Vacation Rental - Developer Financing - Mexico or Overeas

16 Replies

Hello All,

Any one out there have any experience with new construction - vacation rentals in Isla Mujeres or other tourist areas of Mexico? I  have been negotiating a deal and developer is offering financing.  The developer is asking for 25% down now and 25% at completion of property. They will finance the remaining 50% over 5 years. The rate is 9%. Wondering who out there has gone through the entire process and willing to discuss with me.

Hi Bob,

I'm curious about this topic as well. Looks like you didn't get any response, but were you able to learn anything about the process via other avenues? If so, do you can to share your knowledge?

Thanks,

Lisa

run the other direction! I owned as many as six condos across the bay from Isla for over 30 years. There is not enough paper on BP to give you all the reason to stay away. Let me just start with the first problem. Preconstruction or currently during construction? The developer takes 25% from a lot of different buyers with the promise to deliver a unit. After he over sells the number of properties available,  mysteriously, he runs out of money and requires each buyer to put in additional funds. The construction stops and waits until enough new money is added to the property. My building was originally built to the third floor before construction stopped. It took three years before there was more money available. The   devaluation of the peso happened at the same time which made the money worth even less and required more. It was a nightmare getting it to the finish line.

I'm speaking as someone that was a licensed real estate broker in two states as well as someone that spoke Spanish and was a very successful businessman. Hurricane Gilbert and hurricane Wilma also didn't help. My location was the very best in all Cancun, across from senior frogs and nearly next door to Carlos and Charlie's. Run the other way if you're smart, in my opinion.

@Rich Weese It was sad to read your story and it's great that you shared as it might prevent other people having the same misfortune, which I'm sure was your purpose. I however respectfully disagree with your suggestion that we should run away from buying pre-construction condos in Mexico, which I have been doing over the last few years with my investors. We just need to know what we're doing or work with people who do and whom we can trust.

Firstly, there are deals that turn sour in every country and in every sort of business. If we would use that as a reason to not do that sort of business in that country, no business would ever be done! Please don't prevent other readers to take advantage of the awesome real

Secondly, billions of dollars have been invested by foreigners in Mexican pre-construction real estate and only a tiny fraction has had issues. The proof is clearly in the pudding given the amount that keep being invested year after year. And this isn't because of ignorance at a time when everybody learns about everything about social media and when the mainstream media doesn't miss a chance to point out (and often exaggerate) all the negative news that might come out of Mexico.

Thirdly, it is not thankfully not every day that the peso devalues against the dollar at the same time as two hurricanes hit. The devaluation of the peso is a risk for the developer (but not for the buyer as he buys in dollars) and this is normal but the buyer should be aware of that. Mind, you the peso is so low and the dollar so high that the odds favour the peso going up going forward, not down. The hurricanes are part of the developer's risk as well but Florida and the Southeast of the US gets hit much more by hurricanes that Cancun, which hasn't been hit after Wilma. I don't remember what the explanation is but Cancun is actually normally protected from hurricanes.

@Bob Green @Lisa Jarboe let me explain to you how pre-construction sales work in Mexico and how what happened to @Rich Weese can be avoided.

In my home country of Canada (and I assume it's the same in the US), when you buy a pre-construction condo, you pay 5% of the price at the signing of the contract and the remaining 95% at delivery. These 5% will obviously not be enough to finance the construction but this is not an issue since developer have access to plenty of cheap bank credit to finance 75% of their costs including the land.

In Mexico and other countries in a similar situation, bank credit is very expensive, as interest rates run in the double digits. Therefore, they need the (free) money from their customers to fund the construction. When we buy in Mexico, we pay 20% at the signing of the contract and then 30% during construction. If the developer sells well under these conditions, he can pretty much finance all the construction.

Most of the construction in Mexico is in the hands of very wealthy families. I only buy from some of them, who I know personally and have special deals with. They have enough money to finance 100% of the construction if necessary. Obviously, they prefer to use leverage and they'll use their customers' money in the first place but they're dependent on it. In Canada, the bank will require that the developer sells 60% of his project before giving the financing. This ensures that the developer will be able to complete the project no matter what and therefore protects the bank and the buyers.

Since the Mexican developers don't use bank financing the same way, they don't have to abide by that 60% rule, even though it would be in everyone's interest that they do. For the wealthy families, this is not an issue. If they are confident that their project will sell, they can decide to start construction with as little sales as possible, since they have enough money to finish their projects no matter what.

As real estate in Cancun has been booming since Cancun was created 40 years ago, some people, like Rich's real estate agent and businessman, decided to become developers to share in the huge profits that the developers had been and are still making. Since they don't have the money that the rich families have and don't have access to cheap credit, they should wait that they have 50-60% of sales completed before starting construction. I assume that some, like Rich's developer, got overconfident as a result of the market getting hotter and hotter and started construction without having enough sales, figuring out that they will sell more as construction progress. The problem is that, if they don't sell enough, like in Rich's case as a result of unpredictable external events, they will have to stop construction.

I'm extremely risk averse and I will do anything to protect the interest and money from my investors. Therefore, I only buy from developers who belong to these big families but only those who I know personally. Yet, even if I didn't have those connections, I would have thought that being a real estate agent and businessman doesn't mean that you will be a good developer. Moreover, I'd always check the track record of the developer.

Now on the developer financing. Many developers pretend that they give you developer financing because they let you pay over the course of the construction between the signing of the contract and the delivery of the property. This is fake developer financing. As I explained above, it's actually you giving (0%) financing to the developer and not the other way round.

My investors and I are getting real developer financing. As I explained above, we have to pay 50% before the delivery of the property. We should normally pay the remaining 50% upon delivery but the developers give us 5 years to repay the remaining 50% of the price after delivery. This is the same deal offered to @Bob Green, except that we're getting a much lower interest rate, which is super low for Mexico. As a result, we'll never have to pay the 50% balance of the price as our renters will pay for that and we'll still be cash flow positive each month after the loan payments.

This real developer financing is very rare in Mexico as some developers don't have the means to give them and those who have the means don't need to because their projects sell easily without that. My developer doesn't normally give developer financing; we're getting it just because of my relationship with him. Bob's deal could be a red flag, as some developers could be offering such financing to the public in general because they can't sell (enough) otherwise.

To conclude don't be shy about investing in pre-construction in Mexico if the deal makes sense but make sure that you know what you're doing or that you work with people who do.

One last point I forgot to mention. I'm currently working with investors on a condo development project in the Dominican Republic. To protect our future buyers against what happened to Rich, they will pay their deposit into an escrow account managed by a fiduciary company belonging to the country's biggest insurance company. They will only release the funds to us once we have proved to them that we have enough financing to finish construction. Our local partners are the only ones doing that.

I'm also currently working on a development project in Puerto Vallarta, Mexico and I'm going to see if we could make the same arrangement. Let's hope this can become the new standard to protect the buyers.

Mike,

In a perfect world, some of the items you mentioned would prove true. Unfortunately, Mexico is a different animal. You make a great deal of assumptions without knowing my situation. The developer that originally handled the construction of my units was one of the richest families in Mexico, the Riojas family. They had already built the same type of condominium project in Acapulco and I believe the other was in Mazatlan or Puerto Vallarta, with multiple condo buildings. Their development company was called playa sol and this was the third building to be built in Cancun on the same parcel of land. The Carisa and Palma were the first 2 and my building was called Girasol Norte.

The only two hurricanes that caused any difficulty in Cancun during my 40 years of ownership were Gilbert in 1988 and Wilma in 2005. The building had already been completed for many years.

I'm not a rookie in real estate or property development.  I was also a licensed employing broker in the state of Colorado and California when I was dealing with condos in Cancun. Once the building was built, everything was okay and I actually picked up five additional condos over a 30 year period.

If someone is interested in getting into this type of project, don't just take my word for the Potential problems. The Internet is an amazing asset! Just look up problems or people that got screwed in investments in timeshares throughout Mexico, houses in Baja California and housing specifically in Cancun, and the three cities previously mentioned.

The cruise lines have an unbelievable budget to research and study the ports they feel comfortable and safe with. I don't know what the status is this year, but recently there was only one cruise ship that was Still serving the Acapulco-Puerto Vallarta corridor and it was 33 years old and part of a company I guarantee you have never heard of, that was put in service for basically the domestic travelers Of Mexico because foreigners stopped going to those ports due to all the problems and concerns of safety. I have traveled to all three but it helps somewhat to speak Spanish fluently.

I will stand by my concerns and attitude due to my experiences. I hope you are successful and that all your assumptions prove true. I see so many holes in your prospective projects that I would not invest anything. You mentioned that your fiduciary company belongs to the country's biggest insurance company. That does not necessarily impress me. My fiduciary was Banamex, largest banking system in the country of Mexico. They are like any other bank when problems develop and I lived through those. I wouldn't want to assume the economy of Mexico is only going to boom and not have additional problems. I would not bet my investment life on that proving true.

I wish you the best of luck but I will not change my attitude because I have already lived through the experiences in real time. Good luck.

@Rich Weese I made assumptions based on what you wrote and I’m still exactly not sure about what happened. Regardless, I wasn’t trying to change your opinion about Mexico or investing there. Why would I do that. Clearly, you had a bad experience there and whatever I could say wouldn’t change your opinion and that would be the case for most people who have had a problem there or in any country for had matter.

Sadly, Mexico has its fair share of big problems. Drugs, violence and corruption on top. These are highly publicized and sometimes exaggerated.

Both of us are entitled to our own opinion but we’re not entitled to our own facts. And facts don’t lie.

Statistics speak for themselves. Mexico is the 7th most visited country on earth, with more than 40 million visitors per year and has been climbing the rankings in spite of all those problems. It’s not far behind the US in numbers and Mexico’s numbers are much higher on a per capita or square mile basis.

The murder rate is higher than in many other places but the odds are that, if you don’t go to the wrong places and are not looking for drugs or trouble, you’ll be just fine. While there are incidents, this is why people keep going back and more people are going.

Did you know that Cancun’s murder rate is is lower than that of NYC and Los Angeles. Should you not visit or buy property there? No, you just avoid the bad areas, like you should do in Mexico.

Mexico has the biggest population of North American retirees and snowbirds outside of North America, with up to two million people. Many Americans and foreigners own property there and the vast majority hasn’t had issues, which is why they keep buying.

Are these millions of tourists, retirees, snowbirds and investors crazy? I don’t think so.

My point regarding your story was just that anybody can be ripped off anywhere. Mexico is different as in worse for you because that’s where you were ripped off. Somebody who got ripped off in, say, Argentina would say that is the worst country. While the probably of being ripped off in Mexico as a foreigner is probably higher than in some other countries, it’s still low in the grand scheme of things.

As sad as your story is, my point with it was that, in my personal opinion, it’s not right to suggest to others to not invest in Mexico because of what happened to you. It’d be like the victims of Morris Invest in the US suggesting that nobody should invest in turnkey properties in the US. I don’t think anybody would agree with that.

But again, my purpose is not to convince you of anything or to say that you’re wrong. It’s merely to share the facts and figures as well as my knowledge and experience in Mexico.

I am not a Mexican but i have lived and worked in Mexico for well over a decade while working in the hospitality industry: Cancun, Puerto Vallarta, Los Cabos are some of the places i worked. 

Some of the most beautiful and luxurious hotels in North America are in Los Cabos and Riviera Maya. Many foreigners live in resort destinations such as Los Cabos and Puerto Vallarta. Several luxurious hotels opened in the last 5-6 years in Los Cabos. 

 However, I am not sure that mexico is a good place to invest in short term rental properties at this time. The whole country is living through a security/cartel war crisis never seen before. It used to be that only a couple of states were severely affected by drug violence. Not anymore. Tourists destination such as Acapulco, Mazatlan and even Cancun are ravaged by violence. The amount of homicide in Mexico will reach a record number this year.

More and More Americans and Canadians have decided against vacationing in Mexico (i should know, I am still in the hotel industry) and an increasing number of companies have decided not to have their incentive trips in Mexico (a backbreaker for Mexico).

Just do a search on google.  

I am 3 years into my STR single family vacation home experiment in los Cabos and it is working out really well. I paid cash for an existing home so didn't have to deal with the issues above. Great traction on Airbnb and VRBO. I do think it is very possible to achieve a good return with common sense and the right partners in the ground. I am thinking to add to the portfolio.

@Francisco Cimon

You are right in that there has been a surge in violence in Mexico over the last few years. However, there is a lot of exaggeration and disinformation about it, as can be explained. Therefore, it’s important to stick to facts and figures and reliable sources of information.

In terms of reliability, it doesn’t get any better than the US Department of State, who is responsible for the safety of American citizens abroad. They have a travel warning of Mexico. They tell you to avoid certain small areas because of the violence there. That doesn’t include Cancun, Mazatlan, Los Cabos or any other tourist area. For these area and the overall majority of the country, the travel warning is at level 2. That is the exact same level as the UK, Germany, Belgium, France, the Netherlands, Spain and Italy!

How is that possible? Because they know that the surge in violence in Mexico is the result of the infighting for supremacy between cartels as a result of the capture of El Chapo, Mexico’s most infamous drug kingpin. They know that tourists never get targeted and that those who get killed were either looking for trouble (involved with drugs) or at the wrong place at the wrong. The reality is that neither the Mexican government nor the cartels have any interest in killing the golden goose of tourism.

Yes, I know people that won’t travel to Mexico because of the violence. Yet, Mexico is the 7th most visited country in the world and keeps claiming in the rankings. More than 40 million tourists are now coming every year and that is much more than in the US per capita or square mile (I think that’s enough people to fill my short-term rentals). Cancun airport welcomed a record 26 million passengers last year. Puerto Vallarta’s airport is going to get a massive upgrade. The hotel occupancy is one of the highest in the world (which is great for short-term rentals). Airlines keep adding new routes and hotel chains keep investing billions of dollars in new facilities. Do you think they would do that if the demand wasn’t there? As I always stay, statistics don’t lie.

Granted, investing in Mexico comes with its challenges. As Brandon Turner says, when faced with a challenge, you can do like most people: give up and watch Dancing with the Stars. Or you can make some great money like @Matt Ayoub or myself and my investors. Ultimately, all those who don’t invest represent less competition for us.

@Francisco Cimon

There is an important point that I forgot to mention in my reply to your post. In spite of the positives I mentioned about Mexico, it should be clear to everyone that investing in real estate in Mexico is riskier than investing in real estate in the US, except when the US is in the middle of the housing bubble.

Mind you, depending on your risk tolerance, this is not necessarily a bad thing because with a higher risk comes a higher return. I'm currently working on a condo development opportunity in Puerto Vallarta and the potential returns that we can pay to investors are very high (I was so surprised that I recalculated several times to make sure my numbers were high). And those who buy our condos should make a very nice rental return.

I would never invest in Mexico to get an 8% return because it is not that hard to get such a return in the US, while taking much less risk. We should always look at the risk adjusted return when judging an investment.

I have worked as a consultant for many American and Canadian buyers in Mexico. Here are some ideas. I know the original post is about a year old, but nevertheless hope its useful.

- Research market on existing, already built homes and condos in your are of interest. There`s value to be discovered.

- Research and learn more about developer's past projects. Inquire about their track record. 

- Hire a an independent local attorney. Review the legal structure of the project, has it been fully approved by the Municipality? Are all individual units assigned a property tax number? Are they using financing? and If not, seriously look with a magnifying glass as the project may be undercapitalized. What kind of contract will you be signing and will it be recorded? Is it a fideicomiso? These are just basic questions. 

- In Baja, I saw clients with great deals and exits and I saw horror stories as well. It all boils down to deep due diligence and assessing your risk accordingly with the expectations. 

- Undercapitalized developments are easy to spot. Ghost developments are too, such as developments that would out right refuse recording an actual public deed and instead offer just a private contract. An example is the infamous Trump development in Rosario that never was. They had marketing, a sales booth and everything else was smoke and mirrors. No developer, no builder, no title to the land, no financing, nothing in public record. They took millions, with many investors paying the full amount upfront. 

Hope this helps!

@Mike Lambert

Hey Mike, I also invest in Mexico. You’re clearly right. It seems the others who down grade it, just had bad experiences. There is no point to debate with people that were horribly wronged by a particular market. If you’re smart, you do all of your work and you have the right team by you, the world is your oyster. I’m side by side with you on this. Best of luck!

@Allan Flamm

Thank you and exactly! I'm currently working on very profitable development opportunities in Puerto Vallarta. This is made possible by the awesome team we have on the ground. I realize it's not easy to have this kind of connections but those who don't have them can try to invest with those who do. So, ultimately, there are opportunities for many investors over there. Mexico keeps attracting more tourists and retirees and the reasons for that are unlikely to disappear anytime soon. Best of luck to you too and feel free to reach out if you want to compare notes.

@Carlos Cristiani

You brought up great points. To sum them up, there are opportunities but you need to know and trust who you're dealing with and do your due diligence.

I'm working on similar projects in Mexico and the Dominican Republic. In both cases, I have experienced and trustworthy partners. However, I'm risk averse and I want to limit the risk of our future investors and buyers as much as possible.

In the Dominican Republic, we're setting up a mechanism whereby the client's initial deposit will be paid into an escrow account with a fiduciary company belonging to the country's biggest insurance company. They will release the fund to us only when they are satisfied that we have the ability and the financing to complete the project. This represents a huge protection for the buyers. Yet our competitors (the other developers) don't do that. Why? Because it's a very bureaucratic and complicated process. The area is booming and they're selling regardless. We do things differently. Thanks to our connections, our buyers will be able to get financing in a country where most foreigners have to pay cash. We well be cheaper than the competition and have an unbeatable beachfront location. And we will offer this buyer protection. So, our buyers will get a better deal so we should sell better and quicker. This will increase the return and reduce the risk of our investors and so it'll be easier for us to get investors on board. Therefore, this is a win-win-win situation for all parties involved.

We will see if we can do the same for the Mexican development. But in any case, we're working with an architecture and project management firm with an established international reputation. The principal architect teaches in several universities and give conferences around the world. And we are only dealing with the most reputable builders with a longstanding proven reputation.

Yes, some people have lost money buying pre-construction in the past in Mexico (they could in any country if they invest in the wrong projects for that matter). In many cases, you'll find out that it is because they were dealing with the wrong people and didn't do a proper due diligence. So it'd have been somewhat preventable. The problem in Mexico is that it's more complicated for foreigners to do their due diligence if they don't have people they can trust. So there is clearly a risk there but this is why the investment returns are much higher. If it wasn't so, it'd be too good to be true. As we all know, we can't have the cake and eat it too!