A. HOW FOREIGNERS CAN OWN REAL ESTATE IN MEXICO

It is a common misconception that foreigners cannot own Real Estate in Mexico, but reality is that they can.  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, 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.

THE RESTRICTED ZONE

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 or notario 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 transferring his/her rights to the property to a third party or to a pre-appointed 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.

B. THE REAL ESTATE INDUSTRY 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 "Associacion Mexicana de Profesionales Inmobilarios" 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.

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 an established and reputable real estate company. (Refer to the information at the end of this Guide) A potential buyer may want to check with the local Chamber of Commerce Association or prominent law firm.

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 Mexico is moving toward 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 mortgage purposes. In fact, it is here! See bullet on international financing availability.

C. PURCHASE-SALE 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.

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 known as a “Libertad de Gravamen” from the Public Property Registry based on a complete title search.

- A statement from the Treasury of Municipality regarding property assessments, water bills, and other pertinent taxes that might be due or copies of the latest utility receipts.

- An appraisal of the property for tax purposes.

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 1-4%, 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.

COST OF THE FIDEICOMISO

Based on a present tariff, the bank charges the person desiring the Fideicomiso an initial fee (approximately $2,400.00 US) for the permit and for 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 (approximately $500 US) to cover its annual services as a trustee.

REAL ESTATE BROKER´S COMMISSION

Most real estate companies in Mexico charge a 5 to 9% commission based on the actual sales price of the property. However, different area broker rates reflecting higher broker expenses may be found, such as in the resort areas.

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.

D. LEASING BACKGROUND

Historically, in Mexico, the law favored the tenant, making it harder for the landlord to increase the rents and/or evict the tenant upon the termination of the contract. Consequently, contracts were designed to protect the landlord as much as possible, but in 1993, the law regarding leases in Mexico City (Federal District) was modified in order to expedite the lawsuits against the tenants, with the resulting benefits for all. As each sate in Mexico has different laws regarding leases, it is advisable that a lawyer or reputable real estate broker be consulted before signing any agreement. Some years ago, the housing leasing market in areas such as Mexico City, had a very high demand with minimum supply. Therefore, rents, in general, were relatively high. Presently, the situation has reverted because property owners, unwilling to sell due to the economic situation are choosing to lease as an alternative to selling, as a result, markets reflect a tendency for lower rents.

TERMS

The normal and basic terms of a lease agreement are: six month to  one year contracts are common, particularly in housing. Commercial and industrial properties are normally leased for longer terms with predetermined formulas to adjust the rent annually.

- In some cases a co-signer or a bond is necessary in most cases.

- A deposit equivalent to 1 - 2 months rent is normally required. - Generally, refurbishing is the responsibility of the tenant.

- The tenant usually pays all utilities as well as condo maintenance fees, telephone, cablevision, and other optional services such as special area security.

If you are interested in buying, selling, or renting property in Mexico, please call your local real estate broker, Nancy Edwards, Cozumel Living Real Estate.