Ask most Mexican homeowners "What is an escrow account?"and they might not know what you're talking about. That's because in Mexico, real estate transactions are closed at the Notary Public's office, when the public deed for a deal is signed, and the buyer delivers a check to the seller for the purchase price. All payments are done directly from buyer to seller.
 
In the US and Canada buyers are used to paying for property indirectly, through a neutral third party escrow account: an initial deposit is made when the purchase agreement is signed; more funds are transferred when certain conditions are met (for example, when the roof of the house is finished, or when title insurance is issued); and the final deposit is made when the home is complete and delivered. All funds are deposited into the account of an escrow agent, in accordance with the provisions of an agreement signed by the parties. This escrow agreement dictates the timing and conditions required for each deposit made. Escrow agents charge a fee (usually $500-750 USD) for opening, administering, and releasing the funds according to the agreed-upon terms.
 
Foreigners who purchase second homes or land in Mexico often want to incorporate the US escrow process into their Mexican real estate transaction. This tends to be easier in areas where foreigners have a strong presence, and in "restricted zones" where the closing process is more complicated. For example, in Los Cabos, where most buyers are foreigners, escrow is common and used by most attorneys and closing agents.
 
Here are a few tips for using an escrow account in Mexico:
 
1. *ALWAYS use a US-based escrow agent. The most respected and knowledgeable about the Mexican market are First American, Stewart Title, and Fidelity. Even if Mexican banks have products similar to an "escrow account" (like a custodial account or deposit account), none are based on a mutually agreed escrow agreement; additionally, their processes can be slower moving than the US institutions'. Plus, they are not very dynamic.
 
2. **AVOID depositing more than 30 percent of the purchase price directly to the seller/developer's bank account. The concept of escrow is gradually being accepted in Mexico but many still see the purchaser's down payment as a way to finance construction.
 
3. ***NEVER deposit funds directly into a real estate agent's bank account, no matter how good a reputation the agent has, or what they call their account (ie. "trust", "escrow", "good-faith", etc.). Doing so is risky and creates confusion during the closing process.
 
4. BE AWARE that many developers are using escrow accounts as a marketing tool, but a close look at their purchase agreements shows that they have authorized themselves to release the funds in their (the developer's) favor. This mechanism nullifies the entire purpose of the account, which is to safeguard the purchaser's money until the transfer of ownership takes place.
 
5. RESEARCH the different options available to you. Some developers have special deals with US escrow agents, and there are some special agreements for transactions involving financing. You might also want to open an "interest-bearing" escrow account if your money will sit there for a long period of time.
 
6. LOOK FOR the best escrow fee. You can save as much as a couple of hundred dollars by shopping around.
 
7. ASK your local attorney/closing agent to explain the advantages and disadvantages of each particular escrow agent. Each is suitable for different purposes.
 
If you're planning to buy in Mexico, the ideal situation would be to deposit 100 percent of the purchase price in an escrow account. If your seller or developer pushes back on this, then you should try to negotiate a combination of giving a direct down payment to the developer, and putting the balance of the purchase price into an escrow account. This will protect you against abuse and will guarantee your purchase.
 
Pedro Perichart is a founding partner of P&H Closing Services in Cabo San Lucas, BCS. He is a former associate in Solcargo Real Estate and Corporate Law Practice Group where he specialized in real estate cross-border transactions, closing services and international contracting. www.phcs.com.mx
 
* I don’t know of any agent that is not thrilled by the opportunity to use the third party escrow…escrow companies in the United States. This service acts as a neutral disbursing agent between buyers and sellers on a particular real property transaction and disburses following instructions from both parties.
 
** Many developers require that 25-30% down be deposited into their developer account and then that money is used for construction of that particular home. PLEASE ask your agent about your developer…I have faith in several of my preferred developers and feel confident that their projects will be completed. That being said, I have talked clients out of purchasing in certain developments because I did not trust that the home would be completed or that the quality of construction was adequate.
 
*** In the U.S. this is called comingling and an agent would lose their license to work as a real estate agent.