Buying Punta de Mita / Puerto Vallarta Real Estate
It’s bound to happen on any vacation to Mexico – sometime after the pace of life has slowed to a more sane and pleasurable level you find yourself looking around and asking yourself, “I wonder if I could live here….”
Q: Can foreigners own property in Mexico?
Q: What is this Trust, and how does it work?
Q: How are these Trusts created?
Q: Are there differences in other aspects of property ownership in Mexico?
Q: What about taxes? What can I expect to pay in Mexico?
Q: What other expenses should I consider on the purchase of property in Mexico?
Q: How can I be assured of dealing with a qualified Real Estate professional in Mexico?
Q: Can foreigners own property in Mexico?
A: Article 27 of the Mexican Constitution states that non-Mexicans cannot own property within 100 kilometers of the border and 50 kilometers (about 30 miles) of the coastline. This is a protectionist measure, put in place after foreign invasions repeatedly threatened the country’s sovereignty at the end of the 19th century. Today, foreigners may directly own real property in the interior of Mexico subject to certain limitations on specific agricultural tracts.
As time has passed, and as Mexico has embraced the philosophy of globalization, the Mexican government has come to realize the benefits of opening these attractive areas up to foreign investment which has led to the modification of this constitutional restriction. Since 1973 foreigners (non-Mexicans) have been able to purchase coastal and border properties if done through a Mexican bank trust, known as a Fideicomiso.
Q: What is this Trust, and how does it work?
A: Essentially, it is like a Trust in the United States or anywhere else in the world. The bank holds the legal title to the property, with all rights and privileges of ownership, including exclusive use and enjoyment, held by the Trust beneficiary-the foreigner. The beneficiary enjoys all rights of ownership enabling him to occupy, rent, gift or transfer title to the property to any legally qualified person he may designate. The actual document is a Trust Deed and is public document registered in the local land registry. This is not a lease or anything at all related to a lease.
These Trust Deeds have an initial term of 50 years. They are legally renewable in perpetuity at any time or at the end of the 50-year period for a filing fee (less than $1,000 US) for additional 50-year periods. The property may be sold at any time, with the seller being responsible for paying his capital gains taxes on the appreciated value. This process is designed to protect the rights of foreigners, and ensure that property transfers are made in a legal manner.
Q: How are these Trusts created?
A: To establish a real estate Trust, (fideicomiso), banks will charge a predetermined fee, plus a percentage of the property’s value, to cover the costs of preliminary studies and the drafting of the Trust agreement. The bank also charges an annual fee for maintaining the Trust, roughly averaging $500 per year, providing there is no financing
involved.
The Trusts are carried as off balance sheet assets by the banks who act as trustees. The Mexican Government specifically set the trust system up to allow non-nationals the security of ownership without having to change their 1917 constitution.
Most real estate agents can refer you to a reputable Mexican bank trust department, which generally have English-speaking personnel, as well as publications, available to answer questions about Trusts.
Q: Are there differences in other aspects of property ownership in Mexico?
A: Financing is relatively new in Mexico . Our agents are trained in the process of obtaining mortgage financing with several experience lending institutions who are very willing to lend on any property located in Punta Mita. The terms are generally similar to what is available in the US and the loan is fully secured by the Mexican property.
Closing costs to the buyer tend to be higher in Mexico than they are in the U.S. or Canada , averaging 4 to 5 percent of the purchase price. Closing will take from 30 to 45 days depending on contingencies and financing requirements. Escrows are now starting to be available via private escrow companies specializing in this function and will run from $1,500 to $1,800 U.S. per transaction.
In most cases, the buyer and seller need not be present at closing, but may be represented by their sales agent via a power of attorney.
Public Notaries are the agents of record for all transactions registered in the Land Registry Office. The notary is also responsible for collecting any taxes that may be due at closing.
Q: What about the availability of insurance on the transaction (title insurance), as well as the property itself?
A: To date, there are no home inspection agencies nor home warranty policies available in Mexico, however in recent years, title insurance is available. Since 1996 Stewart Title Guaranty Company has been offering and underwriting title insurance for Mexican properties. Consult with your agent as to how to proceed with this process although in many cases a title policy is included with your purchase in Punta Mita.
Other types of insurance, including property, theft, flood, liability, hurricane, damage, and earthquake, are all readily available in Mexico and policies can be written to pay claims in U.S. dollars.
Q: What about taxes? What can I expect to pay in Mexico?
A: For the buyer, the subject of real estate taxes generally comes as good news, especially in the Puerto Vallarta area, real estate taxes tend to be low. Known as ‘Predial’, the tax is calculated as a percentage of the assessed value determined at the time of sale, paid every bi-mester,. Property taxes have historically been low in Mexico because they have never been considered a source of governmental revenue, however, this is subject to change.
Q: What other expenses should I consider on the purchase of property in Mexico?
A:If you are not planning on living full time in Mexico, property maintenance will need to be considered for the time you are away. For condominium owners, maintenance and security is handled by the Condominium Owners Association, paid for through monthly fees.
Homeowners may want to consider a property management company. Many of the leading real estate companies, especially in Mexico’s resort areas, offer this service. Mita Residential offers this service for your convenience, within Punta Mita.
Q: How can I be assured of dealing with a qualified Real Estate professional in Mexico?
A: One of the major differences in buying property south of the border stems from the fact that Real Estate agents in Mexico are not subject to any national certification or educational requirements. As such, the best advice you can act on is to always deal with an established Real Estate Agency, whose references you have checked personally with several former clients.
For 20 years La Punta Realty / LPR Luxury has offered the highest assurance of professional real estate practices.
Punta de Mita’s pristine beaches, perfect climate and primitive beauty have combined with the acclaimed standard of service of the Four Seasons Resort, and the St. Regis Resort to create a community of distinctive resort living. Punta de Mita is recognized as an enclave of distinction, signifying prestige, privacy, and a pristine environment of unmatched natural beauty.
BUYING REAL ESTATE IN MEXICO
THE PROCESS
Property values in México, like in the US, tend to increase year-over-year. As the demand for ocean front property in the US has outstripped supply, it has become an unobtainable commodity for the average person to afford. However, in México, there are numerous locations where one can still afford the ocean front home, condo or lot as prices started at a much lower point.
The increases over the last couple of years have, for the most part, eliminated what we would call cheap, but on a relative basis, you can still find a 4 to 10 times differential in prices when compared to the United States.
Additionally, Bancomex, the Mexican import export bank, asked me for a comparison of a 10 acre parcel in La Jolla, CA. My response was that there was none, but the type of property still exists in México. As with all property, the relative value and appeal of property in México comes down to the three key factors: location, amenities, and accessibility to the United States.
In addition to México’s lower land costs, construction costs are lower, maintenance is cheaper, and ownership costs (taxes, utilities) are very low.
A person can live like royalty on the saving from property taxes alone. For example, in most areas of México, property taxes are about 0.1%, so for a $1,000,000 home, a person would pay about $1,000 per year.
In Florida, property taxes are about 2.5% or $25,000 for the same million dollar home. So with the $24,000 or $2,000 per month differential, one could have a live in maid, pay the utilities, have the maid buy groceries, and have some mad money left over.
Purchasing property in any location requires an extensive amount of research, planning and preparation – México is no exception. A person should understand the laws, do significant diligence and work with true professionals who can guide you to a successful, safe property ownership in México.
History
To understand México’s current legal system and rational for constitutional requirements for foreign land ownership, one must look to México’s history to understand its current practices.
Hernan Cortes conquered México for Spain and most of the western United States, which lead to Spain’s controlled of México from 1535 to 1821. When México won its independence from Spain in the Mexican War of Independence, it also gained ownership the provinces of Alta California (what is now the U.S. state of California), La Mesilla (Arizona), Nuevo México (New Mexico) and Tejas (Texas).
For the next 25 years México tried to consolidate its provinces, but Texas won its independence after defeating Santa Anna and the Mexican army in 1836, which was annexed by the United States in 1845. The Mexican government complained that by annexing its “rebel province,” the United States had intervened in México’s internal affairs and unjustly seized its sovereign territory. This dispute lead to the Mexican American War in 1846.
The Treaty of Guadalupe Hidalgo, signed on February 2, 1848 ended the war and gave the U.S undisputed control of Texas, established the U.S.-Mexican border of the Rio Grande River and ceded to the United States California, Nevada, Utah, and parts of Colorado, Arizona, New México, and Wyoming. In return, México received $15,000,000 USD. México lost more than 500,000 square miles (1,300,000 square km) of land, almost half of its territory.
After being controlled by the Spanish for nearly 300 years and loosing a significant part of its sovereign territory to the United States, it is understandable that in the constitution of 1917, México place severe restrictions on foreign ownership of its land. It was not until the early 1970s that México recognized the benefits of the American tax payers, and created a system for foreigners to own land without modifying the basis premise of its constitution.
1. Find a trusted Real Estate Professional
a. The National Association of Real Estate does not exist in México
b. There is no licensing of Real Estate professionals.
c. AMPI is México’s effort to regulate real estate professionals, but has no real teeth, yet. There are certifications and official training real estate agents can receive in México
d. There is very limited, accurate comparable data. Multiple Listing Services are very primitive.
2. Strike the deal you want
a. If a resale, get a copy of the existing deed/trust.
b. Use a legally binding purchase and sale contract.
i. You are in México and the official language is Spanish, so have the purchase contract written in both languages.
ii. Have a Mexican attorney review it to ensure it is favorable to you and you know what you’re getting into.
iii. If the title is not clean, make sure you can get your escrow deposit back.
iv. Use an escrow account controlled in the United States.
v. If the property can not be delivered by a certain date, the builder should be in default and you should be able to get you money back.
3. Hire a Mexican attorney, approved by one of the US title companies, to conduct a thorough title search.
4. Choose the Notario that you like and are referred to.
They have a standardize fee structure, so fees do not vary greatly.
5. Have one of the US title companies provide a letter stating it will underwrite a clean title policy.
Ensure there are no exclusions other than loss of property due to erosion of the land into the ocean.
6. Do not provide the balance payment for the property until the Notario has signified that the seller has conveyed the property over to you.
The escrow officer should have the responsibility to release the payment.
7. Ensure the purchase price is the recorded price in the public registry.
While the seller wants to minimize his capital gains tax and might ask you to record the purchase at a lower price, you will be stuck when you sell the property at a later date. Your lower basis will result in high capital gains taxes.
Restricted Zone
The Mexican Constitution of 1917 created “the restricted zone” which is the land area within 100 kilometers of México’s international land borders and within 50 kilometers of México’s ocean front. This zone was to prevent foreigners from owning land which they could create a starting point from which to invade México.
Within the Restricted Zone, foreigners can not obtain direct title to land or property. In areas outside the restricted zone, foreigners can receive fee simple title to the property. In 1971, México decided to increase tourism and foreign investment, so it created a legal structure in which foreigners could own the land – a fideicomiso, which is very similar to a living trust in the United States.
Bank Trust
The fideicomiso, or trust, is one of the most dynamic vehicles for owning property in anywhere in the world. The fideicomiso allows the Mexican government to exercise its discretionary power by only permitting approved foreigners to acquire ownership rights to real estate within the “restricted areas” of México. There are three parties to a fideicomiso:
• The settlor (Seller – fideicominte)
• The trustee (the Mexican bank – fiduciario)
• The beneficiary (buyer – fideicomisario)
The beneficiary or fideicomisario has all beneficial rights of ownership of the property. They have full use and control of the property and can make investment decisions regarding it, including the ability to use, mortgage, encumber, improve, lease without limitation and sell without restrictions and to pass the property to named heirs.
In essence, the beneficiary has the same absolute rights to the property as if it were in fee simple (direct) ownership. However the trustee, Mexican bank, acts on behalf of the beneficiary in all transactions involving the property held in fideicomiso.
As the flexibility and benefits of a fideicomiso become widely understood, many Mexican developers are using fideicomisos to acquire land, instead of just taking direct title. The reasoning behind this is it gives them more control and flexibility to structure deal points into the actual trust document.
Private branded villas
