Simply put, an escrow account is used to ensure that funds from a real estate transaction change hands safely at closing. This is not its legal definition, but it is the rationale for its use. An escrow company is the neutral entity that holds and disburses the funds at the time the closing is complete. The money is held in escrow so a buyer’s funds are proven and complete before the deal is closed, and the buyer no longer has access to the funds prior to closing. The seller wants the money immediately when the deal is closed, but also has no access to the funds until the time of closing. It allows for an immediate exchange.
Imported from the United States, escrow is a safe and efficient way to transfer funds between a buyer and a seller. Before its use, it was common in Mexico for buyers to pay the property advance of between 10 and 30 percent of the total sale price directly to sellers. This was based on the signing a simple preliminary purchase-sale agreement. These initial payments went directly to the seller’s account, prior to the commencement of any closing proceedings or any due diligence being carried out. This business practice works as long as there are no conflicts with the transaction. However, when problems arise during a closing proceeding and the seller has the buyer’s money, the request for the return of funds can be a hassle.
Escrow eliminates this risk, as any initial payment is placed in an account that neither party unilaterally controls. When there are real dollars in this account—money at stake—buyers and sellers who use it are more motivated to close a deal and are therefore more vigilant in working out details that could delay closing.
Sellers also like to see that buyers are serious about depositing funds with a trustworthy escrow company, which often goes toward buying a property or, in the event of default, serves as a contractual penalty. Buyers are protected against sellers keeping the down payment and then not selling the property. It acts to protect both buyers and sellers and to help keep the closing moving forward.
The use of escrow in Mexico is relatively new, and until recently, and it was not commonly accepted by real estate professionals. In recent years, however, its benefits have become evident as its use motivates both the buyer and the seller to move efficiently through the closing process. In addition, brokers and agents know that when a deal closes, their clients will get what they agreed to and, more importantly, the agents will get their commissions. Before implementing an escrow system here, there were real risks of default when funds went directly from the buyer to the seller. Too often, sellers wanted to renegotiate agent fees after the deal was closed. In this instance, the agent would have to accept a lower fee or be prepared to file a lawsuit and pay for legal costs in an attempt to compel the seller to pay the appropriate commissions agreed upon before the sale.
Buyers and Sellers: Looking for the Right Escrow
This financial entity is not yet regulated in Mexico; therefore, buyers and sellers should take caution selecting an escrow company. What should a buyer and a seller look for when making this important decision for their purchase and sale of real estate in our country? The following questions are the most common regarding its use:
First you need to be sure the company has been in business for several years and is willing to provide references.
Escrow companies based in Mexico are not regulated by Mexican law, but those based in the United States and providing services in Mexico are generally regulated by the laws of the state of domicile. Regardless, it is advisable to request to see your insurance policies for coverage of errors, omissions, crimes and cyber fraud. To do this, it is advisable to call the insurance provider and confirm that the policy is valid and up to date and to confirm the coverage will apply to the transaction.
The company will ask you to complete a form called “Know Your Client” (KYC). Companies in the United States and Mexico have different forms and requirements, but generally the questionnaire in Mexico is more extensive due to strict anti-money laundering laws. The questionnaire asks for such information as marital status and place of birth for the buyer. In addition to this, the identifications of both parties and a copy of the purchase and sale agreement between the parties are required.
Most escrow companies prefer to use their standard forms but should be willing to make minor changes to clarify the terms and conditions of the release/disbursement of funds as needed on an individual basis. Escrow companies do not negotiate the terms of the purchase and sale agreement between a buyer and a seller. The escrow agent’s job is to verify that a deal is closed and that the funds are disbursed according to the parties’ instructions as outlined in the purchase agreement.
If a dispute arises over the terms of the sales agreement, most companies will try to assist with its resolution to the extent legally possible. This is not their obligation, but if they cannot reach an agreement, the company can “challenge” the funds in the account, assuming the agreement is governed by United States law. In short, if a resolution cannot be reached, the company will hand over the deposited funds to a court, and they will be released when everything is resolved.
While in the United States and Canada it is common to receive a closing statement from the agent or escrow company, in Mexico this does not happen; however, the company can provide a closing statement upon request.
Often, in Mexico, the funds will be kept in U.S. dollars, but some companies provide exchange services if needed.