Real Estate Knowledge

The Power of the Pagare

A couple of years back we were trying to sell our condo and after 2 years on the market and holding the line on a price we were still getting lots of viewings but no offers. Everyone commented on the lovely complex, the lovely views, and the lovely layout and furnishings, but no one was willing to step up and show us the money. I contacted our very patient and hard-working real estate agent and asked - without dropping the price - what else could be done. She quickly responded saying we should consider carrying the financing for a buyer, using a Pagare.  A “paga-what” I responded; she then proceeded to explain it to us.

Pronounced ‘pag-are-ay’, it’s essentially a Promissory Note, or legal IOU, given to us by the buyer to allow them to pay for the purchase over a period of time. We carry their financing. At first, we weren’t warm to the idea of financing a buyer, let’s be honest, we really just wanted out, to get our money back and be done with it.

However, it was obvious that wasn’t happening and seeing continued buyer interest we thought we should at least consider the idea. We trusted our real estate agent, but as Gringo snowbirds we were wary about a Mexican Promissory Note from some person from somewhere else who we might never even meet.  When our agent said they used them in over half of their sales and had never had a problem, we were willing to hear more.

The challenge for Gringos buying real estate in Mexico is you can’t get local financing like you can back home. In fact, we had originally raised money for our purchase of the condo through our bank in Canada, using the equity on our home there as the collateral. This worked for us as we started with a mortgage-free home and knew the strong collateral would get us the lowest interest rate.

Since we had paid off our condo purchase long before listing it for sale, we were ready for a crash course in how a Mexican Promissory Note was going to solve our current problem. Our agent explained the Pagare was more like a mortgage than just a Promissory Note as it was secured by the property. We almost walked away when we heard next that after the buyer and seller execute a standard real estate agreement and the buyer’s initial deposit clears, the title for the property and the fideicomiso transfers to the buyer.

She quickly continued with further details and we started to get more comfortable.  A Pagare is very flexible, negotiated between the buyer and seller with the details communicated to a settlement agent or lawyer who works with a Notary to have the whole agreement documented, signed off by the buyer and registered. By registering the agreement, the Pagare is recorded on the property title like a lien so the buyer can’t resell the property out from under you.

Not long after, we accepted an offer with a Pagare on our condo and had a done deal in hand. We wished we had known about this years earlier but hey things were going fine now. It did take about three months to get a fully notarized copy of the agreement (an impressive bound 10 pages of legal documentation) but the terms were in force regardless and the interest clock was ticking on our behalf.

The terms of the document are very clear and very powerful. For example, we agreed that after an initial deposit of 30 percent we would carry the financing (which means we agreed to wait) for two years to get the remaining 70 percent of the selling price. Meanwhile, the buyer agreed to pay us an interest rate of 6 percent. We would get monthly interest payments and would accept early principal paydown at the buyer’s option. 

The outstanding balance was due in full in 24 months.

One of our biggest concerns (after a potential default) was if the buyer quit making interest payments; what could we do? This is where the powerful language kicks in: if any scheduled payment – either interest or principal – is missed and not rectified in 10 days an additional 3 percent penalty is applied and the Pagare deal is terminated. The buyer then has to produce the entire balance due immediately or the property title reverts back to the seller. That means the buyer has forfeited all monies paid to date including the deposit and all interest payments AND we get the clear title back. Now we fully understood why our agent had never seen one of these deals fail as it would be horrendously expensive for the buyer.

As it turned out our buyer was great; they wired the interest payments to our bank account in Canada each quarter in advance, made early principal paydowns and paid the whole thing off in 18 months, 6 months early of the deadline. Needless to say, we were happy with the whole deal and it was a win-win experience for both seller and buyer.

So the moral of the story is if you are a seller keep this option open and if you are a buyer and need a little help to buy a place offer a Pagare to the seller and see if you can make the deal happen and get your piece of paradise.