Buying Property along the Beaches of Mexico
By Linda Neil, A.B.R.
Foreigners who wish to make money through the purchase of vacation or retirement homes and condominiums on beautiful Mexican beaches or along the U.S. and Belize borders do so through a Mexican bank trust, or fideicomiso.
Article 27 of the 1917 Mexican Constitution, prohibits foreigners from acquiring fee simple title to residential real estate in areas referred to as “restricted” zones. These restricted zones refer to any land: within 30 miles (50 km) of any coastline or 60 miles (100 km) of either border. Also included in this zone is the entire Baja Peninsula.
The fideicomiso law, providing a legal, simple and safe circumvention of the constitutional provisions was established in 1973. The trust places legal title in the name of a Mexican bank under a permit from the Secretary of Foreign Relations, so the bank may administrate the property on behalf of the buyer/beneficiary, who enjoys exactly the same rights of ownership as a Mexican national.
A permit to establish a trust can be obtained for a period of 50 years and then renewed multiple times thus establishing perpetuity for owners of rights in Mexican properties.. Should the foreigner wish to sell he may assign his rights to the buyer, or the buyer may obtain a new trust permit, as he or she prefers. The cost for the permit and registration in the foreign investment registry is currently about 1,950 dollars and bank trust administration fees generally range from 200 dollars to 750 dollars annually.
The Mexican corporation as a vehicle for acquisition of “restricted” property: Under the 1993 Foreign Investment Law, a corporation established in Mexico is considered Mexican under the law, even if all shareholders are foreign. Thus a Mexican corporation with 100% foreign ownership can acquire property in the restricted zone. This applies only to non-residential property: such as a hotel, restaurant or other type of business. It is a violation of the foreign investment law to place a retirement or vacation home in the name of a Mexican corporation.
.Title investigations and the Public Registry: Title, whether through direct ownership or a trust, must be registered in order to give notice to third parties as to the interest of the property. A certificate obtained from the local Public Registry will in addition provide information as to encumbrances on title. Title insurance is now available in some areas through both Mexican and U.S. companies and should be obtained wherever available.
There is no licensing law for real estate or escrow agents in Mexico and regulation of attorneys is virtually nonexistent. A foreigner considering the purchase of property in Mexico should consider the following guidelines:
• Carefully select your real estate broker. Confirm that the agent you are considering is an active member of the Mexican Association of Real Estate Professionals (AMPI). AMPI members operate under a code of ethics, and are affiliated with the U.S. National Association of Realtors (NAR) and the Canadian Association of Realtors (CREA). Check references and with others who have dealt with the broker.
• Be wary of ejidal property. More than 50% of all land in Mexico is ejidal (e-HEE-dal), or communal land, meaning it is government property at the service of a community, much like Indian lands in the United States and Canada. Certain provisions in the law now allow ejidos to be converted into private property, but until the conversion process is complete, it may be risky.
• Confirm that the value to be registered in your deed is the full amount you paid. In many communities it is customary to use an appraised value, rather than full value, as the basis for cost. Since appraisal values can often be 40% to 60% of true commercial value, the buyer will save money at the onset in both acquisition taxes (2% of declared value) and property taxes. Nonetheless, using a value less than full purchase price can be costly when selling since the capital gains tax paid on the sale will be based on the value declared in the deed at the time of original purchase. Thus a seller may end up paying a hefty capital gains tax on a fictitious book value. Better to declare it correctly at the beginning than be stuck with unwelcome taxes when it is later sold.
• Insist that title, whether through direct ownership or a trust, be recorded in the local Public Registry. Should a lien attach, correctly or incorrectly, to the trusted
property, no beneficiary may transfer his rights to the property unless they have been registered in his name prior to the attachment of the lien.
• Select a neutral third party to handle the transfer of your title. Escrow companies operate under Articles 193 to 208 of the Mexican Commercial Code, and perform services as neutral third parties and/or consultants in the transfer of titles. Since there is no licensing for these companies, it is wise to insist on references and an examination of track records in much the same way you would in selecting the realtor representing you.
• Spend the money necessary to research and obtain a valid transfer of title. Closing costs can range from 3% to 20% of property value. A less expensive property will cost more, percentage-wise, to transfer with the percentage decreasing as the price increases.
• Insist upon a binding arbitration clause. Lawsuits can be costly and time consuming. It is far less expensive for the parties to agree ahead of time to resolve any possible dispute through binding arbitration.
Now! Financing options! Traditionally, buying a Mexican property meant paying all cash or convincing a seller to carry a mortgage. Now, however, some US finance companies are entering the lending market, opening a whole new panorama of possibilities for leverage in the Mexican market. Another important option is the use of self-directed IRA accounts for Mexican property acquisitions. Properties purchased with IRA funds can be investment properties only, not for personal use. Nonetheless, a great deal of money is being made in Mexican recreational properties both through appreciation in the purchase and sale and from rental income. Solid investments today can provide a great nest egg for attractive retirement.
More and more it makes great sense to look south to Mexico for recreation, retirement and investment properties!. The future is just beginning!