Guide to Buying Property in Mexico - Resendiz Wong Abogados SC

Introduction

Buying property in Mexico is not as overwhelming a task as it is often perceived to be, however, there are some things any foreign citizen interested in buying property in Mexico should be aware of before entering into negotiations for an investment property or second home there. Within this guide we will hopefully answer many of the questions you currently hold regarding what it takes for a foreign citizen to buy property in Mexico, as well as point out some answers to questions you didn’t even know you had. One of the more valuable sections of the guide, “Pitfalls to be Avoided When Buying Property in Mexico”, for example, could potentially save you a small fortune by pointing out costly errors that foreign citizens often make when purchasing real estate in Mexico.

We hope you find our “Guide to Buying Property in Mexico” useful in your search for answers on how to go about purchasing real estate or commercial property in Mexico, but please do not consider the information contained in this guide as comprehensive to the subject, but instead as a general overview of some of the more important facts to consider before you begin prospecting for your dream home in Mexico. In the end there is no substitute for the personalized professional advice you will receive from an experienced real estate attorney in Mexico.

Buying Property in Mexico

Originally, in accordance with Article 27, Section I of the Constitution of 1917 (“Mexican Constitution”), foreign citizens were prohibited from purchasing real estate in Mexico1. Constitutional amendments made in 1993, which dealt specifically with the issue of foreign citizens buying property in Mexico, dramatically changed previous rulings and opened up Mexican real estate to foreign investment. Since that time, Americans and other foreign citizens have been legally permitted to obtain full ownership, through fee simple title2, of Mexican real estate when the Mexican property in question is located outside of the Restricted Zone (zona restringida)3. In cases where the Mexican property being prospected by a potential private foreign buyer is located within the restricted zone, which is where Mexican real estate is most often sought, private foreign citizens are permitted to acquire use and limited exploitation rights4 on the Mexican property through the establishment of a land trust (fideicomiso)5, with a local bank, but they are not under any circumstances permitted to obtain direct ownership of the property through having the deed registered in their own name.

The property deed must be registered under a local bank of the foreign citizen’s selection, and a land trust, much like those established on behalf of minors too young to obtain direct ownership of property in the U.S., must be set up between the foreign citizen and the bank with which the property deed will be registered. By law, land trusts established on the behalf of a foreign citizen, are granted for an initial term of fifty (50) years, which can later be renewed for another fifty (50) year term. Once the Mexican property has been purchased and the trust has been established, the foreign buyer, being trust beneficiary, will have full exploitation rights to the property while the bank holds the title. The trust beneficiary is thus entitled to use and enjoy the property however he or she may desire for purposes which constitute dwelling purposes. If the foreigner wishes at any time to sell the property that is being held in trust, they may do so at any time they deem necessary, and for as high a price somebody is willing to pay for it. With the exception that the deed to the property can never be registered in their own name, the Mexican real estate is theirs to use however they wish for private dwelling purposes (e.g. vacations, seasonal living, as a primary or secondary home etc.).

Many foreign citizens find this irregularity a bit confusing, and understandably so. If the property deed is not under their name, they ask, wouldn’t it be financially unsavvy to invest large amounts of money into developing it? The answer, quite simply, is no. When it comes to selling a property located within the restricted zone, selling the rights to the property via the land trust is not really any different than selling fee simple title to a property somewhere else. You are free to terminate the land trust and sell the property whenever you wish, and for as high a price somebody is willing to pay for it.

There exist two very distinct processes for foreigners to use to buy property in Mexico which is located in the restricted zone. The first, which we discuss above, is through the establishment of a land trust with a local bank. This is the process used by private foreign citizens that desire to purchase property within the restricted zone for the intent to use for dwelling purposes, (e.g. vacations, seasonal living, as a primary or secondary home etc.). The second process through which a foreign entity may purchase Mexican real estate in the restricted zone is through the Mexican corporation regime.

In consideration of Mexican corporations with foreign capital, the Foreign Investment Act (“FIA”) and the Regulation for the Foreign Investment Act (“RFIA”), provide a legal window that allows such corporations to purchase property within the restricted zone (zona restringida) and to have fee simple ownership rights to it, provided that the property purchased is used for commercial purposes (e.g. time share, leasing, hotels, etc.), as per Section 10 of the FIA and Section 5 of the RFIA allow. To maintain ownership, a notice of purchase must be filed annually with the Ministry of Foreign Affairs (“MFA”). Should it later be found that a property owned by a Mexican company with foreign capital is being used for dwelling purposes and not commercial purposes as agreed, such company would forfeit its rights to direct fee simple ownership of the property. The company would then have the option to establish a land trust with a local bank in the same manner as a private foreign citizen would, for full exploitation rights of the property for the once renewable fifty (50) year term, with the exception that those full exploitation rights shall not include the right to use the property for commercial purposes.

When purchasing real estate in Mexico which is located within the restricted zone, it is recommended that private foreign citizens and or Mexican companies with foreign capital solicit the council of a real estate attorney in Mexico. Both foreign individuals and Mexican companies with foreign capital may legally perform all of the functions involved in the transaction of real estate in Mexico without legal council from a Mexican real estate attorney, however, we strongly recommend the use of either a law firm which specializes in real estate law or a private practice real estate attorney in Mexico. This is important because there are many procedures and legal requirements in the purchasing process that if over looked, could potentially lead to dire financial and legal consequences in the future. A Mexican real estate attorney can isolate these contingencies before they present themselves, potentially saving you or your company an incredible amount of time, money and effort.

A real estate attorney in Mexico will utilize either of the two legal vehicles discussed in this section to accord you the ability to purchase property in Mexico which is located in the restricted zone. For purposes of better understanding these different ways to purchase property in Mexico included in the restricted zone, below we explain in more precise detail both the land trust and the Mexican corporation regime, as follows:

A. Land Trusts (fideicomisos)
As mentioned, private foreign citizens are prohibited from registering property located within the restricted zone in their own name. If a private foreign citizen wishes to purchase property located within the restricted zone (zona restringida) they must establish a land trust (fideicomiso) with a local bank in which the bank agrees to register the deed under its’ name and hold it on behalf of the foreign citizen for a legally statutory fifty (50) year term, which can be renewed for another fifty (50) years. Through this legal process, established in Mexican Law in 1993, private foreign citizens are legally permitted to purchase Mexican real estate property located in the restricted zone, but are never under any circumstance permitted to obtain full ownership rights (fee simple title) of such property by having the deed registered in their own name.After the property has been purchased and the trust established, foreign citizens will then have full exploitation rights to the Mexican property, granting them the power to use and abuse the Mexican real estate as they see fit. Most private foreign buyers then develop the land for private use by constructing a home to use for vacations, seasonal living or as a secondary home. Any added value to the property by such construction shall be reflected in its’ final market value.

In the case the private foreign citizen is interested in utilizing the Mexican real estate property for commercial purposes see Section 1, Part B immediately below.

B. Incorporating in Mexico
When a foreign citizen wishes to purchase real estate in Mexico which is located in the restricted zone, with which they intend to develop for commercial purposes (i.e. develop hotels, time-shares, condos or homes to sell for profit, etc.) the foreign citizen must first establish a corporation in Mexico; if they have not already done so. After incorporation the company must apply to the Ministry of Foreign Affairs (“MFA”) for the rights to the fee simple title of the Mexican real estate under consideration. Once the property has been purchased and MFA has approved the company for fee simple title, the company will have full ownership rights and the ability to develop the property commercially. This legal window which grants foreign citizens the power to purchase property located within the restricted zone is specified by the Foreign Investment Act (FIA) and the Regulation for the Foreign Investment Act (RFIA) as per Section 10 of the FIA and Section 5 of the RFIA, Mexican companies with foreign capital are allowed to purchase and obtain full ownership rights of a property within the Restricted Zone provided that the property is to be used for commercial purposes.If you intend on using your Mexican real estate property solely for dwelling purposes (e.g. vacations, seasonal living, as a primary or secondary home, etc.), and you do not have any intention to create annual profit with your Mexican property through commercial purposes, (e.g. time share, renting, leasing, hotels, etc.) please refer to Section 1, Part A.

Inland and Beachfront Property in Mexico

The reasons for buying inland or beachfront property in Mexico are as numerous and diverse as the thousands of foreign citizens who take the leap each and every year. For many, purchasing real estate in Mexico is a chance to finally achieve the dream of building a second home to escape to during the frigid winter months of Northern U.S., Canada and Europe. For others, buying property in Mexico is more an investment opportunity, in which they enjoy for the holidays and vacations and then rent it out for profit throughout the year while not in use. Still yet, for others, purchasing real estate in Mexico is the perfect opportunity to secure that retirement home in paradise where they can spend their golden years enjoying a nearly perfect climate, world class golf courses and restaurants, and some of the most hospitable and friendly neighbors on the planet.

Just as is the case in most other places throughout the world, Mexican property values increase from year to year, but they have not rose at as significant a rate as those in the U.S. and Europe. Also as is the same with real estate properties in the U.S. and Europe, beachfront property in Mexico is considerably more valuable than properties located further inland. Still though, when compared to beachfront and ocean view property values in Malibu or Monaco, Mexican property along the coastline still comes at quite a bargain, but that may not always be the case.

Considering that foreign citizens have only been permitted to legally purchase and develop beachfront property in Mexico since the Constitutional reforms of 1992, the era of opportunity for investing in beachfront property in Mexico, while still young, will not last forever. It is no question that some of the most beautiful beaches in the world are located along the 9,330 km of Mexican coastline, but as can be expected, the most select beachfront property in Mexico with the most incredible views and convenient locations (proximity to international airports, public utilities and entertainment attractions), are going to be the first to go. In other words, if you are considering investing in beachfront property in Mexico, there is not going to be a better time to do so than today.

Parties Involved When Buying Property in Mexico

There are four different parties normally involved in a Mexican real estate transaction involving a foreign buyer who is a private individual when such Mexican property is located within the restricted zone: a Mexican real estate agent, a Mexican real estate attorney, a Public Notary as well as a local bank. In cases where the Mexican property being considered is located outside of the restricted zone, a bank will not be necessary because the establishment of a trust will not be required. The roles of each person or entity involved in assisting a foreign citizen in buying property in Mexico located within the restricted zone, this includes all beachfront property in Mexico, are as follows:

A. Mexican Real Estate Agent
As is the case in most fields, utilizing the services of a professional, should ultimately pay for itself in the long run. When buying property in Mexico, this assumption holds true as well more often than not. Good Mexican real estate agents pay for themselves two times over by assisting buyers in several stages of the purchasing transaction. First of all, they help buyers find the Mexican property which is perfect for their preferences and budget. In Mexico it is often the case that the availability of a property is spread by word of mouth, and some of the hidden gems may only be found with the assistance of a seasoned and reputable agent. Some of the reasoning for this is that many neighborhoods (colonias) in Mexico are gated and entrance to them is strictly regulated. Often times, without the presence of a local real estate agent, potential buyers are prohibited from entering such communities to view the homes for sale within.Even if you are able to obtain entry to a gated colonia, the homes themselves are often surrounded by high walls, obscuring your view of many homes and their beautiful gardens, (these high walls are notably less common in tourist areas such as Cabo San Lucas, Cancun and Puerto Vallarta). After you have found a Mexican property in which you are interested in, your agent can investigate the buy/sell history of the property you are considering and similar homes in the area. This will help you to uncover the true value of the Mexican real estate property and whether or not the seller is sitting on a “cold property” in which they paid far too much for. Uncovering whether the seller is in a hurry to sell or is patiently waiting for their asking price, is another way a good Mexican real estate agent can help you save money, by giving you more bargaining power in the price negotiation.

Many Mexican real estate companies either have their own attorneys on staff or maintain associations with local attorneys of their choice. Attorneys working for the Mexican real estate company are not the most reliable selection for foreign buyers unaware of some potential contingencies which could arise down the road, several years after purchasing real estate in Mexico, as a result of a poorly performed ground investigation of the property. They are ultimately pursuing the best interests of the realtor or realty company, not those of the buyer.

It is common practice for Mexican real estate agents to “include” the legal fees in their commission, but just remember that in life nothing is free and realize that you are paying for that attorney’s fees one way or the other. It is recommended that you find an attorney or firm which specializes in real estate law or a private practice real estate attorney in Mexico, so that you can be assured that nothing is being overlooked which could come and bite you years down the road. To help make the process less intimidating, it is also recommended that you find an attorney fluent in your native language as well, if you have yet to perfect your Spanish that is.

B. Mexican Real Estate Attorney
As implied in the preceding section, an experienced Mexican real estate attorney is an essential member to the team of professionals required of a foreign national buying property in Mexico. Throughout the process of purchasing real estate in Mexico, your real estate attorney in Mexico shall be responsible for the drafting of contracts, assessment of the legal standing of the property, investigating the ground history of the seller, and for the review of the various terms involved in the sale of the Mexican property being considered, all of which may help you avoid any possible legal contingencies which could arise if something is overlooked.Besides offering his professional expertise and advice in these matters, your real estate attorney in Mexico can be very helpful in saving you money as well. Mexican real estate attorneys work with the various governmental departments and private entities involved in real estate transactions in Mexico on nearly a daily basis. Because of this they often develop close relations with a number of important contacts within banks, notaries and the Mexican government offices. At the very least, these connections help keep attorneys that specialize in this area of law updated on the most competitive rates and fees implicated in real estate transactions in Mexico, information which helps them make sure the buyers they represent are given the best possible prices.

With an experienced Mexican real estate attorney, buying property in Mexico can be a simple, nearly worry-free process. However, attempting to navigate the process without a Mexican real estate attorney, or simply an inexperienced on, could turn what had always been a dream into a nightmare. As is often the case, it could take years for any discrepancies left lingering by an improper handling of the property rights transfer to come to surface. Many of the potential legal contingencies which could develop ultimately spell headache and heartache for the foreign buyer. There are several common pitfalls made buy first time buyers and inexperienced Mexican real estate attorneys during the purchasing process, which an experienced real estate attorney in Mexico knows exactly how to avoid. For more information on the most common pitfalls made when purchasing property in Mexico, please refer to Section 4.

C. Notary Public
The Notary Public plays a vital role in the process involved in buying property in Mexico. The job responsibilities of a Notary Public in a Civil Law system such as in Mexico and those of a public notary in an English Law system such as in the U.S., are as different as night and day. In the U.S. a public notary is an officer who can administer oaths and statutory declarations, witness and authenticate documents and perform certain other acts varying from jurisdiction to jurisdiction. With the exception to public notaries in the State of Louisiana, the roles and powers of a public notary in the U.S. are significantly more limited than those of their counterparts in Mexico.In Mexico, the position of Notary Public is directly appointed by the State Governor, the highest ranking public office at the state level. The Notary Public has the absolute power to witness and certify important documents such as property deeds or business documents which require absolute authenticity. The appointee of Notary Public in Mexico also holds the responsibility for the management and secure storage of original public records. Under Mexican Law, when buying property in Mexico, the deed of the property must be prepared by a Notary Public. It is extremely important that all important documents involved in buying property in Mexico are verified through a Notary Public. A good Mexican real estate attorney has plenty of experience directing this process, which should help expedite the filing and authenticating proceedings for the paperwork and documents required when purchasing real estate in Mexico.

If you are confused about where the responsibilities of the Notary Public end and those of your real estate attorney in Mexico begin, be sure to ask for clarification from your Mexican real estate attorney.

D. Bank
As we have already mentioned, when purchasing real estate in Mexico which is located within the restricted zone, a foreign citizen must set up a land trust with a Mexican bank. Trust agreement (escritura) set-up fees with the bank can range from $2000-$3000 and annual service charges can run anywhere from $500-$1000.It is very important that your Mexican real estate attorney carefully review this trust agreement (escritura) before agreeing to its terms. Many foreigners unknowingly sign over the rights for banks to unilaterally raise the annual service charges as they deem necessary. The only way to escape from these increased rates once agreed to is to transfer the trust to another bank. This involves another round of set-up fees and taxes that are best avoided.

In most cases your real estate attorney in Mexico should be aware of which banks in the area offer the best rates and which ones have a tendency to sneak a clause into the trust agreement which grant them the power to raise rates over time. Utilizing your Mexican real estate attorney in this manner will save you the time from having to shop around from bank to bank to find the best rate.

Pitfalls to be Avoided When Buying Property in Mexico

When buying property in Mexico one must be very careful to avoid some of the commonly made mistakes which often lead to stringent fees and penalties and possibly even the confiscation of the property itself, including everything which has been constructed upon it since purchased. Immediately below you will find a brief explanation of some of the most commonly made mistakes that can be avoided if an experienced real estate attorney is leading your purchase transaction.

It is not our intention that you take any of the information included below or previously mentioned in this document as direct legal council from our firm. We are merely offering this publication as an informative to help prepare you for your future purchase in Mexico, and as so must recommend that you solicit council from a real estate attorney in Mexico once you are prepared to proceed further. The information provided is our opinion and should not be perceived as absolute fact.

A. Ejido Land
A significant percentage of Mexican real estate is located within community owned parcels of land called ejidos. Ejidos are common grazing pastures or community lands that were provided by the government to population centers in order to provide food for the members of that community. After suffering through years under the encomienda system, in which the Spanish conquerors and their inheritors were granted trusteeship over the indigenous people residing on their plantations, land reform was one of the principal objectives of the Mexican Revolution and the resulting Constitution of 1917. In the Constitution of 1917, land was established as a constitutional right of the Mexican people, and ejidos were created a few years later to meet that constitutional requirement.The size of an ejido depends upon the size of the population center which has been granted title to it, either by inheriting it or by application and approval, as well as the productivity of the land being considered. Members of the ejido are permitted to construct homes and cultivate the land which it embodies. Before 1992, it was impossible for any body but an ejidatorio to obtain property rights to ejido land. Constitutional reforms championed by President Carlos Salinas de Gortari, citing the low productivity of communally owned land, eliminated the constitutional right to ejidos and opened the door for its conversion into private property. Communities that so choose, may apply to have their ejido converted into private property which may then be divided evenly amongst the ejidatorios to then be used as they deem appropriate.

If a person unknowingly purchases property in Mexico which is still included in an ejido land claim, whether merely by a small percentage of the property or by entirety, their rights in the case of any legal proceeding are decidedly subordinate to those of the ejido land holders. To put it simply, if a person purchases Mexican real estate property which is later deemed to be ejido land, such person will either lose all rights to the property and any permanent structures which have been built on it, or face an extremely long and costly legal battle in which they will have little or no chance of winning. For these reasons it is extremely important for you to select a Mexican real estate attorney experienced in real estate law in Mexico. Mexican real estate attorneys are much more scrupulous in their investigation into the seller and the property, if for no other reason, because they are aware of exactly what pitfalls need to be carefully avoided.

B. Pre-existing Liens, Unpaid Taxes and/or Utilities
Under Mexican Law liens are passed on with the title of the land. Therefore, when purchasing real estate in Mexico it is extremely important that your Mexican real estate attorney performs a series of checks to ensure that the Mexican property under consideration has a clean history and there are no pre-existing liens, such as an old unpaid mortgage. It is also recommended that you be sure and verify with the Notary Public that all of the necessary land taxes have been paid for up to the l-ast five years and that all utility bills included within the last two years have been settled as well. Mexican Law does not hold you liable for any taxes or utility bills beyond these time frames.
C. Existing Structures are Tax Registered and Up to Code
Some other important tasks to be performed by your Mexican real estate attorney are to check that all of the pre-existing structures on your property have been tax registered, and that all of the installed utilities in those structures were done so in legal fashion. The potential consequences in not performing these tasks are not quite as severe as the other potential pitfalls listed, but failure to identify and correct any pre-existing aberration of the law in regards to building codes or any previous failure to accurately register the property with the tax authorities, could potentially lead to some stringent fines and penalties which are better avoided.
D. The Seller is Legally Permitted to Transfer Ownership
This may seem self-evident, but it is all too often the case that a foreign buyer will enter into negotiations with a potential seller in Mexico, who is not legally endowed to sell the property, usually because the property is jointly owned. If this is the case, both or all owners must agree to sell. If a buyer enters into and completes negotiations with a seller and it is later uncovered that the seller was not legally permitted to sell the property because there were other joint owners of the property in question, the rights of the buyer in regard to the ownership of the property will be substantially less than those of the original owners that never authorized the transfer of ownership.
E. Realty Company’s Abusive Contractual Terms and Conditions
Realtors most of the time use one-sided contracts crafted and drafted by their attorneys to give the realty company all the advantages in the sale transaction. To avoid this, it is important that your real estate attorney stand up for your interests and challenge those abusive or inconvenient provisions often contained in the conventional previously composed contracts often used by realtors.

Conclusion

In conclusion, we would like to recommend that if you are seriously considering purchasing real estate in Mexico located within the restricted zone, that you solicit the professional legal council of a real estate attorney in Mexico; one with both a good reputation and a lot of experience. You can be assured that such a high-caliber real estate attorney will perform his duties right the first time, saving you from the over-charging and double-charging which can be common practice by attorneys in Mexico, most notably when working with foreign clients. We recommend an attorney fluent in your native language as well, so that if you have any questions about the transaction process, your attorney will be able to give you an articulate and precise answer to put your mind at ease, allowing you to sleep without worry. In terms of receiving an immediate return on your investment, an experienced and reputable Mexican real estate attorney will also help you locate the lowest interest rates and governmental processing fees through their various connections with banks and governmental agencies in the area; contacts which they have meticulously built and are able to maintain only through honest and ethical legal service. Most importantly, your legal representation in Mexico will help you avoid the costly legal contingencies which could arise out of any major misstep taken throughout the transaction process.

When considering real estate attorneys in Mexico it is always a good idea to check with the U.S. Embassy in Mexico before making your final selection. If an attorney has a history of misrepresenting U.S. citizens in Mexico, it should have been reported at some point with the Embassy. However, it is safe to say that not every dishonest attorney with a poor history in assisting foreign citizens in Mexico will be flagged on such a list. In other words, just because an attorney has not been black listed, it does not automatically mean you should hire him. Instead, once you have clarified that the attorney has no registered complaints against him, look for additional proof of a good service record, such as certificates of approval from the U.S. Embassy in Mexico, or its various departments. Having such documentation often signifies that the attorney has a long and proven track record of providing outstanding and honest legal service to U.S. citizens in Mexico, and likely citizens of other foreign nations as well.

Our firm, Resendiz Wong Abogados, is very proud of being recognized by both the United States Embassy in Mexico and the U.S. Department of Commerce, and we always look forward to having the opportunity to show clients new and old that we are deserving of such approval.

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1 After suffering through years under the encomienda system, in which the Spanish conquerors and their inheritors were granted trusteeship over the indigenous people residing on their plantations, land reform was one of the principal objectives of the Mexican Revolution and the resulting Constitution of 1917. In the Constitution of 1917, land was established as a constitutional right of the Mexican people.

2 Fee Simple Title – Is defined by law as, the estate which a man has where lands are given to him and his heirs absolutely without any end or limit put to his estate.

3 The Mexican Constitution does not allow foreigners to register deeds to land in their own names in areas of Mexico that are included in a zone of fifty (50) kilometers from the coastline and one hundred (100) kilometers from a national border. The area included by these parameters is known as the Restricted Zone or zona restringida in Spanish.

4 Exploitation Rights – As used, the right to use or possess the property, including its fruits and products for personal and private use, as well as any profits or revenue that results from its transfer to a third party.

5 Because foreign citizens are prohibited from registering deeds to land located within the Restricted Zones in their own names, those who wish to purchase property located within the Restricted Zone must establish a land trust, or fideicomiso in Spanish, with a local bank in which the bank agrees to have the deeds to the land registered under its name for a fee to be paid by the foreign citizen. This trust is good for fifty (50) years and is renewable for an additional fifty (50) year term (statutory set limits). The bank is granted no prevailing rights over the property and is obligated by contract to forfeit the deeds to the foreign citizen, the trust beneficiary, in the case he sells the property to a third party before the conclusion of his fifty (50) year term.

The information contained in this publication is intended solely for informational purposes and is not to be construed under any circumstances as legal advice. If you require legal assistance in Mexico specifically in the areas of commercial property or real estate law please do not hesitate to contact our office by emailing Ricardo Resendiz at rwa@resendizwong.net or by calling +52(55) 5678-5100. If you require legal assistance in areas of corporate or business law please send us a general inquiry to rwa@resendizwong.net Thank You.