Mexico Real Estate Buyers Guide
You’ve been here for a few days and have absolutely fallen in love with the area. We know how you feel. The same thing happened to me. Many thousands of expats live and thrive in Banderas Bay so your instincts are correct. This is a great place to be and live in. Everything you are familiar with back home is here and then some, plus you get to enjoy the fabulous people, the amazing variety of food and you can daily explore history, indulge in hundreds of activities and live in the wonderful climate.
Now that you have made the decision to purchase a home here, you need to find the right property and location. You can spend days looking on line at property options, asking yourself questions as to where, what and budget, but you need more in depth answers. You need to know the difference between Puerto Vallarta, Nuevo Vallarta, Punta Mita, San Pancho and other great areas, the ins and outs of a house as opposed to a condo. Maybe you would like to buy a lot and build. How do you do that? We have the answers so read on and remember, I am an email or phone call away.
Buying Real Estate in Mexico
It is a common misconception that foreigners cannot own real estate in Mexico, but the reality is that they can. Buying real estate in Mexico is perfectly legal for a foreigner or foreign corporation to acquire any type of real estate, holding the property as a direct owner, with the exception of properties located in the Restricted Zone.
The Mexican Constitution regulates the ownership of land and establishes that “… in a zone of 100 kilometers along the border or 50 kilometers along the coast, a foreigner cannot acquire direct ownership of the land”. These areas are known as the “Restricted Zones” or “Prohibited Zones”.
Nevertheless, the latest Mexican Foreign Investment Law, enacted December 28, 1993, provides a solution. Within the Restricted Zone, a foreigner or foreign corporation can obtain all the rights of ownership with a bank trust, known as a Fideicomiso.
Any foreigner or Mexican National can establish a Fideicomiso (the equivalent of an American beneficial trust) through a Mexican bank to purchase real estate anywhere in Mexico, including the Restricted Zone. For practical reasons, even in unrestricted zones, many foreigners and Mexican nationals prefer to hold their property under a Fideicomiso.To do so, the buyer requests a Mexican bank of his choice to act as a trustee on his behalf. The bank, as a matter of normal course, obtains the permit from the Ministry of Foreign Affairs to acquire the chosen property in trust. The Fideicomiso can be established for a maximum term of 50 years and can be automatically renewed for another 50 year period. During these periods you have the right to transfer the title to any other party, including a member of your family. The bank becomes the Trustee of the property for the exclusive use of the buyer/beneficiary, who has all the benefits of a direct owner, including the possibility of leasing or transferring his rights to the property to a third party.
The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary. Fideicomisos are not held by the trustee as an asset of the bank.
Another alternative is to purchase non-residential property through a Mexican corporation, which under certain conditions can be 100% foreign-owned, with a provision in its by-laws that the foreigners accept being subject to Mexican laws and agree not to invoke the laws of their own country. Also, they agree that the real estate acquired be registered with the Foreign Affairs Ministry and be used for non-residential activities. In other words, under these conditions foreigners can directly acquire properties destined for tourist, commercial and industrial use.
Your Agent
The first piece of advice is to make sure that the real estate agent you choose to work with is fully competent to offer you the best service. At the very least, your agent should be an AMPI Member. The local chapters of AMPI (The Mexican Association of Professional Realtors – affiliated with NAR) are some of the most pro-active in Mexico in terms of membership and on- going training requirements. That said, there is no governmental regulatory body that oversees the legal and ethical operation of real estate agents in Mexico. There is, however, Professional Licensing at the Federal level (CONOCER) for Real Estate. It is another credential you can look for in addition to AMPI membership. So make sure you are comfortable with the agent you are working with because you are going to be depending upon that agent to cover a lot of ground on your behalf through to the closing.
Coldwell Banker La Costa agents, of which I am a part, undergo thorough training on an ongoing basis and must all pass a rigorous exam before they speak to any of our customers. On-going training and coaching is something that every broker and agent receives at Coldwell Banker La Costa on a continual basis.
The next thing you should be looking for is an agency that has been able to successfully sustain itself through thick and thin over the years and has a strong name in the community. Coldwell Banker La Costa was originally founded in 1986 and was the first of over 75 Coldwell Banker offices in Mexico. Locally owned and operated, Coldwell Banker La Costa forms part of the most recognized name in real estate: Coldwell Banker Real Estate Corporation.
The Purchase Agreement
Once you have located your dream property, the first step is to submit an offer. Purchase Agreements used by most Real Estate agencies in Puerto Vallarta have become fairly standardized over the years. They are usually prepared in a double column format – English and Spanish – and run about 12 pages in length. The purchase agreement covers everything that you would normally expect to be in a well written real estate agreement: the parties, the price, deposit and payment terms, due diligence, boilerplate clauses, default and special provisions if any, closing date and signatures.
As in any market, there is a listed price and a price a buyer is willing to offer. So what should you offer on any given property relative to the asking price? It depends on the market and also how realistic the list price is. Your agent should be able to guide you with current market data for real estate trends in Mexico and Vallarta in particular. You want your offer to be treated seriously while not over-bidding. The local AMPI Chapter owns and manages a FLEX MLS system which is capable of generating a series of statistical data to which your agent has access and can share with you.
The Deposit
Once the offer has been accepted, it becomes a ‘bilateral binding agreement’ and there is usually a period of 10 to 14 days within which time the buyer has to make the escrow deposit. Before that can take place, an escrow agreement must be completed and signed by the buyer, seller and escrow agent. The deposit amount generally recommended for the Mexican property market has traditionally been 10% of the final agreed purchase price. Although this percentage is more than what is usually called for in most other North American real estate markets, traditionally in Mexico a large amount of the price should be paid at the contract signing. Usually, the deposit will be refundable until such time as all due diligence items have been satisfied – usually 10 to 14 days, or longer – after which time the deposit becomes non-refundable.
The Escrow
The escrow deposit is managed by independent third party escrow company. The escrow protects all parties in the transaction and avoids the situation where an interested party, agent or other entity is charged with managing the deposit. For what are pretty obvious reasons, this is critical to any properly written real estate agreement in Mexico or anywhere else in the world. These deposits can accrue interest at the option of the parties. In the event of default or disagreement, the wording in the contract will take precedent; failing that or failing the ability of the parties to negotiate the disposition of the deposit between them, the matter will become the subject of a lawsuit – something that happens only in the most remote cases. There is a cost for the escrow which varies with each escrow company in Mexico. Generally, the escrow cost can range anywhere from $700US to $1,000US, depending upon the escrow company. These costs are often considered to be the responsibility of the buyer.
The Due Diligence
The real estate purchase agreement may often call for some points of due diligence – everything from boilerplate items such as copy of the deed and copies of the tax and HOA receipts, to a full engineering inspection. Built into the agreement, all due diligence items must be given a clear time frame and either stipulate methods to repair or provisions for cancellation in the case of catastrophic discoveries. Once the real estate due diligence items have been signed off, the agreement then becomes unconditionally binding for both parties and the closing process can begin.
The Closing Costs
At this point, the agent will provide the buyers, who will be responsible for 100% of the closing costs, as they pertain to the transfer of domain, with a closing cost estimate. It is an estimate because the exchange rate fluctuates in Mexico and it can have an effect not only on the fees and expenses but, more importantly, upon the value of the property which is often ‘sold’ in terms of US Dollars but always registered in Mexican Pesos.
The buyer will be asked to advance about half of the estimated costs to the notary to cover his out-of- pocket expenses, and the balance is usually paid through the escrow account and transferred to the notary at the closing.
The Closing Costs in Mexico consist of various fees and expenses and generally total between 3% to 10% of the actual purchase price (higher if there is a mortgage involved). These costs are always the responsibility of the buyer. (The seller will bear the cost of the real estate fees and his capital gains taxes, as applicable). The closing costs cover all costs associated with the transfer of domain except the cost of the escrow account and the engineer’s inspection.
- Transfer Tax
- Trust Permit and Foreign Investment Registry with Department of Foreign Affairs
- Trustee Bank Acceptance Fee
- Trustee Bank First Year’s Trust Fee (This fee is paid to the Trustee Bank every year on the anniversary date of the closing)
- Appraisal for Future Tax Assessment
- No Lien Certificate
- Preventative Notice Advice
- Registration Fees to Public Registry
- Notario Publico’s Fee
The Closing
There is a saying in Mexico that next to God, the Notaries are the most important people in the country – and there are some that would even debate that! Notaries must pass the Mexican equivalent of the bar exam, they are then required to take two years of extensive study while practicing in a notary’s office following which they are subjected to a 3 day examination program and finally must be appointed by the state to a specific office in a city of which there are only a predetermined number of “notario” offices appointed. This is very different from the concept of a notary in the US or Canada. Notaries in Mexico are the only entities that are recognized by the Commercial and Land Registry and and the taxation authority and they are empowered to collect taxes for all 3 levels of government.
At the appointed time, the buyer, seller and their respective agents will meet to ‘close’ – or as it is known in Mexico, ‘formalize’ the real estate transaction in the notary’s office. One can get a basic idea of the documentation required and the various entities that are needed in order to generate these documents.
Over the past 8 to 10 years, paralegal closing coordinator offices have opened that are typically owned and operated by ex-employees of notary offices. A few of the larger real estate agencies in Puerto Vallarta (such as Coldwell Banker La Costa) also have their own in-house closing coordinators. The closing coordinators have the skill-set needed to prepare all parts of the required documentation and are fluently bi-lingual (which most of the employees of the notary’s offices are not). They perform a lot of the work necessary for the closing on behalf of the notary offices, and they are also able to explain important information and help the real estate buyer and real estate seller, along with their real estate agents, towards an orderly closing. In addition, they review the draft trust deed for approval by the trustee banks.
At the closing, the closing coordinator will also appear at the notary’s office and will usually walk through and translate the 40 page plus trust deed with the buyer and seller, answering any questions, should they so request.
Once the notary has stamped the trust deed, it will immediately be sent together with copies of the Certificate of No Lien and the preventative notice to the escrow company by the notary’s office. The escrow company will also receive a Letter of Disbursements signed by the seller and the buyer setting out exactly to whom and how much is to be wire transferred according to the detailed information set out in the Disbursements Letter. Upon receipt, the escrow company will execute the disbursements and funds are generally received by bank transfer that same day.
While the actual trust deed will not be presented to the Public Registry office for probably several days by the notary, everyone is protected from the possibility of any third party charges from being registered by means of the certificate of no lien and the preventative notice, both of which are generated by the Public Registry office at the same time. The preventative notice issued by the registrar freezes the title for a period of 45 days and is obtained at the same time as the certificate of non-encumbrance showing that the property is free and clear and is generally renewed at some time during the initial 45 day period for another 45 day period giving everyone sufficient time to close and present the trust deed for registration. The actual registration will take between 30 and 90 days and the buyer will be notified by his agent (typically) as to when it can be collected from the notary’s office.
What Did I Buy?
You are now the proud owner of the beneficial rights of a trust, the body of which is the property. Think of a glass of water – the glass represents the trust and the water is the property. You have complete control of the glass. Same thing with a trust – you control it completely. You can sell the property, rent it, gift it or lend it – just so long as whatever it is you are doing with it is legal. You will also be obliged to maintain it and pay property taxes. Property taxes are .08% of the assessed value – which was established when you purchased the property by way of the tax assessment appraisal that was registered with the assessment office (the ‘Catastro’). Property tax rates in Mexico are extremely low as they do not represent a significant source of governmental income and must be held to the lowest common denominator.
The trust has a 50-year lifespan. Unlike a lease, at the end of the 50-year period it will become renewable for a filing fee of approximately $1,000 US. Thereafter it is renewable in the same manner, for subsequent 50 year periods in perpetuity. The bank acts as trustee – most banks in Mexico have trust departments to manage trusts (fideicomisos). They charge an annual trustee fee of about $550US. The trusts in the banks are ‘off balance sheet assets’ in that in the event of a bank closure or dissolution (there has never been a bank failure in Mexico – ever), the trusts are not considered assets of the bank and would be assigned to another bank under the auspices of the Bank of Mexico.
When you sell the real estate, you will become subject to capital gains tax based upon your cost base – in pesos – in your deed, which was or should have been, your actual purchase price at the exchange rate of that day – and, the sale price. The capital gains tax at the present time is 36% of the gain and is subject to certain deductions, one of which is the real estate commission.
As of January of 2014, the government tax authority went digital and you are required to receive a digital factura (receipt) indicating the value you paid for the property. This receipt will come via e-mail with two formats attached, a PDF and an XML document. Generally speaking, only the tax authority will have the software to read the XML document, but this is the one which needs to be safeguarded with your important documents so that it can be presented if and when you decide to sell, to be used as your proof of value for capital gains tax calculation purposes.
It should be noted that there is a process for exemption of capital gains tax. Your agent can provide that information based on the current laws in effect so that you could prepare for the likely event you would want to exempt in the future, keeping in mind these laws change and what might be applicable today may not be at some point in time in the future.
Critical Documents
As mentioned earlier, your registered deed/escritura will be available for pick-up from the Notary’s office approximately 90 days after closing. In addition to the deed you also need to receive the following important documents from the Notary:
•El Boleto de Registro – (the Registration Letter) from the Registrar that confirms that the deed was registered on a specific date at a specific time.
•A factura (tax receipt) in xml digital format (via email or delivered on a thumb drive) showing the actual amount in Mexican Pesos of the registered purchase price.
•A factura also in xml format showing the itemized breakdown of your closing costs. These first two items are particularly important because they are the only documents that will be accepted to evidence your cost base as deductions from future capital gains taxes (36%) upon resale. Failure to be able to produce these digital facturas will mean that the Notary formalizing the eventual sale of your property will only be able to deduct 10% of the sale price.
If you have any doubts or questions, please contact me. I can walk you through any parts of the above process with ease and get you quick and concise answers.