Baja's building boom

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Baja's building boom


Mexican coastal area experiencing a surge in housing construction, but observers advise American buyers to do their homework
By Sandra Dibble and Lori Weisberg
UNION-TRIBUNE STAFF WRITERS
October 2, 2005

ROSARITO BEACH – Step out onto the balconies of the newest condominiums rising along the Pacific Ocean and catch colorful sunsets, misty mornings, dolphins leaping from the waves – and giant cranes lifting steel beams for a new tower next door.

It's boom time on the Baja California coastline as U.S. buyers seduced by dramatic ocean views and bargain prices snap up properties from Tijuana to Rosarito Beach to Ensenada.
Bulldozers break the quiet of once-sleepy coastal stretches. Clients stream through construction sites and model homes, putting down tens of thousands of dollars before buildings are even off the ground. U.S. real estate agents, developers, lenders and title insurance companies are setting up shop, eager to capture a share of the business.

"The telephone has been ringing off the hook for every real estate agent in this town," said Diane Gibbs, a longtime agent in Rosarito Beach, a rapidly growing community of 135,000 people where much of the new development is taking place.

A unique set of cross-border circumstances has converged on this coastal strip to heat up the market: skyrocketing real estate prices in the United States, improved investment safety in Mexico because of the increasing availability of title insurance and escrow accounts, and reluctance among growing numbers of U.S. travelers and investors to venture far from home after the Sept. 11, 2001, terrorist attacks.

While the vistas may rival those of La Jolla or Carmel, the reality is that buying in Mexico isn't real estate U.S.-style. Foreigners are barred from directly owning residential property along the coast, and boundary disputes abound on the Baja California peninsula. While good deals can be found, so can potential problems.

Still, with ocean-view homes in California priced at stratospheric levels, investing in Baja California has become an affordable way for many U.S. citizens to fulfill their dream of owning beachfront property.
More and more are drawing equity from their primary homes in the United States to finance second homes in Mexico. Once viewed as a quiet spot to retire, camp or leave a trailer, the coast is drawing an increasingly younger and wealthier U.S. clientele.

"It's the whole idea of being in a foreign country, and still close," said Todd Glimme, 42, of San Diego.

Tapping into equity from their home in Clairemont, Glimme and his wife, Leslie McLaughlin, put nearly $100,000 down on two $277,000 condominiums under construction in Rosarito Beach.

They plan to sell one at a profit. They will keep the other, eventually commuting between Mexico, where he is starting an information technology business, and San Diego, where she works for the Navy.

"To buy a place the equivalent of that up here, you'd be paying in the millions," Glimme said.

The region has been a haven for U.S. expatriates for decades. Shops, restaurants and services cater to English-speaking, dollar-carrying consumers. But for all the trappings of home, this is a foreign country.

The Mexican Constitution bans foreigners from owning coastal residential property, so most oceanfront buyers hold title as beneficiaries of long-term trusts through a Mexican bank. Financing is more difficult and expensive, and required down payments can be as large as 50 percent of the purchase price. Real estate agents are not licensed as they are in the United States, and they have no legal obligation to disclose potential problems with a property.
"When Americans go to Mexico, they should do their due diligence," said Jorge A. Vargas, a specialist in Mexican law at the University of San Diego. "You are entering an alien legal world, so don't be so trusting with people. The conveyance of property is completely different from the American system."

The Baja California peninsula can be particularly problematic. Many parcels suffer from lingering land title disputes, which are a legacy of the region's distance from Mexico's ruling center and decades of little development. Inaccurate land surveys are only now being corrected as parcels are being developed and sold.

"There are a lot of issues dealing with conflict of title all along the coast from Tijuana to Ensenada," said attorney José Larroque, with the Tijuana office of Baker & McKenzie, an international law firm. "For many years, these properties were vacant. Now that they're being developed, all these owners pop up."

Buyers have ended up on land with multiple titles, or without services or have built in the restricted federal maritime zone. A mistake can take years to correct.

Without proper precautions, "this boom can create a new wave of problems," said Silvia Perez-Thompson, a real estate consultant in Rosarito Beach. "I think it's a great investment, but you have to understand the laws."

Thousands of units
Baja California tourism officials tally 24 major projects under way in the Tijuana-Rosarito corridor with a total of 2,800 units, but other projects in the pipeline would easily double that figure. In Rosarito Beach alone, city officials count more than 600 units under construction and more than 700 in the planning phase.

Interest has spread south to Ensenada, where developers of Ventana al Mar are proposing 2,500 units on 611 acres; just up the coast, at Bajamar, a development group is preparing to propose an adult master-planned community with 2,500 homes and a nine-hole golf course. An additional dozen projects with 1,200 units are under way across the state in San Felipe.
The projects along the coast south of Tijuana are a mix of low-and high-rise developments, with units generally priced between $200,000 and $500,000.

Researchers, environmentalists and residents warn that the rapid growth is something that must be cautiously managed. Left unchecked, development could jeopardize the very scenery that draws so many to the region.

The new developments also pose challenges for state and local governments that must supply services to keep up with the growth. "We must run with the market; otherwise we'll have bottlenecks in the next year, water, waste disposal, sewage, water treatment," said Diego Moreno, director of urban development for Rosarito Beach.

The surge in sales follows years of stagnation and false starts on the Tijuana-Ensenada corridor.

"This was always known as the corridor of broken dreams," said David Ellsworth, a longtime consultant who once worked with the Mexican government's tourism development agency, Fonatur. "You saw so many entryways that got built and nothing happens. There were more failures than successes."

The market was hit hard after the widely publicized, court-ordered evictions of more than 200 U.S. citizens at Punta Banda, outside Ensenada. Caught in the middle of a long-standing coastal property dispute between a communal landholding group and private owners, they were forced to leave when the land was restored to the private landowners.

But nearly five years later, Punta Banda seems a distant memory.

In downtown Rosarito Beach, Gustavo Torres' eyes dart between his computer and the potential clients stepping through his office door on a busy Saturday morning. In June 2004, his business sold seven properties; last June, it sold 49, and values are going up quickly.

"Two years ago, you could find a nice oceanfront home for $220,000," Torres said. "Now they are selling for $580,000."

A few miles down the coast, Diane Gibbs and her team operate from an ornately decorated, wood-paneled office in a small strip mall that includes a piano, a bar, a grandfather clock and a sign that reads, "Dream." The Missouri native has been selling property in Baja California since the late 1980s and says she has learned to read her U.S. clients.

"I can have somebody in my car 15 minutes and know if they're going to make it in Mexico or not," said Gibbs, steering her Mercedes sedan through a construction site near her office one recent afternoon. "Just by the questions they ask: 'Well, what about this trash on the side of the road? What about these junk cars?' "

Gibbs and others say a significant chunk of the market is Mexican-American, but many of those buyers purchase lower-priced lots east of the coastal road. Those who are Mexican citizens can hold title directly, avoiding the bank trusts, or fideicomisos required of foreigners buying along the coast.

Some developers are seizing on U.S. Latinos' growing purchasing power. One is planning an oceanfront adult community near Ensenada marketed pri marily at Southern California Latinos. And at least one real estate agent has seen growing numbers of Mexican-American clients for the more expensive oceanfront homes over the past year.

"The increase has been remarkable," said Gustavo Torres, who said Mexican-Americans now account for nearly 30 percent of sales.

Often, those who decide to buy say they are motivated by more than Mexico's affordable prices. They talk about the laid-back lifestyle and the kindness and civility of Mexicans they encounter.

"It's the warm feeling here," said Essam Seif, a retired physician from Orange County, who has bought two condominiums at La Jolla de Rosarito and has encouraged friends and relatives to join him. "Even though I don't know the language, it's very easy to understand people and communicate."

Baby-boom money
A large part of the demand in Baja California comes from California residents such as Seif, who say they like the proximity to the border. Developer Eduardo Chabert, who is planning his fifth condominium development in Rosarito Beach, said nearly all of his buyers are from Southern California, with 70 percent of them U.S. born and 20 percent Mexican-born U.S. residents.
Resorts across Mexico are experiencing a surge in U.S. buyers, from Cancun to Cabo San Lucas and Puerto Peñasco to Puerto Vallarta. Ellsworth, the tourism consultant, attributes the spike in interest to a range of factors, including the stability of the peso in recent years and the increasing availability of title insurance, a form of protection for buyers should problems arise over issues such as ownership or unpaid taxes.

Along the Tijuana-Ensenada corridor, interest in buying property has skyrocketed over the past year, after the region was the subject of a favorable CBS News report, "The American Dream in Mexico," that has aired three times since May 2004; it is now featured prominently in literature and on Web sites promoting the region.

Alex and Diane Piagnarelli, both 50, watched the report in June from their home in a Chicago suburb. They had vacationed in Mexico, but never in Baja California, and began investigating the area through the Internet. A month later, they were driving past palm trees and bougainvillea, stepping into condos with travertine tile floors, granite counter tops, Jacuzzi tubs and floor-to-ceiling views of the Pacific Ocean.

The Piagnarellis wanted to use the equity from their home to buy a place where they could spend vacations and eventually retire together with Diane's sister, Pat, and her sister's husband, Bob Evans.

After three days of touring, the two couples settled on a $426,000, three-bedroom, 2½-bath house with an ocean view in Las Ventanas, a 47-unit community being developed by a Irvine-based company.

With the proper precautions, the risk of buying in Mexico is minimal, say attorneys and real estate specialists. But in their zeal to catch the wave of price appreciation along the Baja California coast, some buyers may take unnecessary risks that put their investments in jeopardy, some real estate experts say.

They buy properties, for example, where the title is in dispute. Or they put a sizable amount of money down long before their unit is completed, without holding the money in an escrow account or demanding a performance bond in case the project is not completed. And some forgo title insurance, even though it is increasingly available.

"It's surprising that they don't use common sense," said Rafael Gama Pérez, a Tijuana attorney who frequently represents U.S. citizens buying coastal property in Baja California. "The most common problem is that people come for a weekend, they see an advertisement, they get excited, they sign a document and put down $5,000 or $10,000. Only later do they realize the commitment they've made, and when they change their mind, it's too late."

In at least one case, U.S. investors have bought condos in a housing project where they knew they could not get a bank trust because the developer didn't yet have the necessary approvals for his project.

Looking past problems
Steve Rockman, a 51-year-old psychologist from Dana Point, looked south after finding oceanfront land in California beyond his means. He says he fell in love with the Costa Bella development the moment he set foot on the beachfront property in Rosarito Beach.
The project, however, has had a problem because buyers are unable to obtain title or bank trusts on the units.

Costa Bella developer Saul Flores said his company is working diligently to secure the approvals he needs from the city of Rosarito so that bank trusts can be issued to individual buyers. He said approvals have been delayed because he redesigned his newest tower to accommodate the tastes of U.S. buyers he is hoping to court. He also acknowledges that for years there had been a large debt that left a lien on the property, which Flores said he has now paid off, and that only a small secondary debt remains.

Rockman took one precaution before putting down nearly $100,000 on a 2,800-square-foot unit that will cost $325,000. He contacted a Mexican attorney who told him there was little chance the deal would fall through.

"We know we're taking a risk, but it's a calculated risk," Rockman said. "Once they get title, I think these places will go up tremendously."

Not everyone who has considered buying in Mexico has come away enchanted with the prospect of foreign ownership.

Laura Dietterle went this year with her husband on a Baja California bus tour sponsored by Coldwell Banker Alliance Real Estate. The Rancho Peñasquitos couple concluded that the investment was too risky.

"Maybe I'm just too cautious," she said. "I'm sure there will be people who will buy and be very happy, but I'm just not one of them."

Even as more developments rise, there are more customers than supply. Fierce competition can erupt among developers and real estate agents jockeying for listings and trying to make sales while the market is still hot.

The intensity can fuel confusion among buyers venturing for the first time into Mexico. Hugo Torres, former mayor of Rosarito Beach and head of the town's main business group, has been calling for clear rules so investors can feel safe.

Torres, who has been a partner in several developments, proposes reforming state laws so title insurance is available to anyone who wants it and mandating a U.S.-style escrow system for any transaction. Torres is also calling for new rules that would ban the sale of properties that don't have all the required city permits.

But those reforms could take time. Meanwhile, builders and sellers are starting to police themselves through codes of ethics and associations.

"If we don't make changes as soon as possible, we're going to have the possibility of something going wrong," said Torres, owner of the Rosarito Beach Hotel.

Though Torres has been a strong advocate of title insurance, his former partner, Eduardo Chabert, has only recently embraced the idea.

"We haven't seen the necessity," said Chabert, a developer of resorts across Mexico. "What we sell is our prestige. We haven't had a single problem."

Last week, Chabert provided a copy of a policy issued by First American Title Insurance Co. to his firm, Desarolladora de las Californias, insuring the land beneath his latest Rosarito project, La Jolla Real, for $200,000.

Desarolladora de las Californias has been granted city permits to develop the property and is building an adjoining condominium project that doesn't have title insurance but is nearly sold out. The land beneath that project, La Jolla del Mar, remains the subject of a lawsuit – filed years before the company bought the property – by Tomás Corona, who alleges that his constitutional rights were violated when an agrarian court ruled in 1999 that a local land cooperative, the Ejido Mazatlan, was the legitimate owner.

The crush of development proposals is keeping inspectors and planners busier than ever at Rosarito Beach City Hall.

Moreno, the urban development director, sits in his first-floor office surrounded by plans and sketches of proposed communities, fielding queries from architects, engineers, developers.

"Everybody wants a piece of the cake," Moreno said. "This is a process that's just beginning."

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Along the coast from Tijuana through Ensenada, thousands of condominums are being marketed to Americans as vacation homes or places to retire. The Baja California boom also is taking place in other areas on the peninsula, including San Felipe on the Gulf of California.

Buying in Mexico


Title insurance can provide peace of mind for those wary of Baja California real-estate investments
By Lori Weisberg
UNION-TRIBUNE STAFF WRITER
October 2, 2005

The promise of lucrative profits and the allure of stunning ocean views have drawn U.S. citizens in droves to invest in Baja California real estate, but buying property in Mexico is not necessarily without risk.

It wasn't all that long ago that dozens of Americans were evicted from their homes in Punta Banda outside Ensenada after a Mexican court ruled that the land on which they were living be returned to the original, lawful owners.

The potential for harrowing property disputes, though, may well become a thing of the past with the increasing availability of title insurance policies issued by U.S. insurers.
As commonplace as title insurance is in the United States, it has not been a standard component of real estate transactions in the Rosarito-Ensenada corridor – until recently.

With growing numbers of foreigners clamoring to buy beachfront homes along the Baja California peninsula, U.S. title insurance companies are responding with policies designed to ensure that buyers are not caught in the middle of a contentious disagreement over ownership rights.
One title insurer recently opened an office in Tijuana to take advantage of the development boom, and another set up shop this month in San Diego for the same reason.

"I think title insurance is as important as it is in the United States or maybe more so, primarily because many of the issues that foreigners face when they buy in Mexico have to do with clear title," said attorney José Larroque, who specializes in Mexican real estate for the Baker & McKenzie law firm. "There are numerous examples, some public, some not so public, in which people thought they acquired land only to find out that they have not acquired it from the rightful owner, or there is a cloud looming over their property.

"The insurance is a good independent filter, and the title insurance companies don't take title commitments lightly."

Companies familiar to Americans, like Stewart Title Guaranty Corp. and First American Title, are now offering policies to foreign buyers in the Baja California area, providing Americans with a sense of security when they invest in Mexico, say company officials.

While many Americans will hire Mexican attorneys to ensure the legality of their purchases, title insurance offers an extra level of protection for the buyer, insurers contend. Legally, foreigners cannot own coastal property in Mexico in the conventional sense, but they can secure title as beneficiaries of long-term trusts held by a Mexican bank.

Because ownership rights on land in Baja California can sometimes be murky, title insurers will undertake an exhaustive search of property records, sometimes going back decades to establish clear title. They will also examine records to determine that taxes have been paid and that there are no remaining liens on a property that could become the obligation of the new buyer.

In Mexico, the notario publico (notary public), who is an attorney, certifies all real estate transactions after reviewing various property and tax records culled from a title search. Title insurers, however, stress that American buyers should not rely solely on the certification of a notario.


"What happens when the notario publico (notary public) in Mexico has made a mistake and the buyer loses his property?" said Hector Barraza, senior vice president of Stewart Title Guaranty of Mexico. "How are you made whole? They're not going to defend or protect you. They're going to say 'Oops, I'm sorry, the certificate of public registry didn't tell me there was a lien there, so you have to pay it.' "

Stewart Title, which has an office in Tijuana, started its Mexico division more than 10 years ago. Although it has issued thousands of title policies, until recently, transactions in Baja California have represented just 5 percent of all policies sold in Mexico, said Mitch Creekmore, Mexican division manager for Houston-based Stewart Title.

He points out that Stewart is the only U.S. title company to have approval from the Mexican government to operate a Mexican title insurance company, known as Stewart Title Guaranty de Mexico.

Insurance rates typically average $5 per $1,000 of the purchase price, Creekmore said.

U.S. buyers, he noted, are becoming more sophisticated when buying property in Mexico, but there are some who still plunge ahead without taking all the necessary precautions.

"What's happening is there's this appreciation in the marketplace and Americans don't want to lose the opportunity, so they're willing to roll the dice," Creekmore said.

Developers of housing projects in Baja California can secure, for a fee, a title insurance policy for their projects or a commitment to insure that essentially says the property is clean and insurable, explained David Wiesley, vice president of sales in Mexico for First American Title Insurance Co.

For its Mexican clients, such as developers, First American has set up an arrangement with the Mexican insurance company Grupo Nacional Provincial to issue title policies under its name but reinsured in the United States by First American.

For American buyers in the Baja California area, First American can issue title insurance policies out of its San Diego office, Wiesley said.

"We feel that an American who is buying a title insurance policy is more comfortable with a policy issued in the United States under U.S. laws," he added. "If you're denied on a claim against us, you can sue us in California, as opposed to having to sue in Mexico."

Increasingly, Mexican developers and real estate agents are seeing the wisdom of securing title insurance and are urging American buyers to purchase it. Not only is it a good marketing tool, but it also makes Americans feel more secure about their purchases, they say. "In the developments that we've already built, nobody asked us for title insurance, because we didn't see the necessity," said developer Hugo Torres, a former mayor of Rosarito Beach and owner of the Rosarito Beach Hotel. "I believe that from now on, one should not build a single development without title insurance."

His son, Gustavo Torres, a real estate agent who is marketing condos in half a dozen developments in the Rosarito Beach area, estimates that about 60 percent of the buyers he deals with express concerns about title issues.

"Everybody mentions what happened with Punta Banda, and they don't want it to happen to them, so we tell them the importance of title insurance," said Torres. "Two years ago, no one had title insurance, but now almost everyone does, and we try to get the listings of developments that either have title insurance or are title insurable."

Not everyone, however, is convinced that title insurance is a necessary precaution when purchasing property in Mexico.

"To me, it is the most redundant business that these (title insurance) companies are doing," said Tijuana attorney Rafael Gama. "I honestly will tell you that if someone has really gone over the (list of previous legal owners) and has found that the title of the person who is selling is very solid, title insurance is not necessary; it's an unnecessary expense."

San Diegan Mark Ortiz, who has put money down on two oceanfront condos in Rosarito Beach, said he is not especially concerned about getting title insurance, noting that he relied more on the reputation of the developer to reassure him that his investment was sound.

The development in which he purchased is currently not insurable by a title company because of long-standing litigation on the property that has not yet been resolved.

"The condos I bought won't be ready until 2007, so I have time to think about it," said Ortiz, a landscape construction contractor and real estate investor who plans to resell one of his condos and use the other as a second home. "The builder has a pretty good track record, he's already built a few developments, and the fact that all the condos in towers one and two are already sold, I'm pretty confident it won't be an issue.

"They have it in the contract that if they don't fulfill their obligations, they'll give you your money back. We had a judge in Tijuana check out the contract."