It’s time to put an end to the most enduring myths about buying property as an American or a Canadian and if it is even possible to own a condo or home in Mexico.
The Mexican Constitution sets forth the general basis for the acquisition of real estate property within Mexican territory by both Mexicans and foreigners. Pursuant to article 27 of the Constitution, a foreigner is restricted to acquire direct ownership of real estate property within the so-called restricted zone (zona restringida); which is the territory comprised of a strip of land consisting of 100 kilometers along the borders and 50 kilometers along the shores of Mexico (the “Restricted Zone”). Therefore, foreigners with the intention to acquire ownership of real estate property located within the Restricted Zone may do so by means of a real estate restricted zone trust or Mexican corporation.
Real Estate Trust
Kindly note that pursuant to Mexican law, only financial institutions (e.g., banks) have the authorization to act as Trustee (Fiduciario) to a real estate trust. In such case, the bank, acting as trustee, will receive from the settlor (fideicomitente) title to such real estate, which will become the trust’s estate. In this case, the Trustee will grant the beneficiary and owner of the asset (fideicomisario) the right to use and exploit the real estate for residential purposes without granting direct ownership. Pursuant to the applicable law, the real estate held in trust by Mexican Bank is of the exclusive benefit of his/her beneficiary (fideicomisario) in all legal respects. If by any chance the bank acting as Trustee files for bankruptcy the real estate held in such capacity is not considered Bank’s asset and the Government will coordinate the mechanics for another bank to absorb the trust service division by another bank. This has not happened in the past 20 years. However, the beneficiary’s real estate and interest is not at risk in any way due to the fact that direct ownership is held by a third party (Bank).
A beneficiary (fideicomisario) to a real estate restricted zone trust is entitled to, among other things, (a) use the real estate property for residential purposes, (b) sell, lease, mortgage or despise of the property and obtain any revenue or proceed derived from it, and (c) assign and pledge his/her/its beneficiary rights derived from the real estate restricted zone trust. A real estate trust may have one or more beneficiaries, and such may be individuals or foreign LLC. The same real estate trust may hold one or more properties. The real estate restricted zone trust must be formalized before a Mexican Notary Public by means of a public deed (escritura pública) and recorded before the competent Public Registry of Property.
Setting up a real estate trust may cost US$650.00 per real estate approximately. The annual fee is also US$650.00 per real estate approximately.
Real Estate Mexican LLC
It is advisable using real estate restricted zone trust when investor is buying a second home and will not be operated as a business (except operating in AB&B or similar from time to time). Otherwise, it is advisable incorporating and using a Mexican LLC (Sociedad de Reponsabilidad Limitada) as real estate investment vehicle. Foreign investor will incorporate Mexican LLC and fully control it. Mexican LLC operate similar to American or Canadian LLCs, such may have multiple shareholders, foreign individuals and LLCs may act as shareholders to a Mexican LLC. Mexican LLC will acquire direct ownership of the real estate. However, accouting and corporate maintenance of Mexican LLC involve retaining a CPA to file monthly and annual tax returns and corporate attorney to keep up to date corporate books. If purpose of investor is engaging in buying two or more properties, developing and/or operating multiple real estate the best way to structure such investment is through a Mexican LLC. As opposed to real estate trust, Mexican LLC may open USD and Mexican Pesos bank account to operate business. Mexican LLC may be form within 2 weeks however obtaining mandatory taxpayers’ ID may take up to two months. The cost of incorporating a corporation is approximately US$2,000.00 which includes both: attorney’s fees associated to drafting by-laws, power of attorney and filing for and obtaining taxpayers’ ID, among other legal documentation and filings and Notary Public’s fee and taxes associated to incorporating NewCo.
The accounting and corporate maintenance fee for 2 properties with relatively low involvement of CPA and attorney is approximately US$1,200.00.
It should be noted that all real estate transactions in Mexico require the involvement of a Notary Public for all the paperwork and documentation requirements. Mexican notary public has significantly more experience and responsibility than a typical notary public in the United States and thus the two should not be confused their important role in a real estate transaction.
While the process may vary, the general process for a Canadian or US Citizen buying property in Mexico’s “restricted zone” should be:
- Find your dream property (a house or a condo) and make an offer.
- Enter into a Promissory Purchase and Sale Agreement with the seller in order for such to take real estate out of the market. A 5%-10% deposit is usually expected from the buyer for pre-construction, and 40% is the minimum for already built property. The legally binding contract is in Spanish and should be written by a Mexican lawyer. However, convenience English translation is highly advisable to foreigners with not Spanish language skills.
- Send your deposit via wire transfer, along with any other sequential payments as outlined in the terms of the Promissory Agreement.
- Once you have paid the full balance for the real estate and developer finished construction and obtained all mandatory permits, seller and buyer start the procedure in order to set up the real estate trust or the purchase and sale of the real estate (in case of Mexican LLC investment vehicle).
- Closing taxes and fees associated to purchasing real estate are approximately 5% of the purchase price. In Quintana Roo most expensive tax is transfer of domain tax which accounts to 3% out of the purchase price. Such tax rate may vary depending on the state in which the real estate is located.
- The real estate trust or purchase and sale agreement shall be formalized by means of a public deed issued by a local notary public. Buyer shall select the notary public as buyer pays his fees and Notary Public represents buyer’s interest. Notary public will issue a public deed containing the new title to the property (whether real estate trust or direct conveyance of real estate by purchase and sale). Such shall be recorded before the Public Registry of Property which takes approximately 3 – 4 months as of closing date.
Photos: Inku Tulum
Closing Costs
considering the closing costs into your budget. Real estate closing costs in Mexico consist of various fees and expenses. They generally total between 4% to 6% of the purchase price. These costs are always the responsibility of the buyer. The seller, on the other hand, will have to pay other real estate fees and their capital gains taxes.
How to Send Payment
If you’re planning to pay your down payment or full payment from a non-mexican bank account, you’ll want to keep an eye on the exchange rate and associated fees from your bank. Most property is listed in USD, so no matter what, you will have to ask your bank to convert to USD before sending the transfer.
Wire transfers are the gold standard and are sometimes the only available method when sending payments to purchase property in Mexico and are also very secure. If the amount is not greater than $10K USD, we suggest using Wise.com as they consistently offer the best exchange rates and the lowest fees.
Property Purchases in Mexico and Escrows
Escrow accounts are fairly a new thing in Mexico, adopted from the US and Canada. This really depends on the seller. If a seller does not wish to set up the escrow, but the buyer requests it, then many times the buyer is responsible for the escrow setup fees ($600-$800 USD). Escrow is commonly used when it is a real estate direct sale by owner of a property. Escrows are not common in pre-construction or pre-sale properties.
To sum it up, don’t be afraid if a seller or developer doesn’t offer escrow. A lot of Americans or Canadians that are in Mexico will tell you “Don’t buy unless there’s escrow!”, and that’s good general advice, but it is still a new thing in Mexico, and until it is more widely adopted you won’t see it very often. So, if you find your dream property and they don’t offer escrow, it’s not a deal-breaker. There are other ways to make sure your purchase is safe.
Photos: Deelum x Hudgins Design Group’s new luxury estate in Tulum
Mexico & MLS
There is an MLS system in Mexico, but it does not have all available listings like Zillow or Realtor.com in your home country. A lot of sellers or developers don’t want to put up their property on MLS because to do so would require a realtor, and in the Banderas Bay area realtors take 8% of the sale, which is double the amount that you would see in the rest of Mexico. So most of the time developers will hire an internal sales team because it’s cheaper for them and they can keep all communication in one place.
If a property is not listed on MLS, it’s not a red flag. MLS is relatively new in Mexico, and since hiring a realtor is so expensive in the Puerto Vallarta area, many sellers here opt not to list their place with a realtor. And if they do, they’ll raise the price to make up for that expense! However, there is something to be said for a seller that is willing to list the property with a broker/realtor and eat that cost – it could show that they are serious about the sale and is a sign that everything is in order to sell. It could also show that they were never able to sell the property on their own, and there could be an underlying reason for that. We wouldn’t generalize that all direct-sale-by-owner deals are not serious or legit though, it’s just something to think about. There’s always so much to think about!
Should You Hire Your Own Lawyer?
Notary Public in Mexico is an experienced lawyer who has been licensed by the State. However, investors shall retain a local attorney to carry out due diligence over the property and seller, structure, negotiate and draft Promissory Agreement and Definitive Purchase and Sale Agreement, respectively. The Notary Public and attorney will work together in order to protect your interest. Nevertheless, each of them undertakes certain tasks during setting up or incorporating real estate investment vehicle and purchasing such real estate.
AMPI – certified real estate agents – have boilerplate contracts and those contracts are what everyone uses or bases their contracts on. However, most of the time such agreements are not carefully tailored according to your needs.
So, What Will a Lawyer Do? Always Hire a Lawyer.
A lawyer is your representation. Your lawyer will deal with the following processes on your behalf:
- Structure, negotiate, draft/review and provide comments to the Promissory Agreement.
- Structure, negotiate, draft/review and provide comments to the Escrow Agreement.
- Carry-out due diligence which includes, inter alia: legal research of all public records to find-out the legal status of the real estate held by competent Public Registry of Property; Cadaster Office; Urban Development Office, Judicial Records held by competent Courthouse, among others. Also reviewing and making sure is in good standing relevant documentation of the real estate, such as, the title to the property, entitlements, zoning authorizations, and any other relevant information in connection with the real estate. Additionally, reviewing corporate information of the seller (including legal investigation of judicial records to find out claims or lawsuits vs. developer, if any, before the local Courthouse and Consumers’ Protection Agency) and the public deed containing the power-of-attorney of its legal representative to confirm his/her capacity and authority.
- Prepare an English Due Diligence Report by means of which legal counsel renders legal opinion regarding the legal status of the real estate, seller and any additional relevant information.
- Filing for and obtaining for all permits necessary for you to own the property with the notary.
- Assisting investor in selecting investment vehicle and in setting up whether real estate trust or Mexican LLC.
- Coordinate with the bank, notary public and competent authorities to create whether the real estate trust or Mexican LLC.
- Assist and represent investor in the closing of the property.
- Structure tax strategies in the event of a sale to mitigate taxes.
Do not expect your lawyer from back home to represent you during a real estate transaction in Mexico since only a licensed Mexican attorney can provide advice on Mexican law.
As you can see, a notary and lawyer work hand in hand. But if you feel savvy enough with contract law, then you might be able to manage on your own. Most real estate agents can take a peek at it too – they see a lot of contracts and know a thing or two.
We at Deelum has a list of more than qualified attorneys we just email us at info@deelum.com