General Information for Foreigners Purchasing Land or a Pre-Built Home in Mexico
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If you're considering investing in land or a pre-built home on Cozumel, there are som e things you should know. Because Mexican real estate transactions work on a different set of rules than you are probably used to.
One of the major differences, according to Dennis Peyton of Peyton and Associates , a US firm specializing in Mexican foreign investment, is that real estate transactions here are largely unregulated.
There is, for example, no Real Estate Commisioner, Department of Real Estate or the like. Nor are there any special requirements or brokerage licenses to obtain. So, basically, all a wanna-be realtor has to do to hang out a shingle is establish a Mexican corporation and, if they're a foreigner, obtain a work visa.
For this reason, we can't stress strongly enough how important it is to retain a reputable Mexican lawyer to guard your interests in any real estate transaction.
The up-side is that Mexican lawyers are much more reasonably priced than their counterparts in the US. We believe you will be pleasantly surprised.
Another thing that's very different about purchasing property in Mexico applies specifically to Cozumel because the entire island is inside what is known as "the restricted zone."
Background Info
In 1917 Mexican Constitution placed into effect a law designed to put a stop to past problems with the French, Spanish and Americans controlling Mexico's land and waterways. Now Mexicans only could own land.
Times changed and, in 1973, along came a constitutional amendment called the Foreign Investment Law. This amendment allowed foreigners to purchase property anywhere in Mexico -- except in what has come to be known as the "restricted zone."
The restricted zone is defined as within 32 miles of the coast during high tide and 64 miles from any border. So Cozumel, which is only about 12 miles wide is entirely in the restricted zone.
The following year, when NAFTA went into effect, Mexico passed another amendent to the constitution that allowed foreigners to own property in the restricted zone. But it had to be through a bank trust known in Spanish as a fideicomiso (fee DAY ee coh MEE so). This trust system was an end run around the constitution's restrictions on foreign property ownership. It allowed allowed foreigners to legally own land near the coastline or border without actually having to change the basic Mexican Constitution.
On Cozumel today the vast majority of foreign home owners own their property through a fideicomisco bank trust.
About Fideicomiscos |
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Here's how they work: When you're ready to buy land or a lot, you choose a Mexican bank to be your "trustee". The bank holds the trust deed for you, the buyer, who is known as the trust beneficiary. It should be made clear that your new property is not part of the bank’s assets and cannot be subject to any lien or attachment for any bank obligations. As the beneficiary of your bank trust, you have all ownership rights to the property and may sell, lease, mortgage or pass it on to your heirs.
A bank trust is not a lease.You really do own the property. But the bank is supposed to be there to protect your interests and, as we said, circumvent the Mexican constitution which they don't feel like changing just yet.
Trusts are usually granted for 50 year periods. When the trust period ends, you have an additional 10 years to renew it for yet another 50-year period and on and on until you or your heirs decide to sell the property. At which time your trust is dissolved and a new one established for the new property owner.
There's an initial fee for setting up your trust which your lawyer can handle for you . The fees can range from a low of around $350 US to over $1000. There is also a yearly fee you must pay to the bank which seems to bear some relationship to the size of the property. But generally it will be between $250 and $400 US/year. TIP: Have your lawyer help you shop all the banks before signing up for your trust.
How the Buying Process Works
Your bi-lingual lawyer will take you through all this step-by-step . Which is another good reason to hire one because the process is a mite confusing if you haven't done it before.
Here's a general overview of the process, however. Just so you know what's involved. Because, again, it works differently than it does in the US. The biggest difference is that in Mexico there is an intermediary between you and your lawyer and the seller. This person is a special type of Mexican lawyer known as a Notario.
The notary is a government appointed official who is also an attorney who has taken special instruction in real estate law. It is his legal responsibility to oversee all real estate transactions and to be unbiased and responsible to both the buyer and the seller. He is the government's representative and, if he doesn't make sure things are done legally and properly for all parties concerned, he can lose his government appointment.
You have a choice of notarios. Choose your lawyer carefully and he or she will recommend the best notario in the area based on past experience with them. Some are faster and less expensive than others.
The Closing Process
The closing process generally takes between 30 to 45 days. In the interim, the bank you and your lawyer have chosen to hold your trust sets up your escrow account. Meanwhile, the notary prepares your legal deed and closing papers and checks if there are any liens or problems with the title of the property.
The buyer pays closing costs which are usually about 6%-8% of the purchase price and include a 2% sales tax to the Mexican government and around 4-6% to other closing costs, such as title search, attorneys fees, filing of all legal documents and closing deal.
The seller is responsible for their own capital gains taxes, of course. And they also must cover any real estate fees owed on the property at the time of sale.
You don't have to be present at the time of sale, but a limited power of attorney will need to be given to your lawyer to execute the closing process for you in your absence.
Other Information You May Want to Know
Property Tax
Known as the predial and currently assessed a 1% of the assessed value determined at the time of sale. The Predial on Cozumel has gone up in recent years. But you can still expect to pay somewhere in the neighborhood of $500 US/year on a spacious 3 bedroom house with pool in a nice neighborhood. |
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| The Ampi Real Estate Study Notes from the report mentioned in the previous article, stated that property owners would benefit from knowing more about the cost for maintaining their property.
IVA is the sales tax that is charged on all goods and services. The amount of sales tax varies by state. In Vallarta it is 15%, in Cabo San Lucas it is 10%. The person receiving payment for the service or product that you are buying collects this tax. It is the responsibility of the person receiving the income to collect the sales tax and pay it to Hacienda, the national tax authority similar to IRS.
If you are ever in the position of renting your home or condo or conducting some type of business activity in Mexico, you should register with Hacienda. You will be issued a tax number (RFC) on an official permit or cedula. When you are purchasing services or goods for your business, you will want present your cedula and ask that the receipt be made out in your tax name and number. A factura is an official receipt, which can be tax deductible. Unofficial receipts are not deductible, even though the expense may be in the correct category to be deductible against income. For example, if you are able to deduct the cost of gasoline for your car, you need to register your cedula with the station where you trade, and each month take in the gas receipts to be changed into a formal factura, or deductible receipt. A simple receipt like the gas receipt you receive at the pump is a record for you of what you paid, but it cannot be turned in as a receipt to Hacienda.
If you don't know what a factura should look like, study the ones that you have received, or ask a friend to see theirs. If you don't know how to read the factura, you may receive an expired or bogus receipt that you can't use for tax purposes.
The factura should be numbered and have the name, address and RFC number of the company/person that is giving you the receipt. The iva or tax may be shown separately. The cost of the product or service will be totaled at the bottom of the factura. Look for the date the facturas were printed and the date that they expire. An expired factura cannot be used as a qualified receipt for an expense. Somewhere on the factura there will be a copy of the cedula for tax identification.
Why all this detail for deductible receipts? A lot of business is done in cash and an official factura becomes a record of the amount of tax that is payable to the government. For example, a receipt for cleaning supplies that may be deductible cannot be used unless you have the RFC number and details of the merchant from whom you have bought the goods.
The printer for the facturas must show on the facturas their address and authorization to print these receipts. Not all printers have permission to print legal facturas. You will want to go to an approved printer, and he will require information from you about your business status, in order to agree to print the facturas for you. The person/company you are paying for services or goods will receive the original receipt or factura, and you will turn a copy into your accountant. Keep cancelled facturas, as you have to account for the total number issued to you from the printer.
You are required to pay tax if you earn income, including rental income in Mexico. If you earn income, you will owe iva and income tax. You can use allowable deductions if you get proper receipts. You will need to file with Hacienda, in most cases, monthly. If you are earning rental income, you may also be required to collect a room tax.
Interview and hire a good accountant to help you do the reporting properly. Paying taxes properly is a subject that is complex and the tax code changes. You want an accountant that stays current with the law, and will furnish you monthly reports. If you have trouble with speaking or writing Spanish, look for a bi-lingual accountant. You can't afford to not understand each other.
Expenses for maintenance on your home may include electric, water, gas, telephone, cleaning and repairs. Electric is charged by levels of usage. The more usage, the higher the rate. You will see that your receipt from CFE has iva shown on it, and that your bill is an official receipt or factura. Your telephone, or Telmex bill is also a factura and it shows the iva tax charged. Your phone bill will include your rental of the line and equipment, local, long distance, cellular calls and iva. The total charges will be rounded up the next whole number.
There is a lot of discussion about what system or service to use for television. The local telecable is available only in certain areas of town and has not been installed very far south of downtown. Other choices are satellite companies, from which there are several to choose. The satellite dish is small and the cost is part of the installation price. The United States satellite companies which find their signal being illegally broadcast into Mexico, have upped their efforts to scramble programming.
Selecting trades and services for your home is much easier if you remember a few pointers. Education and certification standards for trades are different from what you are familiar. Work experience, personal character traits and references should be your guide in hiring. "Manaña" does not mean tomorrow, it means some degree of later. "Manaña en la manaña" is tomorrow morning. "Pasado manaña" is the day after.
A common complaint is that we think an appointment has been set and we stay home all day waiting for someone that doesn't show up. What do you do? Keep your own schedule and leave if you must. Hire someone else to sit and wait.
Remember time is not the same for everyone, and here is a case of where the differences can be great. In Boye Lafayette's Book, " Mexican Etiquette and Ethics," he writes about the situational nature of traditional ethics and morality. Historically, citizens of Mexico were not protected by justly enforced laws and were subject to personal interests of those in power. The way to survive was to please those in power, one way or the other. This meant that the individual had to learn to interpret each situation from two personal viewpoints, theirs and the other person. "The truth" would be determined by the circumstances at hand, not fundamental principles of right and wrong. "The truth" would provide the most protection.
Over time, "the truth" became a matter of telling people what they wanted to hear, so as not to disappoint or anger the other party. In social and business situations, people can say things and make commitments that are intended to make others feel good at the moment; they may not be making an actual commitment. Increase your skill level in understanding by politely ask questions to determine what has to be done before the repairman can return. What else will he need to pick up or have done before he can return? If tomorrow is a major holiday, you may be expected to know this is a not a day of work.
If you feel you need to criticize, do it diplomatically and in private. If a situation is very sensitive, you may need to use a third party to avoid making the situation worse. There are historical reasons why you do not want the other party to loose "face." If you satisfy yourself by making the other person feel inferior, you can loose their respect, and cooperation.
Prior cultural conditions have not allowed all individuals to be encouraged or rewarded for assuming personal responsibility to make sure that a job gets done. Through prior history, individual employees or workers were not allowed to act on their own. Such behavior was unacceptable and there were strong sanctions against it.
If are aware of cultural conditioning when you are learning to work with you staff, you will work toward solutions that come from understanding their viewpoint. Regardless of their social level or circumstances, all citizens expect to be treated with courtesy and respect by everyone.
An observation made by an American who has lived in Mexico for several years is that we North Americans, who are not fluent in Spanish, tend to believe verbal statements by other North Americans as if they were fact. We don't have the tools we normally have (reading and writing) to assess a situation. This is an important point. If we cannot understand the language, we rely on other English speaking people to tell us the truth or " la verdad" about something. We can be manipulated by misinformation. We are not using our ability to think critically because we can't assess the information on our own.
"Mexico's Business and Cultural Code Words, NTC Business Books is a reference book that will be helpful. The character and personality of the nation is linked to the Spanish language, especially the keys words that delineate character and personality. If you can learn the language, you do not open yourself up to as many misunderstandings and gaps.
"Every positive change - every jump to a higher level of energy and awareness - involves a rite of passage. Each time to ascend to a higher rung of the ladder of personal evolution; we must go through a period of discomfort, or initiation. I have never found an exception." Dan Millman
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas area. I recommend that each potential buyer conduct his own due diligence and review.
Harriet Murray, Broker & Buyer Specialist
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Steps and Facts in purchasing in Mexico
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Helpful information to completely understand the process of Buying property in Mexico!
Foreign purchasers should be aware of the same basic issues that any prudent buyer would utilize acquiring real estate. Additionally, they should not depend on the seller for information or advice about the property because they have no way of knowing whether it is correct. They should obtain the status of the title to the property requiring an in-depth title search. They should be knowledgeable of the type of contracts to be utilized for a purchase-sale agreement (compraventa) and preparation of the deed (escritura publica) by the notary public (notario publico) in Mexico. They should be aware of earnest money deposit and escrow considerations, and ultimately, a buyer should have an understanding of the actual conveyance method in Mexico and how legal title or beneficiary interest (fideicomiso) is vestedand recorded for foreign purchasers.
Does the seller have legal title?
The first thing a buyer must consider is whether the seller of the property has legal title to the property, and if so, whether the property can be legally transferred. Although this seems to be a logical and foregone precaution, there have been many documented transactions in which foreigners thought they had acquired real estate only to find out later that the seller was unable to transfer legal title. Very simply, the seller didn't own the property or he had not completed the required development procedures for the conveyance of the real estate. A good example would be agrarian land (ejido) not properly regularized, or the conveyance of a condominium unit that does not have a recorded condominium regime (regime de condominio) or even the sale of a lot or house in a residential subdivision (fraccionamiento) that does not have the required and published state/municipal development approvals. In any of these cases, the result is that the purchaser has paid money for the acquisition of the property but can not receive legally recorded title or beneficiary interest in a Mexican bank trust.
How do I confirm that a seller has legal title?
An adequate title search of the property should be performed
A buyer should always ask the seller for a copy of the escritura vesting title to the real estate.
The buyer should request a copy of the lien certificate (certificado de libertad de gravamen) on the property that should indicate the owner of record, surface area and classification of property type, the legal description and whether there are any liens or encumbrances filed of record against the property.
The buyer can also request a certificate of no tax liability (certificado de no aduedo) from the local taxing authority.
The notario publico is responsible for the title search in Mexican transactions. However, the notary typically only examines the current deed and a current lien certificate resulting in the possibility of a short or incomplete title history of the property. Today, there are US title companies, as well as Mexican companies, that facilitate the title examination process on a more in-depth basis and issue either a Commitment for Title Insurance on Mexico Land or a title report from the Mexican company. A foreign purchaser always has the option of hiring Mexican counsel to provide a legal opinion on the status of title as well.
Contracts and Agreements
Most real estate transactions in Mexico will have at least two (2) contracts: (i) an offer and acceptance (oferta) and/or a promissory agreement (contrato de promesa): and, (ii) a purchase- sales agreement (contrato de compraventa). The first two are preliminary agreements containing the basic transactional information. They are not the instruments by which title to the property is transferred to the buyer. The second contractual document is the agreement to be protocolized by the notario which will transfer title to the buyer. It may have several different forms: a real estate trust agreement (contrato de fideicomiso), a reserve title agreement (contrato de compraventa con reserva de dominio) or an assignment of real estate trust rights (contrato de cesion de derechos fideicomisarios). The Civil Code defines an agreement (convenio) as an accord (acuerdo) between two or more persons to create, transfer, modify or extinguish obligations. Specifically, the Civil Code defines contracts as agreement that produce or transfer obligations and rights. In general, real estate contracts in Mexico must be recorded before a notary public and, to be binding on third parties, they must be filed with the public registry of property. Once there is a written acceptance to the offer, it is recommended that the buyer's attorney draw up the sales contract or promissory agreement. Since this agreement is the single most important document the buyer will execute with the seller, and the agreement's contents will determine the terms and conditions of the transaction, the buyer should insist that his attorney assume this responsibility.
Major difference between US and Mexican transactions
There are many aspects of Mexican real estate deals that are very similar to transactions closed in the United States. It is easy to presume that the basic terms and principals with which a purchaser is familiar in the US also hold true in Mexico. However, a foreign buyer is much better off to assume nothing. Two such terms are escrow (plica) and earnest money deposit. In the United States, an escrow or title company, or a person legally empowered to act as an escrow agent, will serve in the capacity of handling escrow functions and earnest monies. In either case, the company or individual whom carries out the escrow procedure is licensed and empowered by law to do so. They are legally responsible to see that the agreed upon conditions of an escrow agreement are met before any funds are released. This is not the norm in Mexico. Historically, foreign purchasers have given earnest money as contractual consideration to the seller. And in many cases, the real estate agent or broker involved in the transaction has served as an escrow agent. Real estate brokers are not licensed in Mexico and typically do not set-up separate accounts for earnest money deposits. The caveat here is expressly made in bold letters. If a foreign buyer is willing to give earnest money to the seller or the real estate agent in the transaction, be prepared not to get it back!
Only until very recently have a couple of Mexican escrow companies come into existence utilizing US bank accounts for earnest money deposits. The same can be said for a few brokerage companies. A foreign buyer should always exercise caution and use common sense when it comes to their money and whom they're giving it to. As is often said, don't leave your brains at the border!
Closing the deal and the role of Notario Publicos
Ultimately, foreign buyers get to the point where they are ready to have the transaction consummated and take title to the property. In Mexico , all real estate transactions and the legal conveyance of any type of property involve the participation of the notario publico. Although their title translates to 'public notary', the notario publico's responsibilities greatly exceed the formalization of signatures. Appointed by the Governor of the State and the Executive Branch of the federal government for a particular state district, notarios are attorneys that must pass two extensive examinations in order to receive their lifetime appointments. In a typical transaction, they will prepare the deed of conveyance subject to the 'protocolized' purchase-sale agreement. The notario brings buyer and seller together for the formalization of the property transfer and they authorize the appropriate signatures upon execution of the escritura. And lastly, after the property transfer has been formalized, the notario will record the escritura with the public registry of property where the property is located. Prior to the closing, the notario's additional duties include: (i) to examine the documents of the selling party to ensure their accuracy and legitimacy; (ii) to verify title; and (iii) to search the public records to determine the status of the seller's title to the property and the existence of liens against the property. The notario is also responsible for the collection of all applicable property taxes and government transfer taxes. As a representative of the State, however, the notario does not insure title to the real estate nor do they have any legal responsibility for title defects. In short, a purchaser can not seek restitution against a notario in the event the purchaser suffers a monetary loss due to a title defect unless fraud, misrepresentation or gross negligence could be proven in a Mexican court of law.
What about buying property in the 'prohibited zone'?
Title to all real estate in the 'prohibited zone' being acquired by foreign purchasers can only be legally vested and recorded one of two ways: (i) in a Mexican bank trust (fideicomiso) for all residentially declared property; or (ii) in a Mexican corporation for all non-residential real estate. There is no in-between choice or 'gray area' concerning foreign acquisition in the restricted zone (100 km. along all borders, 50 km. along all coastlines, all of Baja California) of Mexico . Foreign nationals can be the sole and exclusive stockholders of a Mexican corporation that holds fee simple title to non-residential property in the prohibited zone. In any type of real estate acquisition in Mexico , non-Mexican purchasers must always register their ownership interest with the Secretary of Foreign Affairs and must waive their rights to foreign government intervention in the event of a property dispute. This is known as the Calvo Clause, which is constitutionally mandated, and is contained in all bank trust agreements. It should be noted that Mexican banks, acting as trustee for a foreign buyer in a fideicomiso, make no warranty or guarantee of the title to the property in the trust nor do they provide any restitution in the event of a title defect. Foreign buyers should always be advised to consult US or Mexican counsel regarding real estate transactions. They also can contact US title companies to assist them in answering questions about conveyance issues, title searches and title policies for a prospective property as well as escrow account considerations. And one last caveat buying public: if you are told by a seller or agent that this beautiful piece of land on the border or this lovely house on the beach does not need to be in a corporation or in a trust, or it does not need to be closed by a notario, walk away immediately, and very quickly!!
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