1. Can foreigners own property in Mexico?
2. Who´s involved in Real Estate transactions in Mexico?
3. The restricted zone and Fideicomiso
4. Investing in Riviera Maya
5. Things to remember when buying property in Mexico
6. Timeline of events for property purchase in Mexico
CAN FOREIGNERS REALLY OWN PROPERTY IN MEXICO?
Yes, Americans and other foreigners may obtain direct ownership of property in the interior of Mexico. However, under Mexican law, foreigners cannot own property outright within the restricted zone. Instead, a real estate trust must be set up to hold title for the foreigner. Since foreigners are not able to enter into contracts in buy real estate, they must have a bank act on their behalf, much as a trust is use to hold property for minors because they also can not contract. The following is a brief outline of the law regarding such trust, known as "fideicomisos", but potential buyers should always get advice and have all real estate transactions overview by a licensed Mexican attorney.
WHO'S INVOLVED IN REAL ESTATE TRANSACTIONS IN MEXICO?
Normally, there are three to four players involved in any real estate transaction in the restricted zone:
• A real estate company
• The buyer's lawyer
• A bank
• A public notary
All four are helpful in their respective areas in assisting with real estate transactions. Transactions outside of the restricted zone do not involve a bank since it is not necessary to establish a real estate trust in those areas. Otherwise the transactions are much the same. Because of the similarities of real estate transactions in general, it is easy to assume that the basic terms and principles which are familiar in the United States also hold true in Mexico. This assumption becomes easier to make when United States real estate terminology is adopted for transactions in Mexico. Much of the paperwork is similar, if not exactly the same, as that used in the US. Although, there are many aspects of Mexican real estate transactions that are identical to procedures carried out in the United States, there are many aspects that are completely different. As a rule, a foreigner should assume nothing.
Mexican real estate transactions are not carried out in the same manner as United States real estate transactions. The buyer must retain professionals to assist in the transaction. Mexico has yet to regulate real estate transactions. Real estate agents and brokers are not legally licensed in Mexico. Consequently, a foreign buyer cannot always depend on the normal safeguards that would be applied to real estate transactions in the United States. The old saying "let the buyer beware" is very appropriate. Anyone can set up a real estate company in Mexico. There are no special requirements or brokerage licenses to obtain. A would-be real estate agent merely has to establish a Mexican corporation, obtain a work visa, and he is in business.
There are good reasons why the real estate industry in the United States is highly regulated. Until the real estate industry is regulated in Mexico, there will always be some real estate companies who prefer that buyers know as little as possible about real estate transactions. After all, a buyer cannot ask questions if he does not have any knowledge of the laws.
Currently there is nothing similar to a Real Estate Commissioner or a Department of Real Estate in Mexico. Some states are beginning to look at some kind of real estate legislation, but it might be some time before this is a reality. The American Embassy and the American consulates in Mexico are good places to start when trying to determine if a real estate company is reputable. Some of the real estate companies have established quite a reputation for themselves at some of the Consulates.
A Mexican attorney should be involved to draw up contracts and to review the conditions and terms of sale. Additionally, an attorney can do a title search and point out any problems or alternatives a buyer may have. The buyer should always have his or her own attorney rather than using the attorney of the seller or some attorney used by a real estate company free of charge. As the old saying goes, you get what you pay for, and usually if someone's services are offered free of charge you are probably paying for them in some other way. Legally, only a licensed Mexican attorney should provide advice on the law. If an attorney is licensed in Mexico he should be able to produce a "cédula profesional." This document is a registered license to practice law in Mexico and includes a photo of the attorney and his signature.
To be sure that an attorney is licensed in Mexico, a foreign buyer should ask to see the attorney's license, or have the attorney's license number included in a retainer agreement before employing any services.
American attorneys are not licensed to practice law in Mexico and should not give advice on Mexican Law. I should clarify, here, that I am referring to individuals who are licensed to practice law in the United States, and not merely individuals who are citizens of that country. There are currently very few Americans who are licensed to practice law in Mexico. The fact that a person is licensed to practice law in the United States in no way allows him or her to practice law in Mexico: Mexican or United States law.
Besides formalizing your real estate transaction, an attorney can be very helpful in saving you money. This is because attorneys are involved in many different transactions and have contacts with banks, notaries, and the Mexican government on a regular basis. Because of this they are aware of the most competitive cost and fees involved in a transaction and can make sure that the buyer is given the best possible prices. An attorney can also inform the buyer regarding his or her legal options and by doing so can make sure that no opportunities are missed: tax planning considerations, closing costs which should be paid by the seller, and ways of taking title to the trust rights which make sense for the particular circumstances of a specific buyer. Very often one piece of good advice can save the buyer thousands of dollars in tax savings or other savings when the buyer eventually sells the property.
When looking for an attorney it is important to remember that any Mexican attorney can normally handle a real estate transaction. The buyer is not limited to only the local attorneys where the property is located. All real estate transactions involving a trust are governed by federal law. This means that all such transactions are carried out the same way regardless if the property is in Cancun or Los Cabos.
THE RESTRICTED ZONE AND "FIDEICOMISO"
The law declares that the Mexican nation has original ownership to all land and water in Mexico, as well as minerals, salts, ore deposits, natural gas and oil; but that such ownership may be assigned to individuals.
The Mexican Constitution prohibits direct ownership of real estate by foreigners in what has come to be known as the "restricted zone." The restricted zone encompasses all land located within 100 kilometers (about 62 miles) of any Mexican border, and within 50 kilometers (about 31 miles) of any Mexican coastline. However, in order to permit foreign investment in these areas, the Mexican government created the "fideicomiso," (FEE-DAY-E-CO-ME-SO) which is, roughly translated, a real estate trust. Essentially, this type of trust is similar to trusts set up in the United States, but a Mexican bank must be designated as the trustee and, as such, has title to the property and is the owner of record. The Mexican Government created the "fideicomiso" to reconcile the problems involved in developing the restricted zone and to attract foreign capital. This enabled foreigners, as beneficiaries of the trusts, to enjoy unrestricted use of land located in the restricted zone without violating the law.
A "fideicomiso" is a trust agreement created for the benefit of a foreign buyer, executed between a Mexican bank and the seller of property in the restricted zone. Foreign buyers cannot own real estate in the restricted zone due to Constitutional restrictions. The bank acts on behalf of the foreign buyer, taking title to real property. The bank, as trustee, buys the property for the foreigner, then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary. The trust beneficiary retains and enjoys all the rights of ownership while the bank holds title to the property. The foreigner is entitled to use, enjoy, and even sell the property that is held in trust at its market value to any eligible buyer.
In order to allow foreigners to enter into the agreement contained in the Calvo Clause, Mexico requires all foreigners to apply for and obtain a permit from the Ministry of Foreign Affairs prior to contracting to acquire real estate in Mexico. This is currently done by the trustee/bank at the time a real estate trust is set-up.
Given the changes made for 1997 in the foreign investment Law, and the fact that a buyer can now apply for and obtain a trust permit in a matter of days, it is always better to secure the trust permit from the Ministry of Foreign Affairs before entering into any contract.
The bank, as trustee, must get a permit from the Ministry of Foreign Affairs to establish a real estate trust and acquire rights on real property located within the restricted zone. The purpose of the trust is to allow the trust's beneficiary the use and exploitation of the property without constituting real property rights. The beneficiaries of the trust (fideicomisarios) may be:
• Mexican corporations with foreign investment
• Foreign individuals or legal entities
The law defines "use" and "exploitation" as the right to use or possess the property, including its fruits, products, or any revenue that results from its operation and exploitation by third parties or from the bank/trustee.
The law does not clarify how trust permits will be issued. Article 14 of the law states that the Ministry shall decide on issuing the permits "...considering the economic and social benefit, which the realization of such operations imply for the nation." The basic criteria used to determine such benefits are likely to change somewhat with the publication of the new foreign investment regulations. However, it is reasonable to anticipate that some of the unwritten rules used by the Mexican government in the area of real estate trusts will be included in the new foreign investment regulations. It is also possible that some of the confusing elements will be eliminated. It is important to understand the application of the current regulations, even if they are going to be replaced, as well as some of the unwritten policies the government has used in the past, to better understand what criteria will be used by the Ministry in the future.
The Ministry of Foreign Affairs must grant any petition for a trust permit that complies with the stipulated requirements within 5 working days following the date of its presentation to the Ministry's central office in Mexico City. It must be granted in 30 days if the application is submitted to one of the Ministry's state offices. The Ministry of Foreign Affairs must confirm the registration of any property acquired by foreign-owned Mexican corporations a maximum period of 15 days following the filing of the petition. In both cases, if the maximum period passes with no action by the Ministry, the trust permit or registration are considered authorized.
There is a common misconception among foreigners investing in Mexico that once the trust expires, the beneficiary loses all rights and benefits of the sale of the property held in trust. This is not the case. On the contrary, the beneficiary has a contractual right under the trust agreement with the Mexican bank to all benefits that may result from the use or sale of that property, even though he does not hold title to the property. Under Mexican Law, the bank, as trustee, has a fiduciary obligation to respect the rights of the beneficiary.
A real estate trust is not a lease. The beneficiary can instruct the bank to sell or lease the property at any time. The beneficiary can develop and use the property to his liking and benefit, within the provisions of the law. Generally, the law allows most activities engaged in by foreigners.
INVESTING IN THE MAYAN RIVIERA
It's bound to happen on any vacation to Mexico…sometime after the pace of life has slowed to a more sane and pleasurable level you find yourself looking around and asking yourself, "I wonder if I could live here...."
Thousands before already have made the transition from visitor to resident (or part-time resident) of Mexico. The country's real estate ownership laws have never been more welcoming to foreigners, who have been attracted by this country's exquisite geography, warm climate, reasonable cost of living, relaxed lifestyle, and overall quality of life.
Yet still, there are significant differences between buying real estate in Mexico and in the United States or Canada. For the traveler interested in buying property in Mexico, it's important to know how foreign ownership works, what the buying process involves, what's available, and what the prices are like.
Can foreigners own property in Mexico?
Article 27 of the Mexican Constitution states that foreigners cannot own property within 100 kilometers of the border and 50 kilometers of the coastline. This is a protectionist measure, put in place after foreign invasions repeatedly threatened the country's sovereignty. Foreigners may directly own rural or urban land in the interior of Mexico subject to certain limitations on specific agricultural tracts.
As time has passed, and as the Mexican government has come to realize the benefits of opening these attractive areas up to foreign investment, they have modified this constitutional restriction. Since 1973 foreigners (non-Mexicans) have been able to purchase coastal and border properties if done through a Mexican bank trust, known as a Fideicomiso.
What is this Trust, and how does it work?
Essentially, it is like a Trust in the United States-the bank holds the legal title to the property, with all rights and privileges of ownership, including exclusive use and enjoyment, held by the Trust beneficiary-the foreigner. The foreign beneficiary enjoys the right to occupy or rent the property, and may cause the transfer of title or beneficiary transfer to the property to any legally qualified person he may designate. Beneficiaries are also allowed to modify their property in accordance with local zoning regulations.
These Trusts have an initial term of 50 years. They are renewable at any time or at the end of the 50-year period for a relatively small fee (less than $1,000 US) for additional 50-year periods. The property may also be sold to a person legally authorized to own land or to another foreigner via a Trust, at any time, with the foreign buyer capturing the amount of the appreciation of the property value. This process is designed to protect the rights of foreigners, and ensure the transactions are legal.
How are these Trusts created?
To establish a real estate Trust, (fideicomiso), banks will charge a predetermined fee, plus a percentage of the property's value, to cover the costs of preliminary studies and the drafting of the Trust agreement. The bank also charges an annual fee for maintaining the Trust, roughly averaging between $500 to $600 per year.
The Trusts are carried as off balance sheet assets by the banks who act as trustees. The Mexican Government specifically set the trust system up to allow non-nationals the security of ownership without having to change their 1917 constitution.
Elimar Properties will refer you to a reputable Mexican bank trust department, which generally have English-speaking personnel, as well as publications, available to answer questions about Trusts.
Are there differences in other aspects of property ownership in Mexico?
Financing is relatively new in Mexico. If financing is something one wants or needs, get pre-approved ahead of time, just as you would in the U.S. or Canada.
Closing costs to the buyer tend to be roughly 2 to 4 times higher in Mexico than they are in the U.S. or Canada, averaging 4 percent of the purchase price. Closing will take from 30 to 60 days depending on possession of property and travel availability of buyer and seller. Escrows are available via private escrow companies like First American Title and cost $500 U.S. to open escrow account
The buyer and seller need not be present at closing, but may be represented by their sales agent or attorney via a power of attorney document.
Notaries are the agents of record for all transactions registered in the Land Registry Office.
What about the availability of insurance on the transaction (title insurance), as well as the property itself?
To date, there are no home inspection agencies but Elimar properties can refer you to licensed professionals in most fields of construction to conduct inspections on the systems in the property. Most new construction comes with a 1 year builders warranty, however as of yet there are no home warranties available for sale by private companies. Title Insurance policies are available from companies like Stuart Title and First American Title and tend to cost less than 1% of the insured amount.
Other types of insurance, including property, liability, damage, and hurricane, are all readily available in Mexico, at low cost, and policies can be written to pay claims in U.S. dollars.
What about taxes? What can I expect to pay in Mexico?
For the buyer, the subject of real estate taxes generally comes as good news, real estate taxes tend to be low. Known as 'Predial' , the tax is calculated as a percentage of the assessed value, paid annually , determined at the time of sale. Property taxes have historically been low in Mexico because they have never been considered a source of governmental revenue.
What other expenses should I consider on the purchase of property in Mexico?
If you are not planning on living full time in Mexico, property maintenance will need to be considered for the time you are away. For condominium owners, maintenance and security is handled by the Condominium Owners Association, paid for through monthly fees.
Homeowners may want to consider a property management company. Many of the leading real estate companies, especially in Mexico's resort areas, offer this service, and can also be quite successful in generating income from vacation rentals, should you be interested in doing so.
How can I be assured of dealing with a qualified Real Estate professional in Mexico?
On of the major differences in buying property south of the border stems from the fact that Real Estate agents in Mexico are not subject to any national certification or educational requirements. As such, the best advice you can act on is to always deal with an established Real Estate Agency, whose references you have checked personally with several former clients.
THINGS TO REMEMBER WHEN FURNISHING YOUR NEW HOME IN MEXICO
•Makesure cash withdrawal limit on bank card is at least $1000
•The best deals are when you pay cash
•Factories and small stores don’t take credit
•No one takes checks
•Open a local bank account with a small amount of $ so you can write local checks when possible
•Familiarize yourself with the money and how it relates to American dollars (even if you are not american)
•Make a good friend who is willing to help you locally (speaks fluent spanish)
•Don’t hesitate to ask for a discount, especially when you purchase many items from one store
•If money is wired to you, tell the sender to make sure they send it to the full name on your passport (including your middle name)
•When picking up a money wire, bring a copy of passport and drivers license!
•Tremendous help: a cell phone so you can make calls when you need to
•Check with airline on how many cases you are allowed... usually you are allowed 2 fill those with towels and sheets (plan your bed sizes in advance)
•Be prepared to travel back and forth to Cancun most of your purchases will be done there.
•Even if you don’t like buying on credit, bring a dependable credit card with an ample limit
•Make sure you have the phone number to your bank/banker handy in case or emergency.
•Keep all your receipts so you verify deliveries
•Know your address or be able to draw a map of your location
•Have an email address and give it out, check email daily.
TIMELINE OF EVENTS FOR PROPERTY PURCHASE IN MEXICO
1.) Written offer accompanied by earnest money check or bank wire transfer. (copies of passports and tourist visas)
2.) Negotiate price and terms.
3.) Meet with Mexican attorney to discuss fees and closing costs. If necessary prepare power of attorney.
4.) Both parties original signatures on binding written contract.(approx. $500.00 to buyer)
5.) Attorney initiates process of Fideicomiso by paying 50% of closing fee. (bank trust necessary for foreigners to own property in Mexico)
6.) Follow format for previously agreed upon deposits towards purchase price to seller/broker.
7.) Meet in person or through power of attorney to sign “escritura” or deed. Pay any outstanding balances.