Title Insurance and Buying Real Estate in Mexico

By Michael Paa

Monday, May 7, 2007

One of the most widely known investor horror stories in Mexico stems from title problems in Punta Banda, just south of Ensenada, Baja California.  On October 30, 2000, the Mexican government evicted American homeowners from their beachfront property, resulting in a US$25 million loss.  After this tragedy, many title insurance advocates argue that if the disaffected homeowners had title insurance on their properties their investments would have been protected.

Although this argument sounds good in theory, it falls apart quickly in the murky world of Mexican real estate disputes.  Title insurance is no magic bullet, and it is not clear that it really would have prevented the Punta Banda debacle.

The problems originally began with an erroneous map and subsequent land transfer to the Ejido Coronel Esteban Cantu in 1973.  This ejido land was titled to two separate owners back in 1952, and litigation raged for decades over who was the rightful owner.  The Ejido began leasing the land directly to U.S. citizens and area developers.  Eventually the competing land interest, a group of Mexican investors, sued the Mexican government to reestablish their competing land claim.  The Mexican court finally ruled in favor of the Mexican investors and the American homeowners were forcibly evicted.

There are a variety of plausible arguments that can be made suggesting that title insurance would have protected the investors.  First, presumably the title examiner would have discovered the map error before the land was sold, and therefore the investors could have purchased elsewhere.  Second, if the map error was not discovered the title insurance company would have paid out the policy and covered legal costs.  And third, if the title insurance company refused to issue a policy, this would warn the investors of the problems associated with purchasing the land.

While all these arguments sound reasonable enough, they also make assumptions that are not necessarily based in reality.

First, whether a title examiner would have found the map error assumes that the examiner conducts an extensive title search that includes checking discrepancies between maps kept at federal offices of the Secretariat of Agrarian Reform.  The title researcher would need to be able to identify errors or frauds committed at the highest level of government.  Since title investigations for insurance companies are conducted in virtually the same way as title searches done by the local Notary Public, a records search might not reveal a problem on the federal level.  As well, since the problem was an ejido dispute there is no lis pendens (notification of litigation) on record at the Public Registry because ejido disputes are heard in a different court.

Second, the claim that the title insurance company would have covered the loss assumes that the title insurance policy would have covered title defects stemming from an ejido conflict.  Title insurance companies have been unwilling to release information directly establishing what they do and do not cover.  However, there have been indications that some title insurance policies do not protect against ejido land claims.

Additionally, the fine print of many policies specifically excludes claims resulting from fraudulent documents, which may have been the case at Punta Banda.  The argument that the Punta Banda residents would have been indemnified for their losses assumes that their policies would actually have covered their claims.

The final contention, that failure to issue a title policy would have warned the investors, assumes that the insurance company would have refused to issue a policy.  Another possibility is that they might simply exempt the problematic condition from coverage.  And a policy containing a large gap would not notify investors of major title problems as industry advocates claim.

For the unfortunate residents of Punta Banda, title insurance might have been the best method to protect their assets.  However, simply because the policy exists doesn’t mean it will cover many of the possible title failures.

At the end of the day, the old rule “buyer beware” is still the best advice.

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Michael Paa, a MexiData.info guest columnist, is a Juris Doctor candidate at the University of San Diego School of Law.  Extracted from “Added Value or Unnecessary Cost: Does Mexican Title Insurance Really Benefit the Foreign Investor?,” a research paper using input from Nancy Conroy, Publisher of the biweekly Gringo Gazette North.