Your Money Is A Hot Potato

Robert:

I do a real estate article in the PV Property Journal each month. This is the article that just came out, in the March issue.

WHY YOUR MONEY IS A HOT POTATO! (OR SHOULD BE TREATED LIKE ONE.)

  

by

Robert Foster

Robert Foster y Asociados, 163 Lazaro Cardenas

Bucerias, Nayarit. 329 298 3314

web site: rfasoc.com

"Say what? My money is a hot potato? What are you talking about?"

What I'm talking about is what should and shouldn't happen to your earnest  money when you make an offer on a property here. No professional agent, or Notario for that matter, wants to hold the money!

Typically, you'll be required by the purchase offer contract to put down a ten percent earnest money deposit just a few days into the transaction.That can be a fair hunk of change. If you're buying a $500,000 property, that's $50,000 of your hard earned money you are going to have to deposit. And even if you like your agent, well, let's face it, you probably just met him or her a few days or weeks before. You are dealing with people you don't really know all that well, in a foreign country. Gulp.

In most cases, if you're dealing with professionals, no one involved in the deal wants the potential liability of receiving or holding your money. If you have the bad luck to run across a rogue agent, who tells you to write the deposit check to him or her, or wire the deposit into his or her account, run for the hills!  (This sort of thing very rarely happens anymore, but 15 or 20 years ago was common here. It wasn't always malicious intent...often the brokers and agents just didn't know what to do.)

So, what should happen to your funds while the transaction unfolds over the roughly 6 week period until closing, and why? Who holds your money?

This was a difficult problem in the "old days" of real estate here. There was no efficient and transparent system for holding funds while the deal unfolded. Escrow as we know it and use it in the USA and much of the world did not exist.The old fashioned, traditional Mexican way was for the Notario (closing attorney) who would be handling the transaction to hold a guaranteed check in his safe; a check for the deposit, signed by the buyer, made out to the seller.

(In some specific cases, if we have a Mexican buyer and a Mexican seller, and the deal will be strictly in pesos, it can still be done that old-fashioned way.)

But in almost all deals involving foreigners this market now (and has for 10 years or so) utilizes the services of well-known international escrow companies. For many years we have used the international escrow services of either First American Title; Stewart Title; or Fidelity.

Why do we do this? Simple. Parking all the funds in a truly neutral, third party, totally transparent US dollar account (transparent to buyer and seller alike), brings a measure of confidence and disbursement efficiency that is completely lacking in the "old fashioned way."

Escrow isn't perfect; in extreme cases things can still go awry, but I have only seen that happen, thankfully, one time in the hundreds of deals I have brokered here, over many years. But while escrow isn't perfect (no system is), the old fashioned way is awkward, inefficient, and fraught with inherent problems. Again, it requires asking the Notario to hold the deposit check in his safe (which more and more Notario's are wisely reluctant to do, because, if heaven forbid the deal breaks down and there is a dispute over the deposit, they don't want to be caught in the middle, cast in the role of King Solomon).

And also in this old fashioned method, the buyer has to show up at closing with another bank check for the 90% balance. What if the seller cannot attend the closing and has someone empowered to sign for him or her, which is a very common occurrence here? The check then has to be Fedexed back to the seller in Canada or the USA. What if the courier loses it? What if there is a slight but critical spelling error on the check, and it has to be recut? The checks have to be made out perfectly, and mistakes are common.

You might wonder why you can't just wire the 90% balance directly to the seller's account a day or two in advance of closing. You could. But that would not be wise. If for some reason the deal falls apart at the last second, good luck getting your money back. Most of our buyers and sellers are honorable, and you would get your money refunded, but nonetheless, business is business, and our job as your agent is to protect you against unnecessary risk as well as possible. So, international escrow has evolved as the best answer.

If you make an offer on a property, the purchase offer contract will typically state that you have 5 (or 10 - it's negotiable) business days from the date of acceptance of your offer, to open and fund an international escrow account with the earnest money deposit.

Once the deal is signed around by everyone, your agent should immediately begin the routine process of opening the international escrow account for you. You'll be required to submit clean copies of your passports (if you haven't given your agent this already), and the agent will send to the escrow company your IDs (plus the IDs of the sellers), along with a copy of the fully executed purchase offer contract, via scan and email. Typically, we (agents) are able to get the escrow account opened for you within one or two business days from acceptance of your offer.

We then provide you with the wire transfer information and specific escrow number that enables you to wire the deposit (plus the fee for the escrow account) directly into escrow. The accounts are in US dollars (with rare exceptions - Fidelity offers the option of escrow denominated in pesos for Mexican buyers and sellers), held in US banks. Fidelity uses CitiBank in New York City to hold the funds for all their USD escrow accounts, for example.

Both buyer's name and seller's name appear on the account, and both are notified of any and all activity in the account. So, the seller has the assurance that the funds are there, in the hands of an unbiased institution.

As a buyer, there is a small cost to you for setting up the escrow account, but it is money very well spent, considering the relative peace of mind it brings to you, and the seller. It's a small investment that brings the trust and assurance needed to enable the deal; to get your offer accepted in the first place. Fidelity charges our clients a flat fee of $650 USD, which you wire along with the10% deposit.

Your purchase offer contract should also state clearly when you are to send the 90% balance due into escrow. Typically, that would be from 3 to 5 business days before scheduled closing date. You don't want to outsmart yourself by waiting until the last second to wire the funds, and risk that an unforeseen delay causes you to be unable to close on time, and therefore technically out of compliance.  Better to go ahead and get the funds in escrow two or three days before closing, allowing of course for a day or two for the wire to arrive and be credited.

At closing, the attorneys involved in the transaction will review all the documents (if you have a knowledgeable,  thorough real estate agent, he or she should do this as well), and when everything is in order (title properly transferred to you as beneficiary, with no liens or encumbrances), you and the seller examine then sign something called the Final Escrow Disbursement Form. This form is then sent to the escrow company, along with the documents proving the transaction is complete and correct, and funds are wired by the escrow company to the seller and any other parties due. (For example, real estate commissions are typically paid out of the seller's gross proceeds via itemized disbursements  to the agencies involved).

(Regarding the Final Escrow Disbursement Form...that is normally prepared by the buyer's agent a week or so before closing date, and a preliminary copy circulated among the principals, for all to review in advance. This way, if there are any mistakes or questions, there is plenty of time to deal with them before the moment of closing.)

Robert Foster

Robert Foster y Asociados, Bucerias.

rfasoc.com