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Getting enough Due Diligence to made Highly Informed Purchasing Decisions

September 15, 2006
At a recent lunch with an attorney who specializes in Mexican real estate transactions especially in the Puerto Penasco area, I asked him to guess how many of the real property purchases in Puerto Penasco, by primarily Arizona residents; did he think had not gone full cycle meaning passed through the notario process? His answer was 2000. My follow-up question was, of these 2000 buyers how many buyers did he think actually think they owned the property? His answer was 2000. I asked myself would this take place in Arizona or California? A few American businessmen in Puerto Penasco hold themselves out to be the last word on how to conduct a local real estate practice. They are confident that time in the marketplace grants them tenure. “I’ll have you know that I have sold so much real estate in Puerto Penasco - you could never catch up to me” attitude. My first job out of college was with Procter & Gamble, and I think I made my quota the first three month on board, but then missed the next month. I remember extolling my past performance to by boss, who thanked me for what I had done, and ever so poignantly reminded me that I was hired for what I should do, not what I did do. What a great lesson to learn in your early twenties. Resting on laurels is not what this market needs. This market is changing, and changing fairly fast. The last thing it needs is a black eye generated by some fast real estate transactions that scare prospective buyers to other markets.

Not long ago I came to Puerto Penasco with forty Arizona licensed real estate professionals for a showcase tour of major developments. Part of the tour included a legal discussion by panelists extremely well recognized for their expertise in Mexican real estate transactions. Their summation to the group strongly recommended that one should err on the side of caution when acquiring property in Mexico. I spent two days with this group and not one of the Arizona real estate professionals in attendance ever said a thing to me about the panel’s recommendations, but OUCH!, did something hit a nerve with a few old timers? There are a few people who have been in Puerto Penasco preaching their brand of real estate sales, and their way and a newer way are going to collide. And, look out if you get in their way! Imagine a meeting wherein these old timers talking about the need to discredit some of what the legal panelists had just recommended to the Arizona agents (Remember that anything that extends a closing delays commissions being paid). Later that same day another individual lost incredible stock in front of the same audience by countering the legal panelists. And, you’re not going to believe this, but yeap, none of the naysayer is an attorney! All were commissioned sale people. Who’d a thought?

I had a long conversation with an individual that spent over a decade in the Cabo San Lucas marketplace as it developed, and he told me that Puerto Penasco’s real estate professionals will similarly adopt practices that mimic north of the border methods, and those who continue the business as usual model will fade away or be litigated away.

“The Californians are coming” - and guess what, California is one of the most litigious state in America. Do not believe for one minute that among the hordes of barristers in California that one of them will figure out a way and surprise the h--- out of some local real estate operator when they cross the border and a process server is waiting – You can probably go to the bank on it! Californians, as most others, are not stupid especially when it comes to paying $500,000 and up for real estate. And, California’s press is probably thirsting for another Baja Tennis Club like item about which to report. I am quite certain that southern California’s licensed real estate professionals will discover Puerto Penasco, and that they will send buyers our direction. But, as a matter of professional due diligence urged on them by their legal advisors, they will strongly recommend a clear set of suggested acquisition guidelines to their prospects. Fundamental to any offer will be a request for a copy of the recorded deed (escritura publico) to firmly establish that the purported seller truly holds an unencumbered title to the property for sale. Real estate professionals above the border do not waste their client’s time chasing fantasy transactions. More and more developers will be doing Arizona public reports. If you’re proud of your product, why would you not want to display it in the bright lights possible? It is going to be harder for projects that don’t offer such disclosures to be able gain the confidence of buyers who have been exposed to public reports. Whether we do or do not apply for an Arizona Public Report, we will make the same information to all of the buyers in our developments. Buyers are well within their rights to ask any developer for such disclosures, and if denied, ask themselves why.

A musing I often have, wonders from the post 9/11 period to now (Boom Times), how many U.S. owners of property in Puerto Penasco asked for this information before they plunked down their money? I wonder at how many people think that they own something, but legally in Mexico they don’t? (The same attorney that made the prediction of 2000 uncompleted transactions was quick to remind me that just because the notario process was not completed did not mean that these individuals were out in the cold. He said that more likely than not a purchase and sale contract exists which provides a road map to complete ownership under Mexican guidelines, and that while there are a small number of fast operators, the vast majority of sellers are honest and the titling process will be completed. The caveat of course is that the seller had the right to sell the property in the first place.) This may be why a few of the “Business-as-Usual” groups don’t want someone to whom they sold something to hear anything other than their brand of sales in Mexico. I met with the leaders of a group of 30 plus North Beach “property owners” each of whom invested in North Beach in 1999 and 2000, have been battling with North Beach through their attorneys for all of this time in order to get bank trusts, or their money returned. They have had many promises and have absolutely nothing to show for it. The total amount invested by the group is 2.1 million dollars. What could they have done differently? I am not sure. What is possibly more unsettling is that they told me that there is an injunction not to buy or sell property in their area, but in fact a few individuals are ignoring this and continuing to sell property in the area telling prospective buyers there is noting to worry about because the outcome will not affect them.

As I plead in a prior musing, “Are you listening, property owners of Puerto Penasco? No one has more to lose if a problem or problems similar to the Baja Tennis Club lands on our beach. The Phoenix and Tucson newspapers will have a field day. Wait and see what happens to property values, and watch the buyers dry up.” One would hope that the disputing parties claiming title problems would also recognize that the winner in the dispute could actually turn out to be the loser. Items such as these just hold property values down and scare some buyers away from us.

I mentioned in my last article that listings are piling up, and sales are not running at past levels, and owners seem perplexed that new buyers arriving in this marketplace are reluctant to do business the “old way”. If all or part of the real estate transaction expenses and the earnest money payments to the seller were deferred until the end of the notario’s responsibility, you would certainly hear some of the “old timer” say OUCH! If they think they can get away with it and eager for their commissions those schooled in the old way will tell foreign buyers that the closing happens when the buyer gets a promise to trust – Still look under your pillow for a quarter - the developer has it? If you hear an agent say “that the way we do business here”, you might reply, “Why don’t we let the seller decide”. Maybe I am just old fashion, but I believe that the more entities working towards a mutual payday just might speed up the process.

The feeding frenzy that took place over the last several years has for this moment in time subsided. As I pointed out in a prior article, there has been a huge change in the price points and thus the basic economic characteristics of the current buyer. In the early development of this market, with a relatively small amount of capital (Largely equity mortgaged out of appreciating Arizona real estate) and instant credit approval (seller financing) and strong prospect for good rental income one could buy a beach front condo. Since that time Americanized type of financing has entered the marketplace. Some “Old Timers” don’t believe it. In one of the excellent local handout publications, a seasoned real estate individual actually wrote that a test of a mortgage company was to ask them how many loans they have closed. If a credit qualified borrower does not close on a property in Mexico, the single biggest reason is that the lender could not satisfy itself that they could foreclose on the property in the event of a default, followed by items that would make the loan not marketable down stream. The professional real estate agents that are operating in Puerto Penasco counsel their listing clients on the importance of doing everything that they can to make sure that their property stands the test of qualifying for third party financing (I do). Some properties qualify and some don’t. But, with an estimated $45 billion of U.S. equity tied up in the second homes in Mexico, be assured that lenders have and will continue to develop financial products to tap this equity pool.

Opportunity abounds in the Puerto Penasco marketplace, and some real estate professionals including ourselves are structuring their approach by beginning to meet with investors before they even come to Puerto Penasco. It is important to us that buyers are made aware of both the risks and the potential rewards of investing in Puerto Penasco. Every effort is made to make sure they engage legal counsel. And, we are equally insistent that they have an exit strategy in mind before any offers are made. Offers should be structured so that there are clear instructions on exactly when funds can be distributed from escrow accounts which preferably are held in the U.S.

In closing, I want you to note that my reference to the old timers is, I hope, an aberration and not the rule. There are many individuals engaged in real estate sales in Puerto Penasco. I know just a few of them. What these few tenured old timers want should not reflect on all individuals involved selling real property in Puerto Penasco. But, remember, it never hurts to ask lots of questions of any agents that might represent you! Bragging about past performance is just that.

ghildreth@wbhsi.net
520 203-0102
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