How Foreigners can Own Real Estate in Mexico

1. ALTERNATIVES

It is a common misconception that foreigners cannot own Real Estate in Mexico, in reality It's possible to do so. However, there is a restrictive zone, as described below, and we have to consider the following alternatives:

Outside the Restricted Zone, a foreigner or foreign corporation can acquire any type of real estate as any Mexican National, holding the property as a direct owner complying with Mexican law.

Within the Restricted Zone, a foreigner or foreign corporation may obtain all the rights of ownership but it must be in a bank trust, known as Fideicomiso.
Another alternative is to purchase non-residential property through a Mexican corporation which can be, under certain conditions, 100% foreign-owned, with a provision in its by-laws that the foreigners accept to be subject to Mexican laws and agree not to invoke the laws of their own country.

Also, it is necessary that the real estate acquired be registered with the Foreign Affairs Ministry and is used for non-residential activities. In other words, under , said conditions, foreigners can acquire, directly, properties destined for tourist, commercial and industrial use.

         2. THE RESTRICTED ZONE

The Mexican Constitution regulates the ownership of the land and establishes that'... in a zone of 100 kilometers along the border or 50 kilometers along the coast, a foreigner cannot acquire the direct ownership of the land'. These areas are known as the "Restricted or Prohibited Zones". Nevertheless, the latest Mexican Foreign Investment Law, which became law on December 28, 1993, makes the allowances mentioned above.

3. FIDEICOMISO OR BANK TRUST

Any foreigner or Mexican National can constitute a Fideicomiso (the equivalent to an American beneficial trust) through a Mexican bank in order to purchase real estate anywhere in Mexico, including the Restricted Zone. To do so, the buyer requests a Mexican bank of his/her choice to act as a trustee on his/her 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 legal owner 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 transfering his/her rights to the property to a third party or to a preappointed heir. During this period, the foreigner is considered as a Mexican National.

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.

For practical purposes, even in unrestricted zones many foreigners and Mexican Nationals, for that matter, prefer to hold their property under a Fideicomiso.

The Real Estate Industry

1. STATUS

The real estate industry in Mexico is similar in many ways when compared to that of the United States, which is most probably the most advanced in the world. It is developing quickly taking advantage of today's technology. However, Mexico seems to be paralleling the system as it exists in the U.S.

The only national professional real estate organization in Mexico is the "Asociacion Mexicana de Profesionales Inmobiliarios" or "A.M.P.I." ( Mexican Association of Real Estate Professionals) with 24 chapters in 38 cities.This organization is somewhat similar to the National Association of Realtors (NAR) in the United States.

2. LICENSING

At this time, there are no Government license laws regulating real estate brokerage and sales in Mexico. Anybody can , in effect, offer properties for sale and, therefore, caution should be taken to search out for an established and reputable real estate company. A potential buyer may want to check with the local Chamber of Commerce Associations or prominent law firm.

3. FINANCING

Historically, due to lack of capital markets and high Mexican interest rates, most transactions were made in cash. In 1993 and 1994, the Mexican economy picked up to such an extent that annual inflation went down to one digit and interest rates were more or less accessible.

Banks introduced attractive mortgage programs and, consequently, sales proliferated throughout Mexico. Due to the devaluation in December 1994, the present situation has reverted and the few banks that offer mortgages do so at such high variable interest rates that very few buyers are in a position to take advantage of them.

The future of financing in Mexio is moving towards a secondary mortgage market, which should open up international financing resources to possible desirable mortgages at reasonable rates. For foreign investors, however, this devaluation has created some excellent values for real estate purchases utilizing foreign funds. We expect during the next year or two that outside financing will be brought into Mexico for financing purposes.

4. MULTIPLE LISTING SERVICE

A couple of electronic multiple listing services (MLS) are now operating in Mexico, this service will soon be widely offered with the state of the ad technology, measuring up to the highest standards found in the United States.

5. FRANCHISING

In 1989 "CENTURY 21 Mexico, S. A. de C. V." established in Mexico the first real estate Franchise System wherein "Each CENTURY 21 Office Is Independently Owned and Operated". More than 80 CENTURY 21 franchise offices are now open to the public in more than 38 cities, making it the major real estate network in the country. This multinational corporation has helped to establish performance standards throughout the real estate industry, thereby benefiting the industry itself as well as the consumer. Other American real estate organizations such as ERA, Really World and Re/Max, have also initiated operations in Mexico.

6. ESCROW, TITLE INSURANCE AND HOME INSURANCE

It is the Notario Publico who, in effect, acts as a 'Holding agent" for the involved parties and for this reason there are few escrow companies in Mexico. At the present time there is no general use of title insurance in Mexico, although some American companies are providing coverage in some resorts areas of the country. On the other hand, insurance companies do provide full home coverage - throughout Mexico.

7. SEARCH

To find the required property, be it for lease or for purchase, it is advisable to contact a reputable real estate company or a relocation firm. Otherwise, be prepared to go house hunting by combing the desired areas on the lookout for lease signs or by going through all classified advertisements in the newspapers. Be sure to use brokers benefiting from a MLS System.

Purchase-Sale

1. PROCESS

Most real estate transactions are 'opened" after a written purchase offer is accepted by the seller and when a purchase-sale agreement (promissory contract) is signed by both parties. In most cases, a deposit is required by the broker in order to transmit the offer to the seller. If the transaction is being conducted directly with the seller, it is highly recommended that a real estate broker or a lawyer be consulted before signing any papers or handing over any money. In some areas it is common practice to deliver to the seller, as an advance payment, the equivalent to a 20-50% (including the initial deposit) of the total price upon signing the purchase-sale agreement which should contain a penalty clause applicable in case there is a breach of contract by any of the parties. Normally, when signing the escritura or official deed, which needs to be certified by a Notario Publico or notary public, the balance is paid and the property is delivered. This should not take more than 45 days. In certain resort areas the custom of using "escrows" is being implemented.

2. NOTARIO PUBLICO OR NOTARY PUBLIC

The Notario Publico is a government appointed lawyer who processes and certifies all real estate transactions, including the drawing and review of all real estate closing documents, thus insuring their proper transfer. Furthermore, all powers of attorney, the formation of corporations, wills, official witnessing, etc. are handled and duly registered through the office of the Notario Publico, who is also responsible to the government for the collection of all taxes involved. In connection to real estate transactions, the Notario Publico, upon request, receives the following official documents, which, by law, are required for any transfer:

• A nonlien certificate from the Public Property Registry based on a complete title search.
• A statement from the Treasury or Municipality re arding property assessments, water bills, and other pertinent taxes that might be due.
• An appraisal of the property for tax purposes.

3. CLOSING COSTS

It is common practice that the buyer pays the transfer or acquisition tax as well as all other closing costs including the Notario fees and expenses, and the seller, pays his capital gains tax and the broker's commission.

Since January 1, 1996, the federal law regarding the real estate transfer tax, which was 2% for all the Republic of Mexico, was modified in order to allow each of the Mexican States to determine its own tax. The range may be from I- 4%, of the tax appraisal value, generally less than the sales value.

The rest of the closing costs, which exclude the transfer cost mentioned above, may vary from 3-5% of the appraised tax value or more, depending on the particular State. These percentages are applied to the highest value of the following:

• The amount for which the property is sold.
• The value of the official tax appraisal. * The value designated by the property assessment authorities

4. COST OF THE FIDEICOMISO

Based on a present tariff, the bank charges the person desiring the Fideicomiso an initial fee (approx. $500.00 US) for the drawing up of the agreement and establishment of the trust, plus a percentage according to the value of the property. In addition the bank charges an annual fee (depending on the value of the property) to cover its services as a trustee.

5. REAL ESTATE BROKER'S COMMISSION

Most real estate companies in Mexico charge a 5-7% commission based on the actual sale price of the property. However, different area broker rates reflecting higher broker expenses may be found, such as in the resort areas.

6. CAPITAL GAINS TAX

In Mexico, the concept of capital gains tax does not apply in the sense in which it is determined in the United States. Here, the gain from the sale of the property is considered as normal income at a tax rate of up to 35%. In order to determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:

• The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes.
• Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above.
• Commissions paid to real estate brokers by the seller.
• The closing costs, including all expenses, taxes and fees paid by the seller.

The Notario will retain the calculated gain after deductions forwarding it to the Mexican tax authorities.

The seller will then deduct this amount against his her annual tax return, which becomes an adjustable tax credit in the U.S.

On the other hand, there is no capital gain tax in Mexico if there is conclusive proof the seller has had the property as his primary residence for the previous 2 years.