This article is from the The Mexico File newsletter.
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Bienes Raices, Buying Into God's Little Hectare
by jennifer j rose
jenniferi rose practices law in Shenandoah, Iowa and is a foreign legal consultant in Morelia Michoacan. She made her first Mexican real property purchase in 1989. This article is general in scope and should not he considered legal advice.
Enjoying the Mexican beachfront or colonial hillside town, you've decided to put down roots in Mexico and "save money" by buying in. Think twice: you may make the deal of a lifetime, or you wish you'd never become involved. Invest a significant amount of time before investing in Mexican real estate. Get to know the terrain, its problems and advantages. Work hard to understand the area, the people and the real estate values. Get the assistance of someone who speaks and reads Spanish fluently so that you don't miss legal nuances and idioms. Even though you may have bought and sold real estate in the United States, the Mexican experience is a totally new experience. You're not in Kansas anymore, Toto.
Under the Mexican Constitution, only Mexicans have the right to own land or receive mineral or water rights. Foreigners have the right to own real property, provided they do not invoke the protection of their goverrinient. That sounds reasonable enough, doesn't it? All this means is that any dispute concerning land ownership will be decided by Mexican courts, treating foreign landowners the same as Mexican nationals. Foreigners have no legal recourse in the legal system of their homelands. This is done to prevent the historic recurrence, prevalent in Latin America in the past 200 years, of a capital-exporting country meddling in the sovereign affairs of another nation to protect a private patty's economic interests.
Foreigners are prohibited from directly owning real estate within the "Forbidden Zones" of 100 kilometers of the Mexican border and 50 kilometers of its coasts. Within these restricted areas, foreign ownership is possible under afideicomiso, or bank trust.
Under the fideicomiso (pronounced Fee-deh-com-ee-so), a Mexican bank trust is created for a period of 50 years, and the trust may be extended for another like period. Legal title to the property is held by the bank, as trustee, and beneficial use is held by the property buyer. Even in nonrestricted areas, the fideicomiso may be used by foreigner landowners and Mexicans alike for the sarne reasons that trusts are created in this country. Under the fideicomiso, multiple or successor owners can be named. The costs of establishing the fideicomiso are not great: an initial set-up cost is based upon a percentage of the property value, and annual trustee fee is charged.
While zoning restrictions may not be apparent in commercial and residential neighborhoods, certain areas may have building codes to preserve colonial flavor. For instance, downtown Morelia has enforced a historical building preservation code for the past hundred years.
Private land ownership may be barred in forested areas, natural protected areas, reserves, biospheres and other environmentally protected areas. That beautifril isolated mountaintop or bucolic site may be out of reach for the same reasons that it's just real difficult to buy a chunk of the Grand Canyon or Central Park.
Historical antecedents have limited large landholdings in agricultural areas. Size, irrigation, and productivity limit the amount of farm land which can be owned by a single entity. Presumably, you're not planning to farm in Mexico, anyway. If you're really determined to do so, there are ways to accomplish this goal, but you'll need more legal advice than we can give you here.
The 1910 Mexican Revolution was rooted in unequal land distribution: 1% of the Mexican population controlled 97% of the land. In response, the government expropriated large landholdings, outlawed latijundios, and created communal lands, or ejidos, occupied by rural peasants or farmers. This concept dates back to Mayan times. Some seventy years after the enactment of the 1917 Mexican Constitution, these small plots of land became less productive and unable to compete in the market economy. In 1992, the Constitution was amended to loosen the tightly controlled ejido system, make it more productive, and to provide ejido members with greater access to capital. The new law allowed some ejido lands to be rented out or sold under certain restrictions. In Mexico, anyone can offer real estate for sale. There are no license laws regulating real estate brokerage and sales.. all the more reason to exercise caution to search out a reputable and established real estate company. Coinmissions are usually about 7% of the actual sales price, although they may be higher in resort areas.
Now that you've found your dream property, how are you going to pay for it? Forget about financing.. unless you plan to finance a stateside property to pay for your Mexican dream. Lack of capital markets and high interest rates force most foreign-purchased real estate purchases to be made in that quaint tender, cash. As the Mexican economy opens, new sources of financing may become available, but high mortgage interest rates will make the worst of American interest rates pale in comparison and will not create the traditional 20- or 30-year mortgages Americans have considered the norm.
Unlike stateside real estate transactions, closing costs borne by the buyer are considerably greater in Mexico. Customarily, the buyer pays 1) the transfer tax, which is 2-6% of the appraised value of the land, 2) notano's fees, usually 2-3% of the appraised value. The appraised value used for deed (escritura) purposes is often much lower than the actual sales price. The notano, a special breed of lawyer who has been delegated quasi-judicial functions and acts much like public recorder, performs what amounts to a title search, obtains "no lien" certificates, secures an official appraisal, verifies that there are no unpaid taxes or water bills which could cloud title, drafts the deed. All real estate transactions must involve a notano, who has virtually no relation to the American notary public.
The seller pays any capital gains tax and the agent's commission.
Real estate prices may be established in dollars. Don't feel that you're being gouged as an unsuspecting American; it's common practice in devalutionary times. Payment may be made by wiring frinds from a U.S. bank to a Mexican correspondent bank in the U.S. or to a casa de canibio.
Like many transactions in Mexico, closing may not proceed as rapidly as in the U.S. One transaction I was involved in took two years from acceptance of offer until possession: the owner had died intestate, and 42 heirs had to agree to the sale.
Because telephone lines are purchased by each customer, the buyer will need to determine whether phone service is included in the real estate purchase. Light fixtures and garden statuary which generally stay with the property in the U.S. are often not part of the real estate purchase in Mexico. Find out what's included and what's not to avoid surprises when you take possession.
Because Mexican landlord-tenant laws, which vary from state to state, are tenant-oriented, making eviction extremely difficult and costly, most leases tend to be written to protect the landlord. In some areas, Mexican landlords prefer to rent to foreigners not so much for higher rental income as for the foreigner's ignorance of landlord-tenant laws.
While locales can differ significantly, normal rental values are 1% per month of the property value. A $200,000 property would likely rent for $2,000 per month. One-year contracts are coninion, with one-and three-year renewal options with predetermined rate increase formulas. Normally, a cosigner is required, and a one or two month rental deposit can be applied to the last month's rent. The tenant usually pays for utilities, water, gas, telephone, cable TV, and condominium maintenance fees.
In resort areas, time share hawkers are rampant. Beware of the high risks involved, because Mexican law provides very little legal protection to the timeshare owner. If you absolutely must invest in a timeshare, do so with full warning and preferably with a stateside company. And be warned that the resale market is extremely poor.
Competent legal counsel (your own, not the seller's or the real estate broker's) is mandatory. Just as you'd carefully watch your backside making your first real estate deal at home, don't let your guard down in Mexico. Fully warned, go ahead and reap the pleasure of Mexican property ownership. While your upfront costs may be higher than you contemplated, you'll benefit from significantly lower property taxes and utility bills. And you'll feel like a real part of Mexico as a property owner.