A Guide for Foreigners Purchasing Property in Mexico

A Guide for Foreigners Purchasing Property in Mexico

Non-Restricted Zone: Foreigners may directly own real property located in the interior of Mexico.

Restricted Zone: Foreigners may not directly own real property located in the Restricted Zone. Instead, foreigners may obtain renewable fifty-year beneficial rights to residential property in the restricted zone through a Mexican bank trust (fideicomiso). The Restricted Zone comprises all property within 50 kilometers (31 miles) from the coast and 100 kilometers (62 miles) from the international land borders.

Commercial: If the property will be used strictly for commercial purposes, foreigners may incorporate a Mexican business entity, which can obtain fee simple title to the commercial property.

Formalities for Purchasing Property in Mexico

Bank Trust: Under a bank trust, a Mexican bank holds the legal title to the property for the benefit of the buyer. The buyer, as beneficiary, has the equivalent of all of the rights of ownership including the ability to use, rent, modify, improve, encumber and sell the property. An additional advantage of a bank trust is the ability to name substitute beneficiaries. Under present law, bank trusts are created for fifty-year terms, renewable indefinitely. Buyers may also assume existing trusts using certain precautions.

Contract: There are no set forms used for purchase offers in Mexico. A purchase offer, once accepted by the seller becomes a contract.

Notaries: A buyer must formalize the purchase before a Mexican Notary Public. Under Mexican law, only Notaries are authorized to prepare and record a property deed. Notaries are attorneys appointed by the state government to specialize in various matters (including real estate transactions). Notaries are also responsible for collecting taxes at closing.

Property Registry: The Public Registry of Property is the central recording entity for all public documentation concerning property. In order to ensure its ownership rights against the seller and third parties, a buyer must record all property transfers at the Public Registry of Property for the jurisdiction in which the property is located. (Timeshare acquisitions are the lone exception to this recording requirement.) Notaries typically handle registration.

Valuation for Taxation Purposes: Buyers must obtain a Mexican appraisal to assist in determining the taxes for closing. The taxes will be based on the greater of the appraisal value or the purchase price. Buyers must not under-report the purchase price to the notary.

Types of Property in Mexico

New Construction: Building a residence is possible by acquiring a construction permit from the local city government (municipio). A builder must obtain title to the parcel of land, obtain a construction permit and hire a building contractor.

Resale Property: Purchasing resale property is possible by acquiring fee simple interest or the beneficiary interest in a trust, depending on the location of the property.

Condominium: Purchasing a condominium is possible by acquiring an interest in a properly recorded condominium regime. A condominium regime is a Mexican legal notary public document that is not legally obtainable until construction is complete. As a word of caution, buyers are commonly asked to make nonrefundable deposits to fund construction. This practice entails significant risk considering that buyers must make a payment without the existence of the condominium regime designed to protect the buyer.

Closing Costs in Mexico

Negotiability of Costs: Closing costs in Mexico are generally more expensive than in the U.S. Sonoran law states that closing costs are the joint responsibility of the buyer and seller, unless otherwise agreed. Consequently, buyers should be aware that payment of closing costs is negotiable.

Buyer’s Costs: Buyers customarily pay the following fees: 1) two percent transfer tax based on the higher of the sale-price or appraised value; 2) appraisal fee; 3) trust bank fees; 4) notary fees; 5) trust permit fees; 6) title insurance premiums; and 7) deed recording fee. Fees for real estate professionals and attorneys should also be taken into account when calculating costs.

Seller’s Costs: Sellers customarily pay the following fees: 1) certification of the absence of liability; 2) certification of the absence of liens; and 3) capital gains tax on the sale. Fees for real estate professionals and attorneys should also be taken into account when calculating costs.

Timing of Payments: Buyers should request an estimate of closing costs before signing any offer to purchase. Most transaction costs must be paid in advance of closing. Pre-closing costs include trust bank fees, trust permit fees, some notary fees, document fees (including certifications of the absence of tax liability and other liens), and appraisal fees. In order to reduce the possibility of paying costs for uninsurable property, buyers should obtain an acceptable title insurance commitment on the property before paying any transaction costs.

Financing Options in Mexico

Bank Financing: Real estate financing in Mexico is difficult to obtain and very expensive when available. As a result, most transactions are handled on a cash-only basis. Qualifying buyers may find U.S. mortgage companies willing to finance 70% of the purchase price for a second home in Mexico. There are also a growing number of Mexican banks willing to finance under certain circumstances. Irrespective of any financing agreement, buyers should require that title to the property (or a beneficiary interest in a trust) be transferred into buyer’s name at the time of closing.

Seller Financing: Sellers may be willing to finance all or part of the purchase price. The buyers, however, should require that title to the property (or beneficiary interest in a trust)be transferred into the buyer’s name at the time of closing. If not, buyers should be aware that all payments made prior to acquiring title transfer run several risks, including the following: risk of liens on the property by the seller subsequent to the purchase; risk of losing to seller’s creditors in case of insolvency or bankruptcy of the seller; risk of potential title defects; risk of multiple sales over the same property; risk of future litigation; risk of not obtaining a good and provable record of payments made and allocation and cost of taxes upon transfer, among others. Buyers should also be aware that title insurance is not available if title is not transferred.

Types of Finance Transfer: Please consult your real estate attorney to review the options on providing security to the buyer and seller in a financed purchase. The most common options are issuance of a mortgage, guaranty title trust or a title retention sale. These three means all require the participation of a Mexican notary public and registry of the resulting document at the corresponding Public Registry of Property.