Affordable Housing Institute : US

A fascinating bridge between finance’s fastest asset (capital) and its slowest (real estate) is being built in Mexico by an innovative band of financiers and entrepreneurs along the Mexican coast, whose developments provide insights into market work-arounds.

 

 

Never designed as a load-bearing joint!

 

Introducing the parties

 

Courtesy of the New York Times, in this corner, Americans with money:

 

WHEN Thomas Keeling, a New York City firefighter, retired from the force in 2003, it took him less than a month to leave College Point, Queens, for this beach town about five hours south of Tucson.

 

Mr. Keeling, 43, paid less than $500,000 for a 3,800-square-foot house with spectacular views from nearly every window.

 

For American buyers, the attractions of San Carlos, in the state of Sonora, Mexico, include its stunning mountain and ocean vistas as well as its proximity to the United States.

 

In this corner, Mexicans with property to sell:

 

The picturesque seaside town of San Carlos, Mexico, with its mountains and quaint shoreline, has become a popular retirement destination for Americans.

 

Blocking the ring between them, Mexican laws:

 

Article 27 of the Mexican constitution … prohibits foreigners from owning property within 50 kilometers (about 31 miles) of the coast.

 

That means stop in any language.

 

Now you may ask, why does that Mexican law exist?

 

The 1917 provision, according to historians, was a response to the loss of Mexican territory — about a third of the country — in the 19th century.  In 1848 alone, in the Treaty of Guadalupe Hidalgo, the United States acquired much of what became the Southwest, for about $15 million.

 

It’s our manifest destiny to acquire vacation homes.

 

That’s a very curious after-effect.  The Treaty of Guadalupe Hidalgo ended the 1846-48 Mexican War, more than 150 years ago, and later (in the 1852 Gadsden Purchase) the United States bought land below the Gila River, what is now southern Arizona.  More likely, it was an upsurge of nationalism that followed Pancho Villa’s revolution, and was a bit of anti-carpetbagger populist political vaporware. 

 

In any event, the statute exists: foreigners cannot own property along Mexico’s coasts.  Yet they do — or they seem to.  What’s going on here?

 

Introducing the work-around: an ownership-equivalent

 

Markets always clear — that is, if there is an economic bargain to be made, markets will find a way to make it, via a work-around:

 

Mexican real estate agents have developed strategies for giving Americans the equivalent of ownership, even if they cannot hold formal title to their houses.  In the most common arrangement, banks buy houses, then hold them in trust for the foreign “buyers.”  

 

In other words, a domestic financial institution becomes the foreigner’s nominee and trustee:

 

A trust, under recent amendments to the law, can now last 50 years and can be renewed at the end of that term. The bottom line is that a “buyer” can expect to retain a property in perpetuity.

 

“Perpetuity?  We don’ have no steenkin’ perpetuity!”

 

If that sounds dubious, in a reversal of Pancho Villa’s PRI heritage, the current government is stimulating investment:

 

The Mexican government has spurred that growth with a number of new rules that make it easier for Americans to acquire real estate.

 

Two years ago, the governors of Arizona and the Mexican state of Sonora created a real estate committee (part of a longstanding Arizona-Mexico Commission) to propose ways of encouraging cross-border real estate transactions.

 

“It’s a two-way street,” said Gary Brasher, a Tubac, Ariz., developer who serves on the committee. Recently, the group oversaw the creation of a guide to buying Arizona real estate — in Spanish. “There’s capital in Mexico that’s a little bit afraid of the U.S.,” Mr. Brasher said.

 

But most of the changes are to encourage money to flow south. Until recently, no American company offered title insurance in Mexico, and banks won’t lend money without title insurance.  

 

Even so, capital is nervous, which has a market implication:

 

(Even now, the vast majority of purchases are for cash, San Carlos real estate agents say.)  

 

The market is trying to form:

 

A few Mexican companies, including Stewart Title Guaranty de México, a subsidiary of a Texas company, now are offering insurance for foreign buyers.

 

Another goal is to reassure Americans who buy in planned communities or condominium complexes that the necessary infrastructure will be built.  The Sonoran government, Mr. Brasher said, is creating rules like those in Arizona that require developers to post bonds to guarantee the completion of roads and sewers.

 

Unwilling to tackle changing a constitutional article (the ultimate in the hierarchy of program definition!), the market — with the active connivance of government — has devised a somewhat complex work-around.  Can work-arounds be sold?

 

“We’re having the best season in history,” said Jose J. Martinez, a broker with Snowbird Realty, one of 15 agencies in the town of about 4,500. Richard C. Baca, a former United States marine who owns Sunshine Realty, on the outskirts of town, said: “It’s not a boom — but it’s been steady growth.”

 

The work-around is viable because this location is so attractive:

 

San Carlos appeals to buyers looking for a quieter retreat. “A lot of people want to keep it hush-hush,” said Mr. Keeling, who would probably be one of them were he not looking to get what he calls top dollar for his house.

 

His broker, Catalina O. Evatt, is optimistic that he will. San Carlos, she said, has the most beautiful sunsets in the world. That claim seemed plausible on a recent afternoon, as small clouds in the sky began to turn from white to pink to red to purple before the sun went down behind the jagged peaks lining the town’s harbor.

 

Brokers like Catalina O. Evatt are showing new condominiums being developed.

 

What does this imply for housing generally?

 

All sorts of takeaways come from this little story.

 

1.         Historical legacy carries into the future unchanged, even though the future changes dramatically.  Capital is like blood, carrying financial oxygen to economically gasping communities; its denial starves development.  A law enacted in the flush of nationalism is now seen as harmful to the national interest, but there it is, embedded in the constitution, and very hard to change.

 

2.         When capital is blocked, markets will work around, at some cost.  Markets do clear, but the cost is a discount from the value that could otherwise be realized.

 

            3.         Capital is skittish, so it must be constantly reassured.  Absence of familiar legal and ownership forms means that the American investors need constant affirmation:

 

Americans should not be afraid of the “in trust” provision, said Mr. Martinez, who spent many years living in Chicago. After all, the typical buyer of a house in the United States moves or refinances before the mortgage is paid off and, therefore, never really owns the building free and clear.

 

Still, some Americans have been reluctant to buy property in Mexico, in part because of myths about “owners” being evicted from houses they had “purchased.” Others were worried that their property could be nationalized by the Mexican government, although there are no examples of that happening in recent decades.

 

Past performance is no guarantee of future success, but it’s a great indicator:

 

“No one has ever lost a piece of property in a properly constituted Mexican land trust,” Mr. Baca said. He explained that a house in trust “is not an asset of the bank.”

 

“If the bank fails, the trust is transferred to another bank,” he added.

 

Translation: No one’s been screwed yet. 

 

Not yet

 

            4.         Innovation of primary form (ownership) yields a secondary form (rental).  Once some people have bought homes, they have become home owners — and if they do not want to live in the home year-round, they suddenly become amateur landlords:

 

Others who visit San Carlos like looking, but aren’t tempted to buy. At a rental office for a condo project called Bahia Delfin, Reto Hanauer, a contractor from Vancouver, British Columbia, said, “It’s fun to see the new projects.” But, he said, he was nervous about buying in a foreign country.

 

For those who aren’t nervous, offerings abound.

 

Ms. Evatt and several American partners are developing a 45-unit beachfront condo project, called Villas Sirenas. Vernon Swaback & Associates of Scottsdale, Ariz., is supervising construction, to see that it reaches “American standards.” The prices, around $500,000 a unit, are the highest ever charged for condos in San Carlos, Ms. Evatt said.

 

            5.         Capital that goes in fast sometimes comes out very slow. 

 

Other condos are available for as little as $100,000, and some have stunning views of the Sea of Cortez.

 

Probably owned by an earlier optimist ….

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