Finding Financing for your Condo Purchase

Feb 28, 2015 by Jim Ringquist

CreativeFinancingSecretsAt this time, there are no US Banks offering financing on condo purchases in Rocky Point. In the past, M&I Bank and a couple others did offer financing, and it is very possible that as the economy continues to improve and prices and rental incomes continue to rise, we may see “normal” financing available in the future but for now, if you don’t have cash to buy your dream condo, being creative when thinking about financing is a must.

Local and National Mexican Banks do offer Real Estate financing but as a foreigner it is very difficult to qualify and, even if you were to qualify, the terms are, shall we say, less than desirable. It is not at all uncommon to see interest rates of 12% or higher. With most people enjoying historically low rates in the USA, paying that kind of interest is most likely out of the question.

Mexico actually didn’t go through the Real Estate financing meltdown that the US did and the main reason was because banks and lenders here didn’t go crazy offering zero down, relaxed requirements, variable rate loans, and unsustainable incentives. Yes, values suffered here as well but there were actually very few foreclosures compared to the US because their stricter standards were not changed as the Real Estate boom frenzy ensued.

When I am referring to “creative financing”, there is nothing really mysterious about it. It really comes down to what works for each individual situation. That means that the Buyer has an idea of what they need in order to Buy, the Seller has an idea of what they need in order to sell, both parties need to be protected, and all laws and regulations need to be followed. We have been very “creative” in our approach to making both parties happy while doing everything right and protecting everyone involved. Here are a few of the options that we have used. As they say “where there’s a will, there’s a way”

1. Formal Developer Financing: We have several condos that are owned by the Sonoran Resorts Developers. Long term financing is offered on these condos and it is probably the best financing that you will find locally. We offer 20% down, 5.9% interest and 20 years to pay it off. Price and terms on developer owned condos is not negotiable.

2. Owner Carryback Financing: Some owners are willing to play “mortgage company” and offer terms on the sales of their condo. But, it is not always as easy as an owner just agreeing to accept terms. There are some laws and regulations that must be considered before we can offer that option. We do have several condos listed with owner carryback financing available. In most cases, you can expect to pay more than if buying “cash” and most owner financing also incorporates a balloon payment at which time, any outstanding balance will become due in full. The length of balloon payments varies by listing but normally it is somewhere between 5 years and 10 years. This can be a great option for someone who can make large principal payments over time, has a lump sum of money coming in the future, or someone who wants to buy now, wait for the prices to go up, and then sell for a profit before the balloon is due.

3. Lease/Purchase Contract: Once in a while we have Owners who are willing to lease their condo for a specified time period and during that time period, a Lessee will have the exclusive option to purchase the condo at a predetermined price. This is not unlike the Owner carryback in that the price will usually be higher and there will be a set number of months/years in which the exclusive offer is available. Normally an Owner will want a fairly large deposit in order to assure that the Lessee takes good care of the property. This situation is not as common as the others listed here.

4. Use Equity From Another Property: In the past when prices were inflated in the US, we saw thousands of people take out second mortgages or finance properties that they had in the US in order to buy a condo here in Rocky Point. Some of those people got into loans that they later could not support and it caused problems. Others did it the “right” way and things worked out just fine. Now that values are on the rise again, people are starting to see equity in their homes and investments and it may be possible to tap that equity in order to pay cash for a condo here. This will likely get you the best loan terms and also the best price on a condo because the “cash” price is almost always lower than the “financed” price.

5. Partnership or Fractional Ownership: Many times when one person or couple doesn’t have the cash needed to purchase a condo alone, they team up with friends, family, co-workers, or others with the same challenge. Most people only use their condo a few weeks out of the year for themselves so sharing can really make sense. This arrangement also allows more people to share the HOA, electric, and upkeep expenses. Forming an LLC and setting up a good operating agreement and ground rules is a must and if the arrangement is organized well, this can be a perfect solution. If you do not have a group of people who are interested in investing with you, you can usually find a few fractional listings available. These listings are for a partial ownership of a condo and normally, everything is already organized and operating smoothly. You can buy anywhere from 1/8th ownership up to 50%, or even more. Expect to pay a little more as a percentage of full ownership if buying a fractional. Note: it is important to know that fractional ownership is NOT timeshare ownership. You actually own a percentage of one specific condo and have all rights to use it, rent it, and sell it, unless restricted by your LLC operating agreement.

6. Buy using your IRA or 401K: This is a mostly unknown option but it has become more popular lately as the stock market has done quite well. People generally do not want to take money out of their plans because of the taxes and penalties involved in early withdrawals. This option allows people to buy a condo without effecting an early withdrawal penalty or making any major changes in their plan.

Most IRA custodians don’t like the “non-traditional” types of investments such as foreign Real Estate. It’s not that you can’t use your IRA funds to invest in Mexican Real Estate but often your custodian doesn’t want you to. This is either because he doesn’t want (or understand how) to deal with the required paperwork or, more often, because he makes more money if you invest in one of his preferred investment products.

To buy real estate, foreign or local, with your retirement funds, you can set up what’s called a “self-directed IRA” or “self-directed 401(k).” In theory, this means you’re in a position to “direct” the investment of your account funds, however, you still must go through a custodian, asking them to make the investment for you. They may refuse and depending on what you want to do, sometimes the only way to take control of your IRA funds is to establish what is sometimes referred to as a “checkbook” IRA.

To do this, you set up an account with a self-directed IRA custodian that allows non-traditional investments. Then you create an LLC in which your IRA invests all its funds. Then you, as the managing member of that LLC, invest the funds of your IRA as you like (keeping in mind that you still have to follow the IRS investment rules, such as no “self-dealing”). This structure allows you to eliminate the paperwork and review process otherwise required each time you invest in something “alternative.” You simply write a check from the LLC’s bank account to make the purchase. We can give you more information on this option and/or refer you to an investment professional who is familiar with this type of transaction if you have any questions.

As you can see, it is possible to buy your dream condo even if your bank account is not flush with cash. Creativity is King and what works for one may not work for another. It is important to research your options and to not make any decisions based on emotions. We are very good at showing you multiple options which may work for you and all you have to do is ask.

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