What can a foreigner buy in Mexico?
The regulations on the sale of real property to foreigners are found in Mexico Foreign Investment Law. The law gives a Mexican company with foreign capital many more rights than a foreign national.
A foreign national can acquire land almost anywhere in Mexico with the permission of the Foreign Affairs Ministry. The only exception in the Foreign Investment Law is that foreigners may not acquire real property in the “prohibited zone”.
The “prohibited zone” is the strip of land 100 km from the border and 50 km from the beach. If a foreigner wishes to acquire land in the prohibited zone, he or she may enter into a trust agreement with a Mexican bank (discussed below).
A Mexican company with foreign investment, even 100% foreign investment, may acquire property in the “prohibited zone” as long as it is not used for strictly residential purposes. If the property is considered to be solely residential, the company must use a trust. The Regulations of the Mexican Foreign Investment Law state that residential real estate is real estate specifically to be used as a dwelling by the owner. The law provides a list of examples of real estate that seem residential but is not considered as such by the law.
According to the law, non-residential real estate includes, but is not limited to:
1. Time Shares.
2. Real estate intended for both industrial, commercial or tourist use and residential use.
3. Real estate acquired by credit institutions in payment of debts.
4. Real estate bought by companies to be developed and sold. This would include apartments and residential communities.
5. Generally, any real estate to be used for commercial, industrial or agricultural purposes, as well as, ranching, fishing, forestry, or to provide services.
The Regulations make clear that this list is not complete and that any questions of whether an activity is residential should be sent to the Foreign Affairs Ministry.
Property Acquisition with Bank Trust
A Foreigner may not hold actual title to any land in the “prohibited zone”. To possess land in the “prohibited zone” a trust is necessary. In a trust, a Mexican bank holds title to the land while a foreign beneficiary has the right to use, enjoy, or even sell the land, and receive the proceeds. There are two steps to forming a trust: obtaining the trust permits and entering into the trust agreement.
Both the bank and the buyer must obtain permits from the foreign Affairs Ministry to form a trust. To obtain a trust permit, the parties must supply personal data, proof of title, and a description of the intended uses for the property. The buyer must additionally agree to be considered as a Mexican with regard to his or her rights. This agreement is know as the “Calvo clause” The bank must agree to notify the Foreign Affairs Ministry of any assignment or cancellation of the trust. There is also a trust permit fee, which the buyer usually pays to the bank. The amount of the fee depends on the duration of the trust.
After the parties obtain trust permits, they should draw up the real estate trust agreement and have it recorded by a notary.
The notary needs the following documents to record the agreement:
1. The title documents for the property.
2. A certificate of no tax liability. This certificate is used to prove that there are no outstanding property taxes nor other assessments on the property at the time of the agreement.
3. A certificate of no encumbrances. The certificate of no encumbrance shows that there are no conflicting claims to the property. It also contains the chain of title and a description of the property.
4. A topographical study of the property.
5. An appraisal of the property. The commercial value of the property is used to compute property and other taxes. The appraisal must either be done by a bank appraiser or a corredor público, an attorney licensed by the state to perform appraisals.
The standard rate that banks charge for a trust is $300 and $1,000 per year. Trusts can be created for up to 50 years and may be renewed.
Before a buyer can actually acquire real estate, he or she must go before a notary. For this reason, it is important to understand the role of the notary in the Mexican legal system.
Unlike American notary publics, all Mexican notaries are licensed attorneys. Notaries are also specially licensed by the state to insure that the law is followed in certain transactions. They are held accountable for any transactions in which they are involved and can be held liable for any irregularities in the documents. Because there are few notaries, and they are necessary for so many transactions, the notary is a prestigious position.
While the notary is a lawyer, it is not his or her job to advise the parties to a deal of any legal options they may have. As long as a document presented possesses all the legal formalities, it will be notarized and recorded. Notaries charge based upon an agreed table which varies according to the price of the property, but is frequently between 1.5% and 2.5%.
Most real state transactions have at least two steps:
The first step in purchasing property is the Promise to Purchase and Sell. The promise is a legally binding expression of the will of the parties to make a contract in the future. Admittedly, “promise” is probably the wrong choice of words, as a valid contract is formed. This agreement is especially convenient in the case of the American who wishes to buy a piece of property through a trust and must wait for the paperwork. At the initiation of activities, the notary will file a notice which will put a temporary freeze on registrations of liens, ensuring the protection of priority to the buyer.
At the time of the Promise, the seller usually demands a deposit from the buyer to take the property off the market. The deposit is usually between 20% and 50% of the purchase price of the property, but tending toward 20%. Mexican law has no equivalent of an escrow, which makes it more difficult to recover the deposit if the selling party backs out of the agreement. All the buying party is left with in such a situation is a lawsuit.
The second step is closing the transaction. The title to the property is transferred by the Purchase Sales Agreement. This contract must be in writing and to be binding on third parties it must be recorded in the Public Registry of Property. To record this agreement, the parties must go before a notary.
“Closing companies” have opened in some of the beach resorts, acting as bonded escrow agents. Another alternative to using the Notary services is to work with a bank and create an escrow agreement among the parties, although the bank will charge for its trust services.
Before a notary will record the Purchase Sales Agreement, the following documents are required:
1. The title document.
2. A certificate of no encumbrance or tax lien on the property.
3. A Topographical study and appraisal of the property.
4. The property tax receipts for the last 5 years.
5. A notice of purchase.6. The water bill receipts for the last 5 years.
Many Americans want to have title insurance on the property as a way to reduce liability. It is not common for Mexicans to possess title insurance, but there do exist companies that supply this, specifically for the benefit of Americans. However, this service is more expensive than the price that is charged in the United States.
The notary also withholds a number of fees and taxes. In addition to the notary fee, the notary withholds the income tax generated from the sale of the property, which is either a percentage of the gain or a percentage of the sales price of the property. Certain costs are most commonly borne by one party or another, but the parties are free to negotiate who will pay each cost.
Customarily the buyer pays all transaction expenses, except the income tax owed by the seller.
In Mexico, inspections are not common, but are recommendable in order to avoid future disappointments. Many times, real estate transactions are negotiated which state the sales price as less than the price that was actually paid. This is usually done to avoid or lessen taxes for the seller. Besides being illegal, this is not a good idea. Any taxes avoided at the agreement stage will eventually have to be paid (at a higher rate) as capital gains taxes when the property is resold, unless the new owner continues to give the property an unnaturally low value.
Ejidos are communal tracts of land, mostly agricultural in nature, which compose a large portion of Mexican real estate. Ejidos are considered to be the property of a whole community, rather than any single person. Members of the ejido (ejidatarios) hold partial title to the land, they can live and work on the land but they may not transfer it to another party. Before 1992, it was impossible for someone who was not an ejidatorio to again title to this land. The constitutional reforms of 1992 changed this rule and opened up ejido land, allowing it to be converted into private property.
Despite the reforms, buyers should be very careful when purchasing former ejido land as the pitfalls are numerous.
At present, there are two ways in which a third party can acquire title to ejido land. The first is through adverse possesion. Because this procedure is uncommon and may not apply to foreigners, the more common method of gaining title to ejido land is through the PROCEDE (Program of Certification of Ejido Rights) procedure.