Clearly driving the Baja real estate market boom is the upward explosion of real estate values in Southern California. Much of the resulting equity is finding its way into relatively bargain-priced housing south of the border. Not incidental in helping the Baja housing boom is the availability of title insurance policies and the emergence of reputable Mexican real estate brokerage offices.

However, buyers’ exhilaration at being able to cash out so much equity and buying homes along the Baja coast for 30 percent to 40 percent of what comparable housing costs in Southern California has veiled the added significant costs of buying real estate in Mexico — the closing costs.

For example, a couple entering retirement age who purchased a home in inland Orange County in 1968 for $34,000 with a 30-year mortgage had paid off the loan by 2000. In late 2004, they sold it for $780,000. Off they went to Baja and below Rosarito Beach they bought a beachfront three-bedroom, two-bath house for $240,000. Closing costs added over $11,000, effectively bringing the price to over $250,000.

A Chula Vista couple had a three-bedroom, 2.5-bathroom home they purchased in an older neighborhood in the early 1990s for $120,000. They sold the home in late 2003 for $347,000. They bought a three-bedroom, two-bath condominium in a high rise building in Tijuana for $137,000. They splurged on a number of upgrades totaling another $20,000 and now live in splendor with a million-dollar ocean view and of the San Diego skyline. Their closing costs added more than $5,500 to the effective total price.

The added closing costs beget a “so what?” attitude because the buyers are pleased that “the savings are still incredible.”

The unusually high closing costs are not, however, some kind of scam. Rather, they include some fixed costs and other fees based on a percentage of the selling price. For instance, charges include a 2 percent transfer fee and a title policy fee equal to about 0.01 percent of the house value. Combined with fixed costs such as “notario” fees, the fideicomiso (bank trust), land registry and other items, it adds up.

The closing costs are about to start becoming a more important part in the buying decision as Baja oceanfront sales slide into a new phase.

Sales in Southern California are slowing and interest rates are rising. Lenders are beginning to take second looks at the equity amounts and some with interest-only mortgages are approaching the “oops, what do we do now?” moment.

A real estate slowdown in Southern California will domino into Baja. On the positive side for buyers on both sides of the border, price appreciation will undergo a dramatic slowing.

Yet the price differentials will continue to provide U.S. buyers a major cushion. The appeal of having a retirement or second home in Baja will remain strong, as will investment speculation.

The major difference for many will be they now are unable to cash out sufficient equity in their existing home to buy a Baja property outright. Those buyers will seek mortgage financing, which brings its own closing costs on top of present closing costs.

Diane Gibbs, managing owner of Realty Executives in Rosarito Beach, laments the high added costs she was quoted for a house that sold for $320,000 with a $160,000 down payment. Fees for financing the remaining $160,000 amounted to $19,400. That’s more than 6 percent of the selling price but an eye-opening 12-plus percent of the financed amount.

The presence of mortgage financing brings added fees such as points (2 percent of the loan; in above case, $3,200), appraisal fee, lender underwriting fee, loan processing fee and escrow fee (lenders escrow). Some of the fees have minimum charges but can go up to three times the minimum. The 7.99 percent interest rate also is higher than the buyer could get in California.

We are not suggesting mortgage financing be avoided. Rather, buyers simply must be aware of out-of-pocket costs. In all cases, request a complete itemized schedule of fees and expenses before entering into a purchase agreement.

Presently the king-of-the-hill in mortgage lending in Mexico is GE Capital. GE has many years of experience there, owning a bank, insurance company and escrow services. GE works through mortgage brokers who initiate the loan process.

As reported in earlier articles on these pages, CS Financial is one of the leading GE brokerage sources. Also very aggressively pursuing Mexico business is Del Mar-based Finance North America.

Russ Schreier, president of FNA, tells us his firm has successfully funded 23 mortgages, mostly in Cabo San Lucas with some in Loreto Bay, Puerto Vallarta and San Felipe. Along the Tijuana-Ensenada coastal corridor where FNA is heavily promoting its services, the first mortgage for $385,000 (sales price $550,000) is scheduled to close early this month.

The application is very similar to what would be used in the United States. The applicant’s minimum credit rating must be 680, the loan can be up to 70 percent of value and the maximum loan is $5 million. (GE uses its own approved appraisers.)

When financing, the bank trust must name GE as the primary beneficiary and the buyer as the secondary. GE will not finance otherwise as this provision allows them, in a mortgage default, to take possession of the property without having to go through the courts. Once the loan is paid, GE is removed from the trust.

What the Baja mortgage market needs, and is coming, is more competition. That will improve rates and fees. Large investment funds are preparing to enter the market, ensuring that Baja properties will continue to be a hot and solid investment opportunity for years to come.

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 http://www.hispanicvista.com/sales/book_sale.htm.