How Seller Financing is secured in Mexico
If you are considering offering or entering a Seller financed agreement to sell or purchase a property in Mexico, these are the two most common methods of structuring the agreement to offer protection for both parties, while adhering to Mexican Law.
Warranty Trust / Guaranty Trust / Fideicomiso de Garantía is a Trust where the seller appointed as a beneficiary in the first place and the buyer is appointed as a beneficiary in the second place. The trustee will be a Mexican bank (usually BANCO MONEX). There is title transfer to the buyer, thus triggering all closing costs and taxes. Once the loan is paid in full, the seller must appear before a Mexican notary public to sign a public deed where the seller is removed as the beneficiary in 1st place and the buyer is recognized as “sole beneficiary”. If the buyer defaults, the seller will instruct the trustee to start a non-judicial foreclosure process. There are 2 options: (1) public auction to sell the property and distribute the proceeds paying the loan balance, interests, etc. first to the seller; or (2) remove buyer as the beneficiary in 2nd place, name seller as “sole beneficiary” and get the property back, keeping all payments as liquidated damages. This option is good because the foreclosure process is non-judicial (no courts involved except for recovering possession in case the Buyer does not want to leave the property voluntarily) and the seller can choose to recover property ownership/title and possession, having to pay acquisition tax (2%). Both Parties name their substitute beneficiaries in case one of them dies. This method is considered the safest option for both parties, but the closing costs for the Buyer are more expensive than in the case of the option below.
Warranty Pledge / Garantía Prendaria– the parties execute a public deed formalizing (1) title transfer to the buyer, and (2) mortgage/pledge agreement, to secure the financing. The mortgage/pledge is recorded as a lien against the property in the seller’s favor. Once the loan is paid off, the seller must appear before a notary public in Mexico to sign a public deed formalizing the mortgage/pledge cancellation and remove the lien. All taxes and closing costs are triggered at closing. If the buyer defaults, the seller has to go to court to start a judicial foreclosure process and eviction against the buyer. The problem with this option is that the judicial process can take 1, 2, or 3 years to be completed. Also, there are no substitute beneficiaries named in case some party dies. The advantage of this option is that the closing costs are less expensive for the Buyer.