Real Estate in Mexico: Rules of the game
All too often, citizens of the United States, Canada and other countries assume that property purchases in Mexico are carried out automatically in a manner similar to their native countries. The first rule of any property purchase in Mexico is, NEVER ASSUME ANYTHING! Purchasing property in Mexico is not the same as in other parts of the world.
Would you purchase property in your hometown, which is not registered in the local public registry, or land title office? Would you hand a complete stranger, without an office or established business, a check for perhaps hundreds of thousands of dollars to pay for a property? The obvious answer to these questions is, OF COURSE NOT.
Then why do so many foreigners do this very thing when they purchase property in Mexico? Many do not take the time to investigate how Mexico’s real estate transactions function and how the supporting legal system has responded to that industry’s needs. It is essential that you have an idea of how this system works and what to expect when considering an investment in Mexico.
MEXICO REAL ESTATE LAW AND HOW IT RELATESTO FOREIGN INVESTMENT
Article 27 of the Mexican Constitution regulates the ownership of its territory by establishing that “….in a zone of 100 km. (62 miles) along any border or 50 km. (31 miles) along the coast, foreign entities cannot acquire direct ownership of the land and waters”. Until recently, foreign investors were allowed ownership of real-estate only outside of the “Restricted Zone”.
Recognizing the demand by foreign interests for ownership of real property, and the importance of making these desirable properties available to foreigners for the potential positive impact on the economy, the Mexican government implemented a series of Foreign Investment Laws begun in 1973, Modified in 1989 and modified again in December of 1993 to incorporate the provisions of the NAFTA treaty.
Creation of the Land Trust (FIDEICOMISO)
For those who wish to acquire property for residential usage, and who have a valid entry visa, current law requires that title to the property be transferred to a Mexican bank, as trustee, in the establishment of an individual land trust. The bank handles all of the paperwork including filing for all of the necessary permits with the Ministries of the Interior and Foreign Affairs. In general, the bank has the responsibility to the government to ensure precise fulfillment of the Trust agreement, assuming full technical, legal, and administrative supervision in protecting the interests of the beneficiary (purchaser).
The bank owns the real property rights, and the beneficiary owns the personal rights to use, rent, modify or transfer his rights to a third party. Ownership of these personal rights is evidenced through a deed prepared by a Mexican Notary, signed by the representative of the trustee bank and duly registered with local authorities.
The Foreign Investment Law of 1989 stipulates a term of 50 years for the Trust with opportunity for multiple renewals, upon filing an application with the bank. By requesting renewals every 50 years, a property may be held by a family or business entity for generations.Since by law Mexican banks enjoy government protection against bankruptcy, the Trust is indirectly guaranteed by the government. As a practical matter, even in unrestricted zones many foreigners prefer to hold their property in Trust.
NEVER ASSUME ANYTHING
A good understanding of the Trust issue can provide a second protection mechanism to the foreign buyer. In certain instances, the property to be purchased is located in a subdivision marketed to foreigners, for which the developer has an umbrella or Master Trust with a Mexican bank for the combined properties of the development. Many foreign investors believe it is beneficial to remain in the Master Trust, hoping to derive protection through the developer’s influence in the industry and locally. We recommend the placement of the property in an Individual Trust for which the buyer is alone responsible. This “fresh” legal basis avoids any legal or financial complications in the event the developing company declares bankruptcy or is dissolved, and allows the buyer complete freedom to advance his property’s interest.
Remember, almost anybody can offer property for sale: abuses and misrepresentations are common. Mexico’s real estate industry is underdeveloped, with few licensing laws regulating real estate brokerage and sales. Again, it is always wise to remember, NEVER ASSUME ANYTHING!
PROTECTION OF THE PURCHASERS INTEREST
All real estate transactions are processed through the office of a “Notario”, a qualified government appointed lawyer who acts on behalf of the government to ensure the proper transfer of all real estate transactions. Among this official’s many important duties is registry with the appropriate government agencies of the deed for transfer of rights of the beneficiary. This is the single most important step in protecting a foreigners investment in Mexico, since it remains the ultimate proof if ownership if a property ever becomes a question.
The purchase/sale document, which includes either deed of rights, or transfer of rights of beneficiary in a property, is generally valid between the parties to a transaction. It most likely contains a description of the property, price to be paid to the seller and any special terms or conditions of the sale. 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.
Until the buyer is formally named as a beneficiary in a public document before a Mexican Notary, title to the rights in the property remain with the last legally registered owner, which would be the seller. While the seller holds title to the property it is his asset; he may mortgage it or sell it again; it may be attached in satisfaction of a judgment; he may die without a will. In such a situation, there may not be any remedy for the purchaser who neglected to correctly register his deed – his interest, his investment may be lost.
To ensure proper registry of the property, an official appraisal of the property, notarized bank instructions, a property tax certificate, and no-liens certificate must be obtained. Sellers Capital Gains Tax and Buyer’s Acquisition Tax must be paid and the deed transferring rights to the buyer must be registered and stamped by both the tax office (Treasury) and the Public Registry. If this process is not completed the buyer is not fully protected.