jurisdiction guaranteeing your ownership rights. If you do and you choose to go forward with the purchase, you'll certainly feel more secure in the choice you've made and you'll probably sleep better at night.

Mitch Creekmore is the Director of Business Development for the Mexico Division of Stewart Title Guaranty Company in Houston and may be contacted at (800) 729-1900, ext. 8753 or (713) 625-8753.