Published Oct 2006
The summary below has been prepared by Jonathan A. Pikoff, Esq. founder of Pikoff & Associates, a Mexico based law firm. Mr. Pikoff is one of few attorneys with law degrees in both the U.S.A. and Mexico. His practice focuses on real estate development and advising U.S. public and private companies doing business in Mexico. He is fluent in Spanish, and lives in Los Cabos, Mexico, where he has an active law practice. The firm also has offices in Mexico City and Houston, Texas.
What Can An American Buy in Mexico?
The regulations on the sale of real property to foreigners are found in the Mexican Foreign Investment Law. An American (or any foreign national) can acquire land almost anywhere in Mexico with the permission of the Foreign Affairs Ministry. The only exception in the Foreign Investment Law is that foreigners may not acquire directly real property in the "restricted zone".
The restricted zone is the strip of land 100 km from the border and 50 km from the beach. If a foreigner wishes to acquire land in the restricted zone, he or she may enter into a trust agreement with a Mexican bank.
A Mexican company with foreign investment, even 100% foreign investment, may acquire fee simple title in the restricted zone as long as it is not used for strictly residential purposes. If the property is considered to be solely residential, the company must use a trust. The Regulations of the Mexican Foreign Investment Law state that residential real estate is real estate specifically to be used as a dwelling by the owner. The law provides a list of examples of real estate that seems residential, but is not considered as such by the law. According to the law, non-residential real estate includes, but is not limited to:
1. Time Share;
2. Real estate intended for both industrial, commercial or tourist use and residential use;
3. Real estate acquired by credit institutions in payment of debts;
4. Real estate bought by companies to be developed and sold. This would include apartments and residential communities; and
5. Generally, any real estate to be used for commercial, industrial or agricultural purposes, as well as, ranching, fishing, forestry, or to provide services.
The Regulations make clear that this list is not complete and that any questions of whether an activity is residential should be sent to the Foreign Affairs Ministry.
Property Acquisition with Bank Trust
A Foreigner may not hold fee simple title to any land in the restricted zone. To purchase land in the restricted zone, a trust is necessary. In a trust, a Mexican bank holds title to the land while a foreign beneficiary has the right to use, enjoy, or even sell the land, and receive the proceeds. There are two principal steps to forming a trust: obtaining the trust permits and entering into the trust agreement.
To obtain a trust permit from the Ministry of Foreign Affairs, the parties must supply personal data, proof of title, and a description of the intended use for the property. The buyer must additionally agree to be considered as a Mexican with regard to his or her rights. This agreement is known as the "Calvo clause".
There is also a payment the buyer must make to the bank to act as the bank trustee. The standard rate that banks charge for a trust is approximately USD$300 - $1,000 per year. Trusts can be created for up to 50 years and may be renewed.
With the trust permit, the parties are ready to proceed to the transfer of title before the Mexican notary public. The notary needs various documents to transfer the title, including:
1. The previous title documents for the property;
2. A certificate of no tax liability. This certificate is used to prove that there are no outstanding property taxes nor other assessments on the property at the time of the agreement;
3. A certificate of no encumbrances. The certificate of no encumbrance shows that there are no liens on the property; and
4. An appraisal of the property. The commercial value of the property is used to compute property and other taxes.
Before a buyer can actually acquire real estate, he or she must go before a notary. For this reason, it is important to understand the role of the notary in the Mexican legal system.
Unlike American notary publics, all Mexican notaries are licensed attorneys. Notaries are also specially licensed by the state to insure the law is followed in certain transactions. They are held accountable for any transactions in which they are involved and can be held liable for any irregularities in the documents. Because there are few notaries and they are necessary for so many transactions, the notary is a prestigious position.
While the notary is a lawyer, it is not his or her job to advise the parties to a deal of any legal options they may have. As long as a document presented possesses all the legal formalities, it will be notarized and recorded. Notaries charge based upon an agreed table which varies according to the price of the property, but their fee can be in the thousands of dollars.
Most real estate transactions have at least two steps:
The first step in purchasing property is the Promise to Purchase and Sell. The promise is a legally binding expression of the will of the parties to make a contract in the future. Admittedly, "promise" is probably the wrong choice of words, as a valid contract is formed. This agreement is especially convenient in the case of the American who wishes to buy real property through a trust and must wait for the paperwork. At the initiation of activities, the notary will file a notice which will put a temporary freeze on registrations of liens, ensuring the protection of priority to the buyer.
At the time of the Promise, the seller usually demands a deposit from the buyer to take the property off the market. The deposit is usually between 10% and 40% of the purchase price of the property. Mexican real estate custom does not include the use of escrow, which makes it more difficult to recover the deposit if the selling party backs out of the agreement. All the buying party is left with in such a situation is a lawsuit. We frequently recommend the use of escrow through a title company for the buyer's protection.
The second step is closing the transaction. The title to the property is transferred by the Definitive Purchase Sale Agreement. This contract must be in writing and recorded in the local Public Registry of Property. To record this agreement, the parties must go before a Mexican notary public.
Many Americans want to have title insurance on the property as a way to reduce liability. It is not common for Mexicans to possess title insurance, but there do exist companies that supply this, specifically for the benefit of Americans. However, this service is more expensive than the price that is charged in the United States.
The notary also withholds a number of fees and taxes. In addition to the notary fee, the notary withholds the income tax generated from the sale of the property, which is either a percentage of the gain or a percentage of the sales price of the property. Certain costs are most commonly borne by one party or another, but the parties are free to negotiate who will pay each cost. Customarily the buyer pays all transaction expenses, except the income tax owed by the seller. A ballpark idea on closing costs for the buyer can be around 4% - 5% of the purchase price.
In Mexico, inspections are not common, but are recommended in order to avoid future disappointments. Many times, real estate transactions are negotiated which state the sales price as less than the price that was actually paid. This is usually done to avoid or lessen taxes for the seller. Besides being illegal, this is not a good idea. Any taxes avoided at the agreement stage will eventually have to be paid (at a higher rate) as capital gains taxes when the property is resold, unless the new owner continues to give the property an artificially low value.
Ejidos are communal tracts of land, mostly agricultural in nature, which compose a large portion of Mexican real estate. Ejidos are considered to be the property of a whole community, rather than any single person. Members of the ejido (ejidatarios) hold partial title to the land; they can live and work on the land but they may not transfer it to another party. Before 1992, it was impossible for someone who was not an ejidatorio to gain title to this land. The constitutional reforms of 1992 changed this rule and opened up ejido land, allowing it to be converted into private property.
Despite the reforms, buyers should be very careful when purchasing former ejido land as the pitfalls are numerous when transferring land from communal to private title. One should seek legal counsel prior to investing money on an ejido or former ejido property.