Dolores Pérez Islas – CEO of SILMEXICO
Is it advisable to use escrow accounts in Mexico for real estate operations?
An escrow is a financial agreement in which a third party holds and regulates the payment of funds or transfer of assets required by two or more parties involved in a purchase-sale transaction. The usage of escrow in Mexico is recent and it comes from the English-speaking countries (particularly the United States) and Europe, being a safe and efficient way of transferring funds between the purchasing party and the selling party.
Using an escrow is advisable to provide protection to the real estate transactions, since it includes benefits such as solvency, safety and stability in payments for the involved parts. It guarantees the funds on a real estate transaction change hands at the moment of closing, consequently, the transaction is transparent and protected. This is because the funds are not directly deposited in the selling party’s account; rather, they are deposited in an escrow account, to ensure payment reaches the selling party and the product/service reaches the purchasing party.
With escrow, there is the confidence the selling party will obtain its funds when the transaction is concluded, and the purchasing party will not lose any money unless there is a breach of contract. If periodic payments are required, an escrow agent can make sure they are made the day they are required. Additionally, by using the escrow method with the individual or property developer, sudden or last-minute changes are prevented, since the price agreed in the beginning is held in the escrow account and cannot vary.
The form in which an escrow operates contrasts with the traditional model, where the purchasing party makes an advance payment to the selling party when signing a preliminary purchase-sale agreement, existing possible complications such as insolvency, presence of levies/liens to the property title, last-minute attempts at renegotiation, chargebacks or even frauds, reasons why one of the parts (or all of them) can have zero confidence in carrying out the transaction.
The escrow provides certainty and it is used in real estate purchase-sale transactions so the purchasing party and the notary can perform their due diligence on the property to acquire, while ensuring the selling party of the purchasing party’s financial solvency, since closings take a while. At the same time, the selling party can ensure the title is clean and has no liens, in case it is required. Once the selling conditions are reached, the funds are transferred to the selling party’s account, and the property is transferred to the purchasing party.
Companies offering escrow as a part of their activities (base) this operation on the concurrence of wills by the parties wishing to guarantee the transaction with the advantages described in the previous paragraphs. Although this legal figure is not found in Mexico’s Civil or Commercial Codes, its operation, in accordance with the articles 78 of the Commerce Code, and 1832 of the Federal Civil Code, as well as their similar on each state’s codes, is juridically valid and legal, since both parts expressly give their consent to the escrow agent to protect the deposit and agree on its future, depending on each operation’s particular case. Consequently, it is necessary to make sure of the terms and conditions under which each figure operates specifically with the escrow agent. In addition, IDs for each of the parties and a copy of the purchase-sale agreement are required, since the escrow’s reliability and legality rests there.