Equity-rich San Diego homeowners are looking south into Baja California as a place to buy a home for weekend getaways or retirement. It can be a winning idea, providing they take the proper legal steps.

Mexico can be one of those places where Americans are victimized in real estate deals. In Punta Banda outside Ensenada, more than 200 Americans were evicted from their homes because the developer had sold them land the Mexican Supreme Court ruled belonged to someone else. Punta Banda was not an isolated case.

Yet thousands of happy Americans have purchased homes in Baja and other parts of Mexico with no problems. Why? Common sense and savvy.

In the United States, we are so used to buying homes under an automatic regimen that hardly any thought goes into the process. About the hardest part is agreeing with the seller on the price of the home and who will pay what for the escrow and closing costs. Simple.

In Mexico, it works differently and with more potential pitfalls. To be sure, the process is improving and will get to a point of standardization like in the United States. Already buyers can find plenty of honest real estate agents and developers who want to do right by their foreign buyers. Unfortunately, many in the business don’t understand that selling property to a “foreigner” is not the same as selling to a Mexican national. The Mexican Constitution describes restrictions for foreign individuals or companies within 61 miles of the international borders and 31 miles of seacoasts, referred to as the “restricted zone.”

In the restricted zones foreigners may purchase residential real estate but only through a bank trust fund established for 50 years and renewable for another 50 years. The bank retains the property title, but the foreigner is the beneficiary, using and enjoying the property including selling it, and passing it to heirs through a will.

Private property ownership is an old concept in Mexico, but the way of transacting real estate is different from the system used in the United States. In this country, part of the process is acquiring title insurance. The practice is so routine the added cost is rarely questioned because it provides the assurance that the investment on the property will not be lost in the event someone comes along at some future date saying the property is theirs. If a mistake was made, the title insurance company is on the hook to pay.

But this routine in the United States is rather young. Title insurance began to become a standard part of the home purchase process in the early 1960s. Prior to that an attorney researched the records and provided a legal opinion. When title companies came on the scene and began making major investments in researching plat books and recording ownership records and then issuing title insurance policies, the legal profession fought this as it meant a loss of income. Mexico is in a similar position today.

Seeing the business potential, United States title insurance companies are starting to do business in Mexico. In turn, many Mexican attorneys are unhappy, and Mexicans who are not familiar with the process of title insurance are skeptical about the change, just as their U.S. counterparts were some 40 years ago.

The difficulty with the old U.S. and present Mexican way is one of warranty — protecting a purchaser’s rights and investment. In the past, short of fraud, there was no recourse as there is now in Mexico. Title policies place the liability on the title insurance underwriting company.

Stewart Title Guaranty de Mexico (Stewart Title Insurance Co.), Fidelity National Financial and First American Title Insurance are the three best known U.S. title insurance companies now operating in Mexico.

Stewart Title offers those pondering a property purchase in Mexico what it refers to as six principles to help buyers avoid risks.

They are:

1. Determine if the seller has legal ownership of the property and if it can be transferred legally.
   
   
2. Hire Mexican counsel or a title insurance company to search the ownership status back to the sovereign.
   
   
3. Have your legal counsel review the buy/sell agreement, which usually determines the transaction’s terms and conditions.
   
   
4. Arrange for a title company to handle the escrow of funds.
   
   
5. Obtain a property ownership insurance policy to protect against recording errors, liens, encroachments, taxes, fraud, misrepresentations and other ownership issues.
   
   
6. If the property is a condominium, examine the documents creating the condominium regime, which defines the owner’s rights, obligations and restrictions.

These points are excellent advice. To the above, I would add that the “deposit” with offer not be made with a check payable to either the real estate sales person or the developer, but rather to an escrow company. Title companies offer this service, as this too is a fairly new concept in Mexico.

Had any of the aforementioned title companies been operating in Mexico in 1985 when Punta Banda began selling to Americans, and buyers required title policies, that entire episode would not have occurred. The companies would not have underwritten the policies after a thorough search of the property’s history and the discovery of former ownership claims in the Mexican courts.

Patrick Osio Jr. can be reached at posiojr@sandiegometro.com. The veteran consultant also has issued “The Mexican Perspective,” an intensive primer on business culture and protocol. Copies are available at www.hispanicvista.com/sales/book_sale.htm.