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 "c�dula 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 "FIDEICOMISOS"
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.
MEXICO PROPERTY SELLER’S CHECKLIST
-A Guide for Selling Property in Baja
Consult this Checklist, prior to engaging in a sale transaction, for the basics on how to you’re your Baja real estate.
- Understand and follow the Mexican Law governing real estate transactions.
2. Obtain the advice and services of a U.S. or Mexican real estate attorney, real estate
agent registered in Baja Sur, a title insurance company and/or appraiser.
- Complete a Seller’s Property Disclosure Statement.
- Consider entering an exclusive right to sell listing agreement with a registered real estate agent who will share commission with other registered agents.
- Have copies of any Covenants, Conditions, or Restrictions along with any homeowner’s association bylaws, budget and financial statement ready for the prospective purchaser.
- Locate and obtain an original copy of your ownership document (the public instrument issued through a Mexican notary public – also commonly known as the deed, trust agreement or title); evidence that you are up to date in payments to your trustee/fiduciary bank (if title is held in a title trust); evidence of payment of your property taxes for the last five years (or certificate from the local authorities stating you owe no property tax); and a certificate from the local Public Registry of Property showing your ownership and no encumbrances or liens.
- Collect all official receipts pertaining to any improvements done to the property.
- Obtain an estimate of closing costs from a Mexican notary public based on an estimated sales price.
- Negotiate your purchase agreement in writing.
- Obtain a sufficient amount of earnest money and have the buyer deposit it with a neutral escrow company pursuant to a fully executed escrow agreement.
- Transfer title to the buyer through a Mexican Notary Public.
- Do not expect full payment of the purchase price until title has been transferred.
When does real estate close in mexico?
The obvious would seem apparent. Real estate deals in Mexico close when the deed of conveyance is executed by the buyer and seller, money changes hands between the parties and the deed is then recorded in the public records. Simple and logical, only it isn't that simple inMexico. For more than the past decade, an attitude and transactional manner has pervadedMexico's residential beach market. It is an alarming methodology, non-standard by foreign expectations and one that puts foreign buyers at risk when purchasing residences in the "restricted zone" of Mexico. Amazingly, the comment given to foreigners desiring to buy in Mexico is, "That's the way we do business here."
The following scenario is typical regardless of the geographic locale and doesn't seem to vary much between Los Cabos, Puerto Vallarta, Puerto Peñasco or the Cancun corridor. A foreign buyer identifies a house, condo, villa or lot on the beach they want to buy. Usually they employ the services of a local real estate agent in that market who informs them that in order to proceed to a contract, an initial deposit is required. The deposit may range from $1,000 to $5,000 and the check is written to the agent or to the seller. Generally, the deposit is not tied to an escrow agreement with a third party acting as the escrow agent, and commonly it goes directly into the bank account of the agent. The buyer is told that the deposit is required just to get the process started and more times than not, the deposit will become non-refundable. Keep in mind, buying public, once you write the check and hand it over in Mexico, how are you going to get it backwithout an escrow agreement.
Now we proceed to the letter of intent or the contract stage. The customary process in Mexicoultimately leads to an arrangement between the parties known as a "promise to trust agreement", though there may be other proposals or simple contracts prior to this final document. Upon execution of the promise to trust between the parties, the buyer is invariably required to pay the seller 100 percent of the agreed purchase price. Since the seller has agreed to convey the property and authorize the Mexican bank acting as trustee for the fideicomiso (bank trust) to transfer the beneficiary interest to the new purchaser, he is therefore entitled to all of his money! Real estate agents in Mexico will tell foreign purchasers the 'closing' of the transaction occurs when the promise to trust agreement is signed. Caveat emptor, nothing has closed!Understand what has transpired and what has not in order to have a legal and protocolized beneficiary interest established on the real property under Mexican foreign investment law.
What has happened and what has not?
- You, the buyer, have given the seller all of the money contemplated in the transaction and yet you do not have a trust permit required by Mexican law to be issued by the Ministry of Foreign Affairs in order to establish your beneficiary interest.
- You do not have the escritura publica (public deed) prepared by the public notary inMexico. The notary must be authorized by the trust bank to proceed with the transfer of the beneficiary interest via the public deed and which he must draft to effect the transfer.
- There is no property appraisal prepared, yet that is a requirement under Mexican federal statutes for tax purposes in order for the fideicomiso to be established.
- There is no lien certificate from the public registry that would indicate any liens or encumbrances on the property and is a required element of any real property conveyance.
- The buyer, really doesn't even know if the seller has good title to the real estate in question. Why? Because you have never been presented with a copy of the deed that vests the title to the seller. The public notary, at this point, has yet to begin his required title search of the property. You have received verbal assurances from the seller and the agent that there are "no problems" with the title.
Issues to be aware of:
The sale of real property between Mexican nationals is a fairly simple and expeditious transaction via a compra-venta. They are not concerned nor do they have to be with Mexico's foreign investment laws. This is not the case, however, when they sell to foreign purchasers in the restricted zone. Their attitude is, "Why should I wait for my money just because you have to get a bank trust. That's your problem, just pay me." Secondly, this attitude has been pervasive because some, not all, real estate agents push it and expect it. If the seller receives all of his money, the agent gets paid his commission. Why should the agent be concerned with whether the buyer gets his fideicomiso established once he has received the fee due from the seller? Besides, many agents will tell purchasers nothing can or will go wrong, and that is a fallacy. What if the seller dies before the conveyance? What if there are title defects or undisclosed lawsuits, maritime matters or lien issues? What if an agent, who receives the money via a deposit, doesn't give the seller all that he expects? Then who will execute the deed? What if there are unexpected problems with obtaining a trust permit or notario problems? Or what if the seller has sold the property twice, unknown to you or the agent? The simple truth is you have given the seller your money with little or no chance to get it back other than a lawsuit in Mexico.
How do I protect my real estate investment?
In every real estate deal, buyers have choices. There are many properties for sale in Mexico. Buyers need to be smart and educated about the deal, deposits, title and conveyance matters. Many real estate developers sell their property with a percentage down at the time of the promise to trust agreement, with the balance paid when the public deed can be executed to establish the trust. Many developers, and more and more real estate agents, are utilizing third party escrows in the U.S. to protect foreign buyers. Full disclosure of potential issues is becoming more prevalent. Any property in Mexico can be researched and a title investigation can be done in order to issue an Owner's Policy of Title Insurance. Purchasers can be insured when they release their money to the seller upon execution of the escritura publica and the issuance of thenotario's preventive notice to the public registry of property. At the end of the day, foreign buyers have a right to a transaction process that ultimately protects their investment and minimizes their risk. Those who participate in the sale of real estate in Mexico must strive to protect that which "feeds and prospers them." When they don't, purchasers should walk away and buy elsewhere.