Ricardo and Guillermo Martinez are brothers who have a successful business in Nogales, Sonora. They want to expand it to Puerto Peņasco, but they need to borrow some money on a low interest long-term loan to do this. They try to get a loan in the U.S. because rates are lower there, and they have good credit on several American credit cards.
When they talk to banks in the U.S. they are told, "We can't make you a loan because you have no security." They point out that in addition to their business, they each own a home in Nogales. "But you have no security in the United States," says the loan officer.
The reason that American banks and mortgage companies are reluctant to lend to foreigners, no matter how well established they may be in their own countries, is that the lenders must be assured borrowers have enough income to make payments on the loan. Even in the U.S. people who are in business for themselves have trouble getting financing . Unfamiliarity with the economy of another country and its ways of doing business will make most lenders unwilling to see a foreign business or home as good security for a loan.
Lenders also use real estate itself as security, so that if the borrowers default, they can take the property and resell it to recoup their loss. If Ricardo and Guillermo were to get a loan, using their Mexican real estate as security, and then default, the lenders would have no way to acquire their property. In the U.S. there are established procedures that would allow them to do so, but the perception of the lenders is that these do not extend across the border. At present, however, Arizona and Sonora government and real estate people are working together to establish some common procedures for transactions between the U.S. and Mexico, so we may see better opportunities in the future.
Title insurance may be the key to opening the door betwen the two countries. In the U.S. it started as far back as 1874 and has been in large part responsible for the growth of the housing business, which is one of the largest industries in the country.
Title insurance is provided by a company that contracts to protect the homeowner from potential problems such as defects of title or liens upon the title. The company has a staff of lawyers and other specialists to check the records and find defects. Until these are corrected, the title policy cannot be issued.
Examples of defects in title are:
Examples of liens are:
Title insurance makes sure that all these possibilities are investigated and that every transaction is recorded, so that it's clear who owns the property and what loans are outstanding. If the title company misses something that later is discovered and causes a problem for the owner, the insurance pays for the damages.
Some U.S. title companies are starting to issue insurance to American citizens on the Mexican properties they own. If this practice could be extended to Mexican citizens, they would find it easier to get loans in the U.S., using their Mexican property as security.
Ricardo and Guillermo reason that if they owned property in the U.S., they might be able to get a loan. People of any nationality can buy property in the U.S. There are no restricted zones. The only problem is that they would need to buy it for cash since they can't get financing to buy property. So this isn't feasible for them at the moment.
Right now, however, with the current limitations, let's examine how a hypothetical Mexican family might buy property in the U.S. and use it to increase their net worth. The figures used here have been simplified and rounded off for ease in understanding but are otherwise pretty accurate.
Juan and Maria Garcia from Puerto Peņasco have about $35,000, and they want to buy property in Tucson where their youngest son Eduardo will be attending the University of Arizona. This is not enough to buy a house or even a townhouse.
But, although the Garcias can't get a new loan to buy property, they can assume an existing loan--if it's the right kind. What they need is to have their realtor find a property with an FHA or VA loan that's assumable without qualification. This means buyers don't have to provide proof of income or cash or undergo a credit check. All they have to do is invest cash equal to the equity (the property's value minus the loan balance) and keep up the payments. FHA and VA loans made since 1986 are no longer assumable without qualification, but there are still some older ones around.
Another possibility would be to have their realtor find a seller who has a property with no loans outstanding on it and to have him or her do seller financing. With a down payment as substantial as $35,000, they could find homeowners willing to do this.
Juan and Maria's realtor finds them a $100,000 3-bedroom house that has an assumable loan on it with a balance of $70,000. They spend $30,000 in cash and assume payments of $700 a month.
The house is spacious and located in a good neighborhood, but it's what's known as a fix-up. The carpets are stained, there are tiles missing from the kitchen and bathroom floors, some of the doors have apparently been kicked in (the couple selling the house has just gone through a messy divorce), and the house needs painting inside and out.
Eduardo, who has worked in construction for several years in Puerto Peņasco, is willing to do the necessary repairs. So Juan and Maria buy the house and spend an additional $5000 for materials. Eduardo and some of his friends do the fixup work. Then Eduardo has five fellow students move in with him; two share each bedroom. The other 5 each pay $150 a month to Eduardo, enough to cover the loan payments. At this point the house is paying for itself and its condition is vastly improved.
Now that the Garcias own property in the U.S. they can use it as security for a loan. Juan and Maria apply for a home equity loan. The house is appraised for $119,000. The loan balance is now $69,000, so the equity is $50,000.
Juan and Maria find a lender who will lend them 80% of their equity, $40,000. They decide to invest it in another property in the U.S.
Their realtor finds them a fourplex for $100,000 that's also a fixup. It needs a new roof; there's extensive termite damage; the electricity needs upgrading; the kitchens in all four units need replacing; and there are numerous cosmetic repairs necessary. Because it's so run-down, the rents are low. Obviously it needs better property management too. Juan and Maria put $20,000 down on it and get financing for the remaining $80,000, with payments of $800 a month, secured on this property. They use their remaining $20,000 to make the repairs. Eduardo does some of the work, but much of it is done by licensed contractors.
When the renovation is complete and a covered parking ramada has been added, Juan and Maria are able to rent each unit for $600. From their income of $2400 a month from the fourplex, they pay $800 on the loan, another $400 on the home equity loan on Eduardo's house, another $400 for property management, repairs, and miscellaneous expenses. So Juan and Maria have a cash flow of $800 a month from the fourplex. In addition, the property's worth has increased to $160,000, and their equity in it is now $80,000.
The Garcias now have several options. They may want to refinance the fourplex, consolidating the $80,000 loan on it with the $40,000 home equity loan on Eduardo's house, securing the new loan on the fourplex. They may want to borrow 80% of their equity in the fourplex and use it to invest in more real estate, perhaps an apartment building or a commercial property. They may want to exchange one of their properties for another in order to defer taxes on it. Or they may want to invest some of their money in Mexican real estate.
The strategy we've just described is known as pyramiding. Actually it's an inverted pyramid. It's a way of increasing equity in real estate. All it takes is enough capital to get started and a knowledgeable realtor to help. Juan and Maria were able to increase their equity in the first property rapidly by having Eduardo do the repairs. But if they had had to hire workers to do them, the strategy would still have worked; it would just have increased their equity a little more slowly.
If Ricardo and Guillermo could put together enough cash to adopt this pyramiding strategy, they would eventually have security enough to borrow money in the U.S. for their business needs. Perhaps someday soon we will see the lending line drawn between our borders erased, and we'll put our financial hands together, working for people and businesses on both sides.
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