Real estate transactions in Mexico for foreigners have, until very recently with the introduction of financing packages from U.S. companies, been mostly all-cash affairs.
As more and more U.S. investors warm to the idea of buying real estate in Mexico, a host of financial services have surfaced to meet the demand for products commonly available stateside.
San Diego's Finance North America has emerged as a player in one of these new services by offering mortgages to U.S. and Canadian buyers of Mexican real estate.
"Before we came in it was like the Wild Wild West," said Christian Alvarez, co-founder and head of sales at privately held Finance North America. Alvarez described transactions that took place in which buyers would bring bundles of cash across the border for use in impromptu transactions.
In 2004, after finding a vacation home in Mexico he wanted to buy, Finance North America co-founder and CEO Russ Schreier was unable to find a mortgage for the purchase. He eventually paid cash and took on partners to purchase the property, but the experience left him with a business idea -- providing financing to foreign buyers accustomed to buying with credit.
"The average U.S. consumer wants to finance. They finance everything from cars ... to fine dining," said Schreier in a recent interview.
Nevertheless, Scheirer estimates currently only about 1 percent of foreign buyers in Mexico -- most of whom are from the United States -- have mortgages. The reason, he said, is that most are retirees that have leveraged equity in their U.S. homes that have gained in value over the years.
At the time Schreier was looking for financing for his Mexico property, he was an executive vice president at First Capital Corp. in San Diego. He eventually convinced Alvarez, who was working for him at the time and who had owned and lived in Los Cabos for a number of years, to come on board with Finance North America. The two established the company in 2005.
It didn't take the pair long to realize they weren't going to be able to operate on a traditional loan officer model, whereby employees are paid on a 100 percent commission basis. Instead, they established a call center -- which is located within their Carmel Valley office -- along with regional field operators working in Mexico to generate leads.
Now with a total of 15 employees, the company offers financing similar to what a customer would be able find if they wished to get a loan for U.S. property. But rates tend to be higher and lending standards more stringent, a product of the nascent state of the cross-border lending industry, according to Schreier.
Whereas in the United States there is a preponderance of loan options, which include mortgages that allow little or no down-payments and interest-only payments, in Mexico Finance North America -- like their competitors -- require at least a 20 percent down payment for even the most credit-worthy borrowers. Finance North America won't consider a loan to a borrower who has less than a 660 credit score, compared to many lenders who loan within the United States to buyers with ratings as low as the 500s.
Interest rates range from 6.75 percent on a three-year fixed, 15-year loan, with full income documentation, a credit score over 701 and a 50 percent down payment to 8.75 percent on a 30-year fixed rate mortgage with a 20 percent down payment.
So far the formula has worked. The combination of borrowers with higher credit ratings and a sizeable equity buffer has resulted in no defaults on the approximately 150 loans Finance North America has issued since its inception, according to Schreier and Alvarez. In fact, the pair said they were only aware of one foreclosure on a property in Mexico by a U.S. lender, and that was the result of the death of the borrower.
"As time goes on and we do more and more of these mortgages, the risk layers will continue to whittle down and we'll be able to open mortgages up to more and more people," said Schreier. He predicts approximately 70 percent of foreign buyers of Mexican real estate will be using some sort of mortgage product in their purchases within 10 years.
But the trend of buying real estate in Mexico on credit has taken a while for agents and developers south of the border to adjust to, Schreier and Alvarez said.
Nevertheless, as buying property in Mexico -- and particularly Baja California -- has become more of a mainstream activity over the past few years, thanks in part to high-profile developments like Donald Trump's Trump Ocean Resort Baja in Rosarito, more and more people are getting into the market.
"For the most part this market has been on the uptick year after year," said Nathan Moeder, a principal at London Group Realty Advisers, a San Diego real estate consulting firm that does business in Baja.
Moeder estimated that among the main coastal communities in Baja, 75 percent to 80 percent of property owners are foreigners.
Both Moeder and Scheirer said the general public is feels safer about buying real estate in Mexico as the popularity grows.
"That doesn't mean that you still don't have to be cautious," said Scheirer. "You're buying in a foreign country; you need to understand the ins and outs of how title is transferred to you."