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Purchasing Your Dream Home in Mexico
Advice from a Mexican land use professional
on buying real estate in Baja California Sur.
By Linda Neil
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By Linda Neil
Los Cabos is an increasingly viable alternative for those looking for a vacation or retirement home, or seeking an outstanding investment. Home...the word represents security and comfort for most, but all too often when used in conjunction with the purpose of purchasing property in Mexico, it creates stress, worry and even financial loss.
The buyer of a house, condominium or lot in Mexico must ask the same questions and receive answers similar to those they would when buying property elsewhere. It is important that you begin by selecting the community and the company that fits you.
When making important purchases such as buying real estate, it is also important to find the right people to represent you and your interests. Select the general area where you think you would like to live, then confer with the local real estate agents. Most are listed or advertise in Los Cabos Guide, others are listed in the local phone directory. You can feel confident that real estate organizations in the Los Cabos area are actively promoting ethical and professional business practices.
Once both the area and the agency representing it are obtained, carefully determine that they have access to the property in question and are familiar with basic local real estate practices. If in doubt, ask for references or a professional resume. Once you have found a person whose honesty impresses you...stick with them. If they know you are not simply shopping around, they'll generally work harder to find exactly what you want, and can afford.
Next, review your budget and closing costs. Closing costs will range from 7% to 30% of the total cost of the property. Yes, they can be as high as 30%! These costs include title search, transfer taxes, government permits and notary fees. Your seller may assist in some of these costs; especially those related to title search and insurance. Be sure to obtain an estimate of the expenses you will be paying for, so you will not have any unwelcome surprises at closing date. Insist that a third, neutral party handle these details. While your real estate agent may know the procedure, this is not his job.
Check the title to be certain that the seller has a registered title to the property. Many foreign buyers, in order to avoid closing costs, have acquired the property, paid for it, yet never obtained a recorded title to it. Ask for a copy of your seller's title documents and reserve the right to examine them prior to release of any part of your payment. If they are in Spanish, ask for a translation or have them translated. If in doubt, consult with a land-use professional or an attorney about their probable validity. It should be added that if the seller has never acquired title to the property they are selling, often it can be remedied. The buyer should be aware of this condition, however, and be certain that the person who accepts their offer is truly the title holder. The buyer should make arrangements for the additional costs, if any, involved in this double transfer.
Examine the neighborhood. Is it new, or old? What will it look like in ten years? Are highways or other development projects planned for the future? How near is it to facilities you feel you might need, such as schools, churches, shopping? Are there homeowner fees for maintenance or common areas? If so, how much are they and when are they to be paid? Are all utilities in and paid for? What does the developer have left to do? What kind of building restrictions, if any, are there? Are there covenants and conditions registered for use of the land?
In many parts of Mexico there is no enforcement of a master plan or building codes. This can affect the changing face of the neighborhood you have selected.
The Mexican Trust: Fideicomiso
Payment of the purchase price is not enough. In order to obtain valid ownership interest in the property you are buying, it is necessary to have the title recorded. This puts the rest of the world in notice that the property is yours. If you are a foreigner, that is, not a Mexican citizen, purchasing property in Mexico, including the entire Baja Peninsula and both states of Baja California Norte, and Baja California Sur...the property will transfer not to your name, but the name of a Mexican bank as trustee for your benefit. Article 27 of the Mexican Constitution of 1917, prohibits direct ownership of real property by foreigners in the "prohibited zone" which is a strip of land 30 miles wide along its seacoast and 50 miles along the borders. This is the reason for the bank trust, or Fideicomiso, which has been established under the guidelines of the Mexican government so foreigners may be protected in their property acquisitions.
Nonetheless, whether you are purchasing property in a zone requiring a bank trust or in an area where title can be taken directly in your name, it is necessary that this transfer take place, and your interest registered as soon as possible after the successful conclusion of negotiations to purchase your property. Until this transfer takes place you are vulnerable; the seller may die, the heirs may be unwilling to recognize your rights in the property, and you may become involved in a lengthy and expensive probate proceeding.
Meanwhile, your interest will not be recognized by the authorities should you wish to obtain a building permit, or by the bank should you wish to borrow money and use the property as collateral or as part of your assets. Should a third party also claim an interest in the land, or, very importantly, should you later decide to sell it, your interest should be clear.
The prudent buyer of real estate in the United States or Canada, would not consider leaving their title in limbo in either of these two countries. Nor should they do so in Mexico.
How does "personal" vs. "real" affect the foreigner who acquires property under a Mexican bank trust? Instead of using the term "transfer of title" more properly it should be called a "transfer of trust rights", or an "assignment of trust rights." In practical terms, the beneficiary has full control of the property. They may direct the trustee bank to lease the property, mortgage the property, or sell it. The foreign owner enjoys full rights of usage and may do anything to the property permitted under Mexican law. These are the same rights of dominion provided to a Mexican citizen who has direct title.
Currently, the term for a trust is fifty years. The Foreign Investment Law of 1989, provides for a renewal by filing an application. Multiple renewals are permitted under law. By requesting extensions each fifty years a property may be controlled by a family or business entity for generations.
The Master Trust
The purchaser of a home on a lot in a town or village, or larger property, will probably need to obtain an individual trust. Once issued, the rights in the trust can then be transferred to a new buyer by requesting the trustee bank to grant a deed to the rights before a Mexican Notary Public.
If, however, the purchase is a condominium, townhouse, or a lot or home subdivision, the developer may be required to establish what is called a Master Trust with a Mexican bank. This trust will most likely name the developer as the First Beneficiary, or "A", of that trust. Beneficiary A will then be empowered to designate Beneficiaries B, who are purchasers of the condos, lots, etc., included in the Master Trust. Once the Master Trust is issued, some buyers believe they should stay under this umbrella. But, until the buyer is formally named as Beneficiary B in a public document before a Mexican Notary Public, title to the rights to the property remain with beneficiary A, whose signature is required in order to affect a transfer.
Non Residential Property
Mexican Foreign Investment law permits direct ownership of non-residential property when the title is taken through a corporation that is established in Mexico, even when all of the shareholders in the corporation are foreigners. This is because the entity acquiring the title is Mexican, not foreign, which does not conflict with the provisions of Article 27 of the Mexican Constitution. Thus franchises such as McDonald's, Kentucky Fried Chicken, Baskin Robins, etc., are now probably the direct owners of the land upon which they operate their businesses.
It should, however, be remembered that direct Mexican corporate ownership of a real property is available only for non-residential properties. The establishment of a Mexican corporation requires the regular services of a Mexican accountant who must prepare tax declarations and government reports each quarter. This can be an expensive process and would probably not be a viable ownership vehicle for residencial property, even if it were permitted under the law.
Registration Of The Deed For Beneficial Rights
The purchase/sale document may be drawn up by the buyer or seller, an attorney, or a Mexican Notary Public. It will not, however, provide valid notice to third parties unless it is recorded in the Public Registry office of the municipality in which the property is located. Mexico's land registry system functions in much the same manner as those in the U.S. or Canada. Unless the deed for the rights of the beneficiary has been recorded, there may not be a remedy for the purchaser who neglected to obtain a registered deed, so their interest or investment may be lost.
When a foreigner is acquiring residential property for which a bank trust is required, they should receive a deed which has been signed by the bank trustee before a Mexican Notary Public. This will name the beneficiaries and substitute beneficiaries of the trust in accordance with the purchaser's instructions. A full description of the property must be included in the deed document, which may consist of eight to ten pages, or more. Final page of the document should bear the stamp of the Public Registry, together with book and page numbers and the recording date. If this stamp is not on the document, the transaction is not complete and the buyer is not fully protected.
Closing Costs, or How To Avoid Unpleasant Surprises
Mexican law requires that taxes be paid on purchase price or appraised value, whichever is highest. Since most appraisals reflect approximately 30% to 50% of the actual selling price, your taxes will be considerably lower if the appraised value is declared. Though customary for many years, it is illegal.
The following are examples of some of the necessary costs, quoted in U.S. Dollars, and subject to variation between areas:
Appraisal: $150.00 This should be made by an appraiser, usually an architect, who is recognized as a Perito Valuador, or Official Appraiser, by the property tax authorities in the municipality where the property is located.
Foreign Relations Permit: If the property you are purchasing is in a Master Trust with a Mexican bank, and your seller has a beneficial interest which has been registered under the Master Trust, you will pay only the cost for Assignment of those beneficial rights, bank transfer fees and registration in the Local Public and Foreign Investment Registries. Some Master Trusts specify a permit obtained for each transfer. Should one be required, the cost is about $300.
If your property is not under a Master Trust, a permit to establish a trust will be needed, obtainable from the Secretary of Foreign Relations. Generally, for an unimproved lot, the permit will be issued with the condition that you invest a minimum of from $100,000 to $300,000, for the cost of the land and improvements within twenty four months. Cost of a fifty year permit is currently about $700.
Notary Fees: The Mexican Notary Public is an attorney who has been in practice for at least five years, and appointed by the Governor of the state in which he practices. Fees are based upon a rate a schedule tied to the amount declared in the property transfer. They can range from $250 to several thousand dollars, depending upon the declared value.
I.V.A.: The Impuesto Sobre Valor Agregado is a value added tax, currently based on 10% of the value of the services provided in Baja Caa California, and 15% on mainland Mexico. They must be paid by the notary, appraiser, and any other professionals whose services you use.
Bank Administration Fees: If title to your property is in a bank trust, there will be annual administration fees. These fees are negotiable, and generally run between $300 to $500 per year. They are subject to change every three to four years.
Title Search and Insurance: A title search will cost from $385 to $2,500, depending upon the value of the property purchased and its location. A good search is necessary since it will reveal existing liens, history, easements, etc. Title insurance cost is based upon $7.50 per $1,000 of purchase price and is required by lenders.
Acquisition Tax: generally paid by the buyer, currently based upon 2% of the declared property value.
Capital Gains Tax: Called Impuesto Sobre la Renta, or I.S.R., it is the Mexican equivalent of the Capital Gains Tax. Liability is either 20% declared value of the transaction, or 35% net value. It takes into consideration the length of time held, improvements made, commissions paid and other allowable expenses. The complicated formula should be figured both ways and confirmed by the Notary Public who will record documents and make the tax payments.
Settlement Costs: Finally, attorneys and notaries public often oversee parts of the previously described transactions. The buyer usually has to perform a certain part of their own legwork, made easier if they speak Spanish. With the increase in foreign investment, it is expected that more "settlement" companies will be established. This is a company whose sole function is to supervise and coordinate permits, tax payments, and other myriad of details needed to obtain full legal rights. Fees will vary depending upon who performs these services. Attorneys generally charge $1,200 and up. A settlement company's fee will range from $975 to $4,000, depending upon the property value.
About the Author
Linda Neil is the founder and Director of The Settlement Company which handles trusts and title transfers on Mexican properties. They are land-use professionals. Ms. Neil has worked in the field of real estate in Mexico for more than twenty years and is also a real estate broker, licensed in California. Ms. Neil may be contacted for further information in San José del Cabo at (624) 142-20-06, or FAX to (624) 142-2016.
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