Do your homework before buying – avoid Mexican real estate hangover

They call it the “margarita syndrome.”

It refers to Americans who go to Mexico and buy a house without doing their homework. “People go down there and dream. They leave their brains at the border,” says Tom Kelly, author of books on buying in Mexico.

Linda Neil, founder of the Settlement Co., a title and escrow firm in La Paz, Mexico, sees it all the time.

“People see a beautiful piece of property, ask who owns it, maybe some Mexican will represent himself as the owner. He forgets to say his wife and 10 children have an interest, or it was inherited but never went through probate,” Neil says. Buyers pay the alleged owner before making sure he has clear title.

Tim Hmelar, president of real estate agency Intero, Mexico, says, “I spent two weeks driving from San Diego south for 80 miles. I looked at 64 developments. We came up with eight we felt comfortable attracting buyers for.” Some of the developers didn’t have clear title, some wanted the buyer’s money before completion, a few had shoddy construction, and some had bad locations.

Here are some tips for avoiding trouble in Mexico:

— Ownership: Foreigners can own residential property outright in Mexico except in the restricted zone 62 miles from the borders and 31 miles from coastlines. In restricted areas, they can place property in a bank trust known as a fideicomiso.

A Mexican bank is trustee and the buyer is the beneficiary. The beneficiary can occupy, improve or sell the property. The trust is good for 50 years and can be renewed multiple times.

The trust costs about $2,500 to set up and $350 to $700 per year, Neil says.

Placing property in the trust does not guarantee the owner has clear title to it. “If you have a dispute, the bank won’t help you. It’s limited to holding the property,” says Tijuana attorney Ruben Fernando Benitez.

— Hire a reputable attorney: “Look for someone in practice for at least five years specializing in real estate,” Benitez says.

— Search the title: Hire an attorney or local title-search company to make sure the seller has clear title and there are no liens or debts.

— Consider title insurance: Stewart Title Guaranty, First American Title Insurance and Fidelity National Title Insurance sell policies to Americans on property in Mexico.

It costs about 1 percent of the purchase price in Mexico, more than double the cost in California, says Mitch Creekmore, senior vice president of Stewart International.

— Closing escrow: Virtually all property transactions must go through a real estate lawyer called a notario. The notario “is an impartial party. He represents neither buyer nor seller,” Benitez says. He drafts the agreement and make sure taxes are paid.

— Closing costs: Buyers typically pay 6 to 8 percent of the purchase price in closing costs, which includes the notario fee, trust setup and a 2 percent transfer tax. If you add a mortgage, it’s more like to 8 to 12 percent.

— Mortgage: Some banks, including GE Money and Citigroup subsidiary Banamex, will lend money secured by a Mexican home, but these loans tend to be pricier than U.S. mortgages.

— Visas: Contact the nearest Mexican consulate in the United States to see what visas you will need.

— research: Contact the nearest U.S. Embassy or Consulate in Mexico. It can give you names of local attorneys and informal information about real estate.

— Renting: If you plan to rent out your home, see what taxes you must pay and what permits you might need. If you will employ people in your home, make sure you comply with labor laws.