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Buying pre-construction properties in Tulum and Mexico in general
Hi everyone,
Over the last few years, I've responded to almost 700 posts on buying and investing in international real estate yet I haven't written any single post. In order to best help all of you who want to buy or invest overseas, I figured out it made more sense to answer your questions rather than trying to guess what you'd like to know.
So, this is my first post. Those of you who've read my replies to posts know that my answers can be long because I try to put in as much useful information as I can. Obviously, since this is my own post, I had to follow the same standards or higher so you might want to get yourself a nice cup of coffee and sit comfortably ;-).
Why did I decide to finally write a post now and write specifically about buying and investing in pre-construction properties in Tulum and Mexico in general? On the one hand, many of you have been asking about that subject, whether through the forums or through contacting myself directly (which is understandable since buying a pre-construction condo in Tulum or Mexico in general can be a very attractive investment opportunity if you buy the right property at the right price in the right location from the right developer). On the other hand, I just started working on my own development in Tulum so there’s a lot I can share on the topic.
Many of you have thanked me for helping you buy a property in the area thanks to the informative content I have published on the forums or I have shared in our private communications but I know that there are many more people I've helped who haven't pulled the trigger even though they wanted to. The three reasons that come up the most are: 1) they’re not comfortable with handing over their money to a developer without knowing if he’s trustworthy and capable of delivering the property as agreed, 2) they feel they’re priced out of the market and 3) they don’t have either enough cash or access to financing. Sadly, in those cases, sharing my knowledge and experience might not be enough indeed. By wondering if there was any other way I could help these people, I decided to do my own development project in Tulum that would address these three issues of risk, price and financing, in order to meet the needs of the savvy buyers and investors.
To this end, I spent almost the entire month of May on the field. With the help of my local partners, I found solutions to these three issues that I’m going to use in my own development. I’m now going to share them with you to help you assess and compare the offerings from the different developers.
1. Risks
Unlike what many people think, the main risks of buying a property in Mexico pre-construction have little to do with corruption or drug cartels. They have most to do with the developer and the fact that you have to advance a significant amount of money against just a piece of paper without any guarantee that you’ll get either your property or your money back.
There are actually two distinct risks here. The first is that the developer is dishonest by either scamming you or using your money for other purposes than the construction so you’d need to find out whether the developer is trustworthy. I realize that it’s easy for me to do thanks to my network on the ground but it’s probably much harder for you. Yet, you can do online searches and, most importantly, use your common sense.
A few days ago, one of you asked me what I thought about a particular development in Tulum he was thinking of buying into. I looked at the website and I saw these beautiful renderings. Yet, I didn’t let that distract me and the first thing I wanted to know is who is behind the development to see if I know them or at least can ask my network about them. I was flabbergasted to see that there is no “about us” section and absolutely no information about the developer anywhere. This tells me one of three things: either it’s a scam or the developer has something to hide, has nothing in his background to justify that he could make the project a reality or the developer doesn’t think it’s necessary that he gives any information about himself, which in my book amounts to gross incompetence. Whichever it is, I don’t know about you but I’ll give that project a pass, even if I find the project attractive.
Now, onto the second developer-related risk associated with any pre-construction purchase/investment. Let’s assume that you found a great project with a trustworthy developer. You decide to purchase and you start making payments, alongside with other buyers. The developer cannot wait to make his money as quick as possible and move onto the next project. Therefore, he’s going to start construction as soon as he gets some money. This is a problem because if he can’t sell enough units, he’ll have to halt construction, his project is going to go bust and the buyers will lose their money. This is the main reason why a project would fail and that’s probably what it is when you see idle building frames in the landscape.
There’s another version of that same risk when the developer uses the money from his first buyers for anything other than the construction like personal expenses for example. He thinks it’s ok to do that because he’s going to use the money raised from future sales to complete the construction. By doing so, he’s putting himself and his buyers at great risk of having the project go bust as there’s no guarantee he’ll sell any more units. One of the advantages of being longer than usual on the ground was to catch up with the latest gossip. I was flabbergasted to hear that even some of the largest and most experienced developers are doing that and other shenanigans. By the way, this shouldn’t discourage you from buying in Mexico because the majority of the Mexican developers are honest. It’s the few that aren’t who account for the horror stories you might be hearing or reading about from time to time.
There is a double solution to eliminate or at least significantly decrease these two risks:
a. Instead of having the buyers advance the funds to the developer directly, the buyers will pay into an escrow account under the control of an independent third party. In order to access the money, the developer will have to prove that the project is fully funded, present invoices from his suppliers and/or provide evidence of construction milestones being reached. That’ll make the buyers much more comfortable that the project isn’t a scam and that their money is going to be used for the construction.
b. Having the developer wait for the project to be fully pre-sold before asking the buyers for any non-refundable money. This way, when the time comes for the buyers to put their first dollars on the line, they can be confident that the project is fully sold and therefore fully funded and won’t go bust during construction. Many developers aren’t doing that because selling a project completely first takes time, which obviously is a problem.
So, if you know the developer or have good reasons to think he’s honest and capable, you could consider advancing the money directly to him if you’re comfortable with that. Alternatively, choose a developer who uses the escrow account mechanism.
Also, if you’re one of the first buyers in a project, you’ll pay less but your risk will be higher. If you’re one of the last buyers, your risk will be lower but you’ll pay more. So, if you buy early in a project that you know will go ahead only if it’s fully pre-sold, you have the best of both worlds: a lower price and a lower risk.
2. Prices
As mentioned above, prices in Tulum (and other parts of Mexico for that matter) have risen over the years. This, combined with the necessity to have a sizable amount of cash, has priced many would-be buyers out of the market.
Here, the solution is for the developer to sell properties that are qualitatively as good below market and make up for the lower profit margin by selling quicker and more and having happier clients.
Some of you have asked for my opinion on 2-bedroom condos in Tulum in the upper $300k - $400k range. It would only make sense to me if it’s a lifestyle decision and, even in that case, you could most likely find a much better deal. Such condos are meant to be second residences, not rentals. If you’re looking at an investment, I’m not sure how you’d be planning to make a profitable one. The problem is that you buy by the square footage (and the fanciness) and you rent by the number of bedrooms. As a result, the smallest condos in a given category will generally be the most profitable investments. So, if you absolutely want to spend $350k - $400k, you might as well buy two condos instead of one, which will increase your return and decrease your risk.
Now, a word about the fanciness aspect. Mexico has a lot of great architects and the quality of the construction in the higher-end of the market (in which foreigners and upper middle-class and wealthy Mexicans buy) is very good. The beauty and the quality of many developments in a place like Tulum is impressive and it’s hard to resist the call of the beautiful renderings. While it’ll make you feel great to have an exceptionally beautiful condo, you’ll have to pay a significant premium, which you’ll be unlikely to profitably recoup through your rental income.
On another note, many developers offer a discount if the buyer pays 100% of the purchase price or at least a large part of it at the signing of the contract or at the early stages of the construction. Typically, the more and/or the earlier you pay, the higher your discount will be. However, the higher your risks too (remember the two main risks I outlined above?)! The solution to that, as mentioned above, is for the buyers to pay into a third-party controlled escrow account. As a buyer, I’d have no problem paying 100% of the purchase price at the conclusion of the contract against a substantive discount provided that I can pay into an escrow account.
And for the buyers who are less comfortable with the pre-construction risks, there’s a solution too: buying through resale shortly before delivery. From time to time, I find myself on the selling end of this. When a pre-construction deal is exceptionally good, I might buy more condos than we need knowing that we can resell the surplus shortly before delivery. I actually did one such sale recently. The building was almost done and so the pre-construction risk for the buyer had completely disappeared. Yet, I still gave the buyer a large discount to have him buy from me instead of the developer and I gave him some seller financing that he couldn’t get from the developer.
Let's finish this section with an important distinction. If you buy a property for lifestyle that you might be happy to rent as well to cover your costs or even make a small profit (or not rent at all), by all means buy that more expensive beautiful property, which would still cost you significantly less than a similar property in a comparable US location. If you buy a property mostly as an investor, try to buy at the best possible price, without sacrificing excessively on the quality. This will be the main determinant of your ROI, alongside with the financing if you can get one (see next section).
3. Financing
The other and actually the main solution for buyers priced-out of the market for the lack of available cash is for the developer to offer financing.
For example, the buyer would pay up to say 50% of the purchase price by the time the property is delivered. Then the developer will give the buyer say 5 years to pay the remainder of the price. If the buyers buy the right property, the cash flow should be more than enough to cover all the costs, including that of the financing. Such a situation would result in a much higher ROI.
Beware that some developers are offering what I call fake financing. Fake financing is allowing you to pay in installments but entirely by the delivery of the property as opposed to paying 100% at the signing of the contract! This is no financing from the part of the developer. Real developer financing only exists when you can pay back after the delivery of the property.
Do you have a good deal if the developer offers it to you? All other things being equal, you do of course. However, it isn’t a good thing if the only reason behind the financing is the inability of the seller to sell without it. In the same vein, developer financing doesn’t transform an otherwise bad deal into a good deal. Therefore, developer financing in itself alone isn’t a good reason to buy a property.
On a separate but related note, judging by the questions I’m being asked, it seems like a few people are interested in buying units condo hotels. I can see the main attraction, being that you could make some nice money by having nothing to do. Personally, I’d never consider that option for multiple reasons: 1) you cannot properly dispose of your own property as you can’t rent it by yourself, 2) the price is inflated as they make you pay for the convenience, 3) the performance of your unit is completely dependent on the performance of the building as a whole and the performance of the management, 4) property management is extremely expensive and they’re going to be the ones making most of the money while you take all the risks and 5) you cannot get rid of the property managers if they don’t perform. Also, the revenue estimates are generally widely exaggerated in order to justify the exorbitant property management fees.
Finally, if people are interested, I’m happy to post updates on how my own development project works out.
I hope this helps!
Thank you and I agree with the points you mentioned. While the important points I wrote are still valid today, the situation has changed quite a bit.
I think the biggest risk now, on top of those you mentioned, is that of overbuilding. As you wrote, it isn't good for resales but it isn't good for rentals if the growth in construction disconnects from the number of visitors.
@Mike Lambert Yes, the growth is currently outpacing demand, at least temporarily, as evidenced by the decline in occupancy in Tulum in 2022. But visitors to Tulum continue to increase, and the new airport, when finished, will likely increase overall visitors to Tulum as well.
I am looking for an investment (to get the best ROI) in Tulum. Therefore, I would like to invest in a pre-construction condo in a small project. Mike Lambert, I am interested in knowing about your recent projects. I would like to invest 200k.I am Mexican, but I live in Denmark and I would like to rent the condo. Probably, I will use it once a year.
Quote from @Silvia Gabriela Sanchez Valle:
I am looking for an investment (to get the best ROI) in Tulum. Therefore, I would like to invest in a pre-construction condo in a small project. Mike Lambert, I am interested in knowing about your recent projects. I would like to invest 200k.I am Mexican, but I live in Denmark and I would like to rent the condo. Probably, I will use it once a year.
Hi Silvia, I replied to you by DM so as to make sure that I don't breach the forum rules.
Hey @Mike Lambert, it was great chatting with you last week. I stumbled upon this thread and was wondering if you had any suggestions as to where to look for properties in pre-construction. I have done some googling so far and some facebook group searching and there are some results there, but I imagine there is much more than meets than eye.
I just bought a preconstruction Villa at Azulik two weeks ago. The development is insane. They will be finished in Dec of 2025. I can connect you to my realtor Manual there if you want.
Quote from @Bryan Mendes:
I just bought a preconstruction Villa at Azulik two weeks ago. The development is insane. They will be finished in Dec of 2025. I can connect you to my realtor Manual there if you want. I attached a Youtube video but doesn't seem to be showing. Remove the space before the .com and it should work.
youtube. com/watch?v=EIzWImS6Y_g
Quote from @Bryan Mendes:
I just bought a preconstruction Villa at Azulik two weeks ago. The development is insane. They will be finished in Dec of 2025. I can connect you to my realtor Manual there if you want.
Hi @Bryan Mendes, thanks for your response but I'm not interested in one specific development at this time. I'm interested in knowing generally the best places to look to source pre-construction projects so that I can better understand the market.
Hey @Christian Romano you're welcome. The standard reply is it depends on your objective and the level of risk you want to take. Also, the best locations for pre-construction are no different than the best location for resales.
So like everywhere else, the best locations are those that have the best supply/demand parameters. When it comes to demand, you want mass tourism and the three main tourist destinations in Mexico are the Riviera Maya, BajaSur and the Puerto Vallarta / Riviera Nayarit areas. You could bet on less established destinations but it's much more speculative. When it comes to supply, you want to avoid oversupply, as it's the best one-way ticket to losing (a lot of) money.
I'd avoid Tulum with a 10-foot pole as it's already hugely overbuilt and it's going to get much worse in the coming years. For that reason, I didn't go ahead with the development I mentioned in my initial post in this thread and I'm so happy and relieved I did. Generally, you need to be careful with the Riviera Maya, as that risk is higher there, not to mention the sargassum risk.
Quote from @Mike Lambert:
Hey @Christian Romano you're welcome. The standard reply is it depends on your objective and the level of risk you want to take. Also, the best locations for pre-construction are no different than the best location for resales.
So like everywhere else, the best locations are those that have the best supply/demand parameters. When it comes to demand, you want mass tourism and the three main tourist destinations in Mexico are the Riviera Maya, BajaSur and the Puerto Vallarta / Riviera Nayarit areas. You could bet on less established destinations but it's much more speculative. When it comes to supply, you want to avoid oversupply, as it's the best one-way ticket to losing (a lot of) money.
I'd avoid Tulum with a 10-foot pole as it's already hugely overbuilt and it's going to get much worse in the coming years. For that reason, I didn't go ahead with the development I mentioned in my initial post in this thread and I'm so happy and relieved I did. Generally, you need to be careful with the Riviera Maya, as that risk is higher there, not to mention the sargassum risk.
As usual @Mike Lambert, I appreciate the insight. But I guess I wasn't clear enough in my original question. I'm wondering, how do you find pre-constructions? The only tools I could think of are google and facebook groups however I don't think either one is exhaustive or efficient.
@Christian Romano what you're looking for doesn't exist because there's no unique way for the developers to advertise their projects (or not). So it's not easy for anyone to do and then it's even more difficult to separate the wheat from the chaff. But, it is easy finding a great deal in the US these days?
Aside from Google searches and Facebook groups, you have the website of developers, the website of real estate agents and master brokers, Mexican sites like Vivanuncios and another one I can't remember the name of, Point2Homes (beware that many if not most of the listings in that one are old, fake or even possibly scams - buyer beware in this one: if it looks too god to be true, it probably is).
Bear in mind two other points:
1. Some agents or brokers are exclusive sales agents of some developments so you might never know about them unless you know the right people.
2. Typically, Mexican developers have a "friends and family" round before going to the market. These are the best deals and, if they sell everything at that time and you're not "in", you'll never get the opportunity to buy into the project, even at retail price later on. Speaking of which, for example, as I mentioned to you on the phone, I deal exclusively with "friends and family" so you'd never know what I've got unless you know and/or contact me. You bet others are doing that too.
As usual @Mike Lambert, I appreciate the insight. But I guess I wasn't clear enough in my original question. I'm wondering, how do you find pre-constructions? The only tools I could think of are google and facebook groups however I don't think either one is exhaustive or efficient.
Hello Christian,
I hope this message finds you well. I'm reaching out to introduce myself as a developer, investor, and realtor with over a decade of experience in the Riviera Maya. Throughout my career, I've been actively involved in buying and selling properties in this region.
One challenge we face here in Quintana Roo is the absence of an official MLS. Many foreigners rely on platforms like Point2 Homes for property listings, despite encountering some misleading information. As Point2 Homes aptly puts it, while information is provided, it may not always be guaranteed accurate.
It's worth noting that most agents have access to the same pool of listings, leading to a proliferation of duplicate entries. While there are some exclusive pocket listings, my advice is to work with a realtor you trust and verify their licensing credentials. Sadly, licensing among agents here is not as widespread as it should be.
For those who prefer browsing in English, Mexican websites like Trovit, Vivanuncios, and Inmuebles24 might pose a language barrier. In such cases, I recommend utilizing Point2 Homes or reputable real estate company websites, where listings are vetted for accuracy and legal compliance. If you're interested, I can provide access to our curated listings.
As licensed agents, we have privileged access to comprehensive databases like Brokercenter and The Red Search, which encompass all projects in the area, including preconstructions at various stages. I'd be delighted to share information on ongoing projects, including those in the family & friends stage, across Tulum or any other part of Quintana Roo.
Additionally, as developers, we regularly conduct market studies encompassing factors such as absorption rates, price per square foot, square footage, and unit counts. If you're keen on delving deeper into market insights, I'm more than willing to share this valuable information.
Sunny regards,
@Sebastian Papworth Trovit, that's the site I wanted to mention but forgot the name. And, yes, Inmuebles24 too. I didn't mention it as I believe it's the same company as Vivanuncios. Not sure if you're aware but, nowadays, Google Translate translates any web page so there shouldn't be any language issue on these sites for non-Spanish speakers.
I have never had to use the translation but you are right a client from Montreal just sent me some screenshots of our website in French. Still wouldn’t recommend choosing an agent from those portals, most specialize on Mexican or Latin buyers and might not be fully bilingual or aware of the buying process for foreign investors.
Thanks for your inputs. Sounds like without having boots on the ground and being actively involved in real estate in a certain region, you'll never truly know if you're getting the best deal possible.
You're welcome. I'm not sure what you mean by the best deal possible and why it'd matter. There will always be people getting a better deal than you and others getting a worse deal than you. Also, what could appear as a better deal might not be as a lower price might mean a higher risk in certain cases.
I guess what matters is to find a good deal by yourself or get a better one by working with other people. That's already hard enough so why look for perfection (which doesn't exist anyway) and often leads to inaction.
@Mike Lambert those are great points!!