O'Farrill & Associates Law Firm in Rocky Point (Puerto Penasco), Sonora,  Mexico.

Rocky Point  2008  Market  Analysis

By   Raúl O'Farrill,   Founder,   OTP Trust

The Rocky Point real estate market has traditionally depended to a great degree on the health of the Arizona real estate market, and despite Rocky Point's steady continued expansion of its geographic "pull", this continues to be the case.

Rocky Point is not, however, 100% dependent on the Arizona / Southwestern markets, nor should its trajectory in 2008 be expected to exactly mirror those markets.  In fact, while there are certainly both positives and negatives in the current status of the Greater Rocky Point real estate market, some of the differences between Rocky Point and the Arizona / Southwest markets may point to a brighter future sooner here than in the United States.

It is generally believed that improvement in the Arizona and the Southwestern real estate markets depends on a number of factors, including an overall acceleration in the United States economy; on low interest rates; on more disposable income per household; on the absorption of large inventories of existing homes; on a reduction of real estate prices; and a reduction in new re-sale listings.

The strength of the coastal Mexican real estate market --  and Rocky Point in particular  -- is indeed linked to the health of the housing sector in the United States, but it is also tied to a number of different variables.  Greater Rocky Point is actually not a Mexican market at all: it is an hybrid market because even when the property is in Mexico the market is largely made up of United States, Canadian, and European investors --  not buyers, investors.

The distinction we are making is that a "buyer" is someone who is purchasing a house or condominium as a primary residence.  In Rocky Point the term "buyer" would only apply to locals, Mexican professionals moving to Rocky Point (usually to participate in its development), and a number of retired people, usually from the United States or Canada.

But the core strength of the Rocky Point market has always been investors looking for a vacation house or second (or third) houses as longer-term investments, and/or as sources of income from rental usage.  It is through the lens of an investor's eye that we need to view both what happened in 2007 and analyze what can be expected in 2008 and beyond.

Resale Offerings:   As we enter 2008 the number of re-sale units in the market is not growing -- re-sale inventory is still being absorbed slowly, but is being absorbed even by this slow market in which sales closed in 2007 fell 40% compared with 2006.  The fact that new investors and buyers continue to see value in our existing homes is an excellent indicator of the underlying strength of our market and a sign of the beginning of recovery.  In the past year new developments were not created at the same speed and number as in 2006, and new offerings have been dramatically reduced. Five existing large developments are either on hold or have been stopped, which reduces the total number of units being offered by roughly 4,000, and which we believe is another good sign that supply and demand are finding their proper balance.  We don't expect more large-scale offerings in 2008 unless one or more of these five large developments comes back on the market first.

Prices:   In 2007 Rocky Point saw a price contraction in the condominium market, usually between 10% and 25% depending on the characteristics of the individual units.  Beachfront or beach-view lots and homes saw steady or even rising values, due to continued strong demand and limited offerings of houses and beachfront building opportunities.  Lots destined for single-family homes in the Miramar, Playa Encanto and Playa Dorada areas did especially well, mainly -- beyond the obvious spectacular beauty of those locations -- because of the expansion of Mayan Palace, and the rapid progress of construction at the new airport and on important private infrastructure investments in the area.  We consider the ongoing price strength of oceanfront and ocean view properties to be a very good sign, and expect it to continue through 2008 and long into the future.

Rental Market:   The rental market grew slightly in 2007. If their properties were marketed properly, investors with rental units did well in the past year.  We believe that the rental market in Rocky Point will continue to grow because of growing advertising of our community by government, private organizations, and private investors in regions of the United States outside the southwest, in Canada, and even Europe, and because of the excellent online marketing efforts of our better rental / property management firms like Sea Side Reservations, Ocean Vacation Center and and Oceano Rentals who present our offerings -- and our community -- to every corner of the globe 24/7/365.

Financing for Developers:   This is probably the most visible sign of the real estate slow down in Rocky Point.  Even when Mexican banks are lending to a wide variety of other enterprises -- or for real estate developments directed to Mexican or commercial markets -- because of the deceleration of the United States economy, and because Rocky Point has traditionally had large ties with the Arizona / Southwestern real estate markets that have been so hard-hit, in 2007 Mexican bankers showed reluctance to finance or re-finance new large scale condominium developments.

We don't believe that financing for developers will significantly improve in 2008.  Only sales of existing developments will reduce the perception of risk by Mexican bankers -- which we believe is exaggerated, at least in the mid and long term -- and allow the flow of money for new developments.  From the potential investor / buyers perspective this is good news, in that a reduction of new large scale offerings should speed the absorption of current inventory, and help underpin pricing by 2009 as demand begins to once again exceed available supply.

Financing for Investors and Buyers: More Mexican banks are lending to United States buyers or investors, but the overall number of loans is still relatively small.  United States bankers are being more strict with their loans due to the present overall state of the mortgage markets in the United States, not in our view primarily because of specifics related to the Rocky Point market. We expect these trends to remain constant in 2008, neither worsening, nor getting better.

But the overall environment for Investor / Buyer financing in Rocky Point actually improved in 2007, and we expect it to continue to do so in 2008. How can this be? Simply, the Rocky Point real estate market has never depended upon traditional bank financing:  it has usually operated on a model that matched investors with their own funds with developers or sellers offering financing directly.  Because of the softening of some sectors of our market, our developers and sellers have been forced to become much more aggressive in wooing potential customers, and have offered investors and buyers unprecedentedly attractive financing packages and terms, or attractive discounts.

Market Expansion and Diversification: Developers, AMPI, PPAREA, Aeromexico, the State of Sonora, strong realty companies with international presences like Century 21, Remax and Realty Executives, rental companies like Sea Side Reservations, Ocean Vacation Center and and Oceano Rentals, and OTP Trust, Banco Monex and EntrustCama.com among others are advertising Rocky Point widely, not just in the southwest.  The Rocky Point message is now reaching consumers in California, Nevada, New Mexico -- even the midwest, the east coast, and Canada.  This publication, for example, is widely distributed in Arizona, California and Nevada, and radio, TV, and nationally and internationally circulated magazines and newspapers have been used by these companies as advertising tools.

Because Rocky Point is now connected by air with the rest of Mexico via Hermosillo and the rest of the world via Los Angeles, these far-flung advertising impressions are beginning to draw visitors from further and further afield.  Coupled with the completion of the coastal highway from Rocky Point to San Luis Arizona (and onward to California...) our community has never been more connected, and we can only see this trend continuing as more airlines and flights are added, and as more North Americans discover the Coastal Highway.

This ability to reach out to new markets is one of the important differences between Greater Rocky Point and Arizona or other markets in the United States:  Rocky Point has continually expanded its pool of investor / buyers by attracting new visitors that fall in love with our community and its dynamic investment environment.

Amenities and Tourist Activities: Intimately connected with Rocky Point's market expansion is the fact that our community and its amenities and entertainment options continue to evolve and grow rapidly. Commercial development thrived in 2007.  The Plaza Gobernadores; the new look of restaurants in the Historic Old Port; the developments at Sandy Beach and its new bars, restaurants, and shopping plazas; the Mirador Area, the infrastructure and associated amenities exploding in Las Conchas; the ongoing infrastructure development in the Playa Dorada and Miramar corridors; the Mayan Palace investments in the East Zone -- all of these are examples of the strength of our expansion and the confidence that experienced commercial investors have in the long term strength of our market.

This being said, we strongly urge the city and chambers of commerce to be much more proactive in improving the look of our downtown, Calle 13, and the primary locations that virtually all tourists visit, such as access points to Sandy Beach and harbor-line development leading into the Old Port, in order to impress first time visitors to our community.

Predictions? Now is the time to invest and buy. 2008 will be a great year for investors and buyers -- low prices, terms, in some cases bargains -- but will be a challenging year for sellers.  Great opportunities await those who buy now, the second half of 2009 will be good for sellers. Now is the worst time to list a property and the best time to buy one.  Sellers need to select very carefully who will promote and market their properties if they want to succeed, and need to shop for a strong realty company who has an international presence and an aggressive promotion campaign outside of Rocky Point.  Your brokerage needs to be bringing buyers to the area and not depending solely on local traffic.

As always, if you are planning to acquire real estate in Rocky Point -- or anywhere in Mexico -- look for a strong brokerage and agent; ask about their credentials, their marketing efforts in the United States and other markets; check their licenses; ask about their closing practices and costs; ask about their bank trust processing resources, timing, and costs; ask what they think about your title insurance needs (you need title insurance!); verify your closing costs in advance; obtain professional legal counsel; obtain professional tax counsel.  If buying from a developer, don't be shy: ask for total disclosure about their financing status, funding, construction program timing.  Then invest or buy.

Born in Mexico City, Raúl O'Farrill is the Founder of OTP Trust -- the first United States-based title processing company to offer services for Mexico real estate as its sole specialty.  He is also the Founder of O'Farrill & Associates, a premier bi-national law firm specializing in real estate, and Founder of St. James Gate Development Services based in Phoenix, Arizona, a firm dedicated to assisting developers of any size in their ventures in Mexico.  OTP Trust and O'Farrill & Associates maintain offices in both Phoenix and Rocky Point.

Educated at the Centro Universatario Mexico, Universidad Iberoamericana, Universidad Panamericana and University of California, Berkeley, Raúl is widely experienced in Mexican real estate, corporate, and securities law.  He is former Vice President of Training and now Legal Counsel for AMPI Rocky Point, a member of NAR, a member of PPAREA MLS, a member for three years of the Arizona Mexico Commission Real Estate Ad Hoc Committee appointed by Arizona's Governor, coordinator of the Arizona Department of Real Estate's liaison with the Thunderbird School of International Management, and a member of both the Arizona State Bar Association and the American Bar Association in the United States. Raúl is also a member of National Association of Corporate Attorneys (ANADE) in Mexico.

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