The Warranty Trust (Fideicomiso en Garantia) in México: The Best Option to
Secure an Owner Financed Real Estate Sale.
First of all, remember that a Mexican Trust (fideicomiso) is an adaptation of the U.S. Trust to Mexican legal system, and it is basically the same in both countries. There is one exception in México, and that is the Restricted Zone Trust, from which, most foreigners get to know about Mexican Trusts, and get the wrong impression thinking it is different than in the US. Having said that, there is a form of a Trust that is a perfect vehicle for Owner Financed Sales, protecting both parties in the transaction.
Financing to purchase a house by foreigners is a need in the Mexican Foreign market that currently is not adequately covered by financial institutions, due to the high rates and lack of options. So it is natural that some owners are considering offering to financing as part of the sales price to purchasers for specific periods of time. Collateral is the biggest concern for the Sellers. I won’t discuss here about the importance of qualifying the credit capacity of the Purchaser, as this exceeds the aims of this article, so I will just say that, more and more, lenders do not focus on the strength of the collateral, but, on the strength of the Buyer’s capacity to pay.
Except made within the Warranty Trust, all other financing collateral options and methods, need to be resolved through court if the borrowing party defaults. No foreigner wants to be involved in a problematic judicial recovery of their property. In the case of a default by the Purchaser, it involves a Civil Case in court to recover the property rights first, and if won, another civil case to recover possession.
Therefore, the only safe alternative for an owner-financed sale is through a WARRANTY TRUST. Not all Warranty Trust are the same though and it is fundamental that they are done with the adequate structure and provisions, to secure the collateral (the property rights) under all circumstances. I will discuss here the one I use and its benefits.
Through a Warranty Trust, the property is transferred to a Trustee, a Bank, the Seller is Beneficiary in first place, and Purchaser is the Beneficiary in second place until the loan is paid in full. The Warranty specifies the Beneficiary in second place as having the right of possession not the title rights, as long as he is current in his payments. The loan is documented within the trust and through a promissory note. Here is the first benefit of a Warranty Trust: The property is held in trust (title rights) on behalf of the Seller until fully paid and the Purchaser only has right to possession until fully paid and the Warranty is then canceled.
In case of default, there is a standard process that, if executed correctly, should completely avoid the risk of going to court to exercise the warranty on the ownership rights and can be done within a very short period of time by the Trustee without any authority intervention. The only exception to this is if the purchaser refuses to deliver possession, and we´ll discuss that in a moment.
The steps are easy: If the seller presents to the Trustee (Bank) the original of the promissory note defaulted, the Trustee requests payment within 5 business days to Purchaser at the address in México (the address of the purchased unit) through a notary public. If Purchaser does not pays, he loses his possession rights and they are returned to the Seller, who legally consolidates first and second beneficiary rights and does not need to make another trust. If Purchaser presents the original of the promissory note cancelled to the Trustee, all first beneficiary rights passes to him and this will consolidate his first and second beneficiary rights and he does not need to make another trust.
Now the big issue here is POSSESSION: According to Mexican law, possession can only be taken away through a court order. Therefore, if purchaser does not deliver possession, in all cases, this has to go through court. But, in a Warranty Trust there is another big difference. A trust is a mercantile contract according to law, so recovery of possession is not made through a civil case, but through Federal Court, through a special expedited process. This is much faster.
To try to avoid this risk, I recommend that a Warranty Trust should establish that, if purchaser delivers possession after default within a specified time period, he has the right to recuperate a percentage of the principal that he has previously paid, minus expenses. But if he refuses to deliver possession, then he loses everything as a penalty.
If possession is not surrendered by the Purchaser, the Purchaser is then evicted through a federal expedited process, and sellers keeps the trust and property. If possession is given by purchaser, seller can decide to pay the purchaser the reimbursement of the percentage of principal agreed, minus legal and other expenses, and keep the trust and property, or request the trustee to sell the property and pay the Purchaser whenever it is sold, minus legal and other expenses. The Seller is in the driver’s seat to determine the terms of his loan to the Purchaser.
This is just a brief explanation for the reader, so you can know there is a truly safe option for seller´s to offer financing.
By Raúl León, Attorney At Law, Expert in Mexican Trust (Fideicomiso), Commerce & Real Estate Attorney. From US: Cel. 011 521 624-151- 6332, Local Cel: (624) 151-6332
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