Escrow Account for Mexicans... What's that?

By Agustin Galindo, Attorney at Law

“Money is nothing, but a lot of money, that’s another story.”
-George Bernard Shaw

This time I do not want to write about a specific issue of the Mexican law or technicalities. I am writing this article just to share with you some of the experiences I have had during real estate transactions between foreign buyers and Mexican sellers, and I can tell you that one of the most relevant culture clashes in doing business in Mexico is when a United States or Canadian citizen wants to acquire property by transferring the funds into an escrow account.

I do not intend to explain how an escrow account works because a reader from a common law system will understand it perfectly, but I want to raise attention to the fact that in Mexico the concept of an escrow account is not common or well known by an average Mexican.

In order for you to have an idea of the difference in cultures regarding this concept is that just to start with, an exact translation for the word “escrow” in Spanish does not even exist. Some people would say that it is a “deposit” or a “conditioned deposit,” but the fact is that there is no precise word in Spanish that matches this concept exactly, and any attempt of translation would invariably be an explanatory phrase of the concept that “escrow” entails.

My experience has been that transactions between foreigners from a common law system include the use of an escrow account as a normal and mandatory condition of a real estate transaction. Occasionally, between a foreigner and a very sophisticated Mexican (let’s say a Mexican broker living in New York and owning property in Mexico) it might be possible, but not for the average Mexican because she/he would not understand how an escrow account operates and would want to receive the payment directly, as is regularly done in Mexico. Often powerful Mexican developers or already “Mexicanized” Canadian or U.S. citizens doing real estate business in Mexico are not willing to accept payments through an escrow account, not because they do not understand how it works, but because they need the financing.

For a buyer from a common law system, either Canadian or American, it is inconceivable to buy and pay a certain amount in advance directly to a seller, and for a Mexican seller (again, an average Mexican buyer or seller) it is inconceivable not to pay the seller directly and that the money go into someone else’s account. Therefore we have a problem.

So, how does it work in Mexico? Normally, a preliminary contract is signed and a certain percentage of the price (a down payment) is paid directly to the seller and a provision in the contract and payment receipts for such purpose are prepared. This way, the buyer has a binding contract that can be enforced before a Mexican court.

Which is the customary percentage? Normally it can be between 10 percent to 20 percent of the price, but can vary to a higher or lower percentage, depending on your negotiation skills, the negotiation skills of your realtor, or most important, the percentage requested by the seller, which is always negotiable. The balance is paid when the transaction is formalized before a notary public in Mexico.

A down payment (anticipo) in Mexico is similar to the concept of “Earnest Money” (A deposit paid -often in escrow- by a prospective buyer, especially of real estate, to show good-faith intention to complete the transaction, and ordinarily forfeited if the buyer defaults” as is provided by the Black’s Law Dictionary), with the understanding that in Mexico the down payment goes directly to the seller.

Therefore, in a real estate transaction documented by a preliminary contract there is a penalty provision for the parties in case of default, with the basic idea that the contract is prepared in accordance to Mexican law and can be enforced by a competent court.

There are some U.S. escrow companies trying to accomplish this purpose in Mexico in addition to certain efforts made by Mexican banks to provide the service of “conditioned deposits” (escrow) for foreigners acquiring property in Mexico. Some of the problems normally faced in these situations are those that appear at the time of setting up the escrow account which can take some time, and normally the buyer doesn’t want to wait very long because the seller could possibly withdraw, or other buyers may appear suddenly who are willing to pay a higher price or a higher down payment…sound familiar? In these cases the buyer usually prefers to take the risk and pay something in advance to secure the deal. Also, sometimes realtors or lawyers offer to accept the money in escrow, but the problem here is that the buyer does not always feel secure because the realtor or the lawyer is not an institution…so what would happen if the realtor or lawyer dies before completing the transaction?

So how do you get protected? My approach is: check that the title from the seller is clear, negotiate the percentage of down payment into a lower percentage, provide for a penalty in case of default, and who knows…maybe the seller can be convinced to use an escrow account in addition to an enforceable contract.

The main purpose of this article is to give you a general scenario of acquiring property in Mexico in relation to how the price is paid so that buying property does not become a frustrating and unexplainable process. As I always like to finish my articles, there is no recipe that will apply to every situation: every transaction needs to be tailor-made. There are some transactions whose down payment is so low that there is no reason to set up an escrow account, but in other cases, the stakes are too high not to use an escrow account, so please look for professional advice so you can have a smooth, safe and practical acquisition.

ABOUT THE AUTHOR: Agustin Galindo is an attorney at law, founder of Galindo Abogados, S.C., and has an International Master of Laws (LLM) from Southern Methodist University (SMU) and a tax degree from Instituto Tecnologico Autonomo de Mexico (ITAM). Fully bilingual, he specializes in real estate, tax, civil and commercial matters including litigation. You can visit the firm’s website at: www.galindoabogados.com and you can contact him by e-mail at agustingalindo@prodigy.net.mx, or his office by telephone (755) 554-9915 and (755) 554-9916.