The Process: Buying Real Estate in Mexico
Property values in México, like in the US, tend to increase year-over-year. As the demand for ocean front property in the US has outstripped supply, it has become an unobtainable commodity for the average person to afford. However, in México, there are numerous locations where one can still afford the ocean front home, condo or lot as prices started at a much lower point.
The increases over the last couple of years have, for the most part, eliminated what we would call cheap, but on a relative basis, you can still find a 4 to 10 times differential in prices when compared to the United States.
Additionally, Bancomex, the Mexican import export bank, asked me for a comparison of a 10 acre parcel in La Jolla, CA. My response was that there was none, but the type of property still exists in México. As with all property, the relative value and appeal of property in México comes down to the three key factors: location, amenities, and accessibility to the United States.
In addition to México’s lower land costs, construction costs are lower, maintenance is cheaper, and ownership costs (taxes, utilities) are very low.
A person can live like royalty on the saving from property taxes alone. For example, in most areas of México, property taxes are about 0.1%, so for a $1,000,000 home, a person would pay about $1,000 per year.
In Florida, property taxes are about 2.5% or $25,000 for the same million dollar home. So with the $24,000 or $2,000 per month differential, one could have a live in maid, pay the utilities, have the maid buy groceries, and have some mad money left over.
Purchasing property in any location requires an extensive amount of research, planning and preparation – México is no exception. A person should understand the laws, do significant diligence and work with true professionals who can guide you to a successful, safe property ownership in México.
To understand México’s current legal system and rational for constitutional requirements for foreign land ownership, one must look to México’s history to understand its current practices.
Hernan Cortes conquered México for Spain and most of the western United States, which lead to Spain’s controlled of México from 1535 to 1821. When México won its independence from Spain in the Mexican War of Independence, it also gained ownership the provinces of Alta California (what is now the U.S. state of California), La Mesilla (Arizona), Nuevo México (New Mexico) and Tejas (Texas).
For the next 25 years México tried to consolidate its provinces, but Texas won its independence after defeating Santa Anna and the Mexican army in 1836, which was annexed by the United States in 1845. The Mexican government complained that by annexing its “rebel province,” the United States had intervened in México’s internal affairs and unjustly seized its sovereign territory. This dispute lead to the Mexican American War in 1846.
The Treaty of Guadalupe Hidalgo, signed on February 2, 1848 ended the war and gave the U.S undisputed control of Texas, established the U.S.-Mexican border of the Rio Grande River and ceded to the United States California, Nevada, Utah, and parts of Colorado, Arizona, New México, and Wyoming. In return, México received $15,000,000 USD. México lost more than 500,000 square miles (1,300,000 square km) of land, almost half of its territory.
After being controlled by the Spanish for nearly 300 years and loosing a significant part of its sovereign territory to the United States, it is understandable that in the constitution of 1917, México place severe restrictions on foreign ownership of its land. It was not until the early 1970s that México recognized the benefits of the American tax payers, and created a system for foreigners to own land without modifying the basis premise of its constitution.
1. Find a trusted Real Estate Professional
a. The National Association of Real Estate does not exist in México
b. There is no licensing of Real Estate professionals.
c. AMPI is México’s effort to regulate real estate professionals, but has no real teeth, yet. There are certifications and official training real estate agents can receive in México
d. There is very limited, accurate comparable data. Multiple Listing Services are very primitive.
2. Strike the deal you want
a. If a resale, get a copy of the existing deed/trust.
b. Use a legally binding purchase and sale contract.
i. You are in México and the official language is Spanish, so have the purchase contract written in both languages.
ii. Have a Mexican attorney review it to ensure it is favorable to you and you know what you’re getting into.
iii. If the title is not clean, make sure you can get your escrow deposit back.
iv. Use an escrow account controlled in the United States.
v. If the property can not be delivered by a certain date, the builder should be in default and you should be able to get you money back.
3. Hire a Mexican attorney, approved by one of the US title companies, to conduct a thorough title search.
4. Choose the Notario that you like and are referred to.
They have a standardize fee structure, so fees do not vary greatly.
5. Have one of the US title companies provide a letter stating it will underwrite a clean title policy.
Ensure there are no exclusions other than loss of property due to erosion of the land into the ocean.
6. Do not provide the balance payment for the property until the Notario has signified that the seller has conveyed the property over to you.
The escrow officer should have the responsibility to release the payment.
7. Ensure the purchase price is the recorded price in the public registry.
While the seller wants to minimize his capital gains tax and might ask you to record the purchase at a lower price, you will be stuck when you sell the property at a later date. Your lower basis will result in high capital gains taxes.
The Mexican Constitution of 1917 created “the restricted zone” which is the land area within 100 kilometers of México’s international land borders and within 50 kilometers of México’s ocean front. This zone was to prevent foreigners from owning land which they could create a starting point from which to invade México.
Within the Restricted Zone, foreigners can not obtain direct title to land or property. In areas outside the restricted zone, foreigners can receive fee simple title to the property. In 1971, México decided to increase tourism and foreign investment, so it created a legal structure in which foreigners could own the land – a fideicomiso, which is very similar to a living trust in the United States.
The fideicomiso, or trust, is one of the most dynamic vehicles for owning property in anywhere in the world. The fideicomiso allows the Mexican government to exercise its discretionary power by only permitting approved foreigners to acquire ownership rights to real estate within the “restricted areas” of México. There are three parties to a fideicomiso:
• The settlor (Seller – fideicominte)
• The trustee (the Mexican bank – fiduciario)
• The beneficiary (buyer – fideicomisario)
The beneficiary or fideicomisario has all beneficial rights of ownership of the property. They have full use and control of the property and can make investment decisions regarding it, including the ability to use, mortgage, encumber, improve, lease without limitation and sell without restrictions and to pass the property to named heirs.
In essence, the beneficiary has the same absolute rights to the property as if it were in fee simple (direct) ownership. However the trustee, Mexican bank, acts on behalf of the beneficiary in all transactions involving the property held in fideicomiso.
As the flexibility and benefits of a fideicomiso become widely understood, many Mexican developers are using fideicomisos to acquire land, instead of just taking direct title. The reasoning behind this is it gives them more control and flexibility to structure deal points into the actual trust document.
Bank Trust cont’d
Another benefit everyone can take advantage of when using the fideicomiso is for estate planning purposes. A fideicomiso can name multiple beneficiaries in the trust. Thus, in the event that the primary beneficiary passes away, the secondary beneficiary is already on the title. Therefore; there is no sale of the property when the heir takes control of the property and no associated estate or capital gains taxes.
There is a set up cost and an annual maintenance cost paid to the trustee, Mexican bank, for acting as a trustee. Assume $500 to $1000 to establish the trust and a $500 per year maintenance fee.
Effective since December 28, 1993, the Foreign Investment Law is a major step toward bringing ownership of Mexican real estate in line with other industrialized countries. It allows fee simple (direct) ownership of nonresidential properties in the country’s restricted areas; provided that such property is intended for commercial uses.
Additionally, the Law also extended the duration of the fideicomiso term for third-party residential properties from 30 to 50 years, and provides for a one time renewal of another 50 year period upon request. If the 100 years are up, the beneficiary of the property can then enter into a new trust and restart the 100 year timer.
However, this scenario is highly unlikely for two reasons, on average, Americans do not hold property for 100 years and the Mexican government will probably do away with the 50 year periods allowing the trust to be valid into perpetuity.
Property Already in a trust
When a property has already been placed in a fideicomiso, the new buyer may want to assume the existing trust, instead of creating a new trust; this is called Assignment of Rights (cesion de derechos). The main thing to think about is the length of time remaining of the trust. The buyer in essence, is acquiring the seller’s rights to the fideicomiso that holds title to the real property.
Ultimately, buyers and sellers get to the point where they are ready to have the transaction consummated and take title to the property.
In México, all real estate transactions and the legal conveyance of any type of property must involve the participation of the Notario Publico for it to be official.
Although their title translates to “public notary,” the Notario Publico’s responsibilities greatly exceed their counterparts in the United States.
Notarios are highly trained attorneys who must pass two extensive examinations to receive their appointments. A notario is appointed by both the governor of the state and the executive branch of the federal government. The appointments are for life and are valid for transactions in the area in which they were appointed.
The Notario is the central figure in a real estate transaction and works with the buyer, seller and trust bank to formalize the property transfer.
Without the Notario, there is not legal transfer of title. If someone tells you otherwise, run……
The notario’s duties include:
(1) To examine the documents of the selling party to ensure their accuracy and legitimacy.
(2) To verify title
(3) To search the public records to determine the status of the seller’s title to the property and the existence of liens against the property.
(4) Calculate and collect all applicable property taxes, capital gains taxes and government transfer taxes, and
(5) After the property transfer has been formalized, the notario will record the trust or deed with the public registry of property where the property is located.
This last step is the most important, because if the property is not registered with the public registry, then there is no official record of the transaction.
Notarios will typically only look at the last publicly recorded deed to verify the chain of title. While they will state that the title is clean, as a publicly appointed figure does not insure title to the real estate nor does he have any legal responsibility for title defects.
In short, a purchaser cannot seek restitution against a notario in the event the purchaser suffers a monetary loss because of a title defect unless fraud, misrepresentation or gross negligence could be proven in a Mexican court of law.
While comparable property is significantly less in México than the US, closing costs are significantly higher. Expect closing costs to be 4 to 6% of the transaction.
Notario fees, transfer taxes and title insurance make up the majority of the costs. Even though title insurance is not required, the peace of mind is immeasurable and México Properties believes the savings are not worth the risk.
Additionally, with the mortgage market taking hold in México, title insurance will be required with any externally financed investment.
For years foreign purchasers have been persuaded to “purchase” ejido parcels or beach front lots without fully understanding that they can’t legally own ejido property nor can the ejidatarios (those individuals who have the beneficiary interest in the land) legally sell it.
Hence, most of the horror stories one hears about Mexican real estate involves ejido property. However, if done properly, ejido property offers the best value for land, but requires significant due diligence, patience, understanding of the law, and political savvy.
An ejido is an old communal farm formed when the campesinos (farmers) of every village in México were given property to form a co-op. The reason was two fold: first, to minimize the amount of aid the Mexican government needed to provide peasants and second, to prevent future uprising.
The Constitution of 1917 proclaimed that all land in México would either be ejido (communal) or owned by Mexican nationals. The ejido is not owned by any one and worked by everyone–not unlike a huge community “pea patch” in the United States that no single person owns yet many use as a garden to grow flowers and vegetables for whatever reason they please.
However, in many cases, the ejido property is divided into separate family holdings, which could not be sold, but could be handed down to heirs.
In 1992, recognizing the inherent value of most ejidos because of their geographic, border or coastal location, coupled with the development potential they created, the Mexican government enacted a Constitutional Amendment in order to “regularize” agrarian lands.
Under the auspices of the Office of Agrarian Reform, the Mexican government has created a process to legally convert the ejidal regimen to one of private regimen. In other words, ejidatarios now have the right to take land that they did not own and convert it to private property; thereby benefiting monetarily from the ensuing regularization process.
This process is highly regulated and has specific steps that must be followed in order to obtain clean, private title. Once the process is completed, governing control of the property goes from the Agrarian courts to the civil courts and the first public title of the property is created at the public registry.
Since this is the first title on the property, it is the cleanest title one can obtain, because the chain of title starts with you.
If one desires to purchase ejido property, hire a very competent Mexican attorney that is very accustom to ejido transactions. The money spent upfront will be well worth it over the long run.
When you buy real estate in Mexico, you would do well to consider taking out Title Insurance on the property. Title Insurance covers you should the property you buy subsequently turn out to have liens associated with it.
This especially relevant if the property you are buying has been privatized, having previously been classified as being “Ejido” lands, but even if this is not the case, Title Insurance will protect you if any other previously unforeseen lien or charge is brought against the property before you took possession of the Title Deed.
Rates for Title Insurance are around US$5 – US$5.50 per US$1,000 of the property’s value; pay-able once only at the point of purchase. A good Estate Agent in Mexico will be able to advise you further about Title Insurance.