Owning in Mexico
A brief history of real estate in Mexico
Between the years 1517 and 1822, Spain held claim to the Mexican land. In 1822, Mexico declared independence from Spain but wealthy foreigners, the Church, and the upper class Mexicans continued to lay claim to much of the land. Also during the 19th century, Mexico lost about one-third of their country to the United States; Texas in 1845, and in 1848 the territory that became California, Nevada, Utah, most of Arizona, parts of New Mexico, Colorado, and Wyoming which was purchased for $15,000,000.
In 1854, through the Gadsden Purchase, the US acquired the rest of what is now Arizona and New Mexico. In 1917, the Mexican Revolution began and with it came the loss of over one million lives. From this came the Mexican Federal Constitution which imposed new laws and restrictions on foreign ownership, resulting in the “restricted zone”.
With this constitution, Mexico began the process of subdividing large property holdings (50 million acres in all) belonging to the Federal Government into smaller parcels. This provided the Mexican farmers with a beneficiary interest in the land. Entitled under the Agrarian Law, these government parcels known as “ejidos” are recorded in Mexico City.
The ejidtarios (farmers) can live, farm, homestead and construct dwellings on the property, but they do not own it. These farmers have the use and benefit of the land, but they do not have title to it, and therefore cannot sell, lease, subdivide joint venture, contribute, mortgage or encumber the property. In 1992, realizing the value of the ejido land and the development potential that would be created by allowing the owners to sell or lease the property to non-Ejido members, such as foreigners, the Agrarian Law was passed.
In other words, ejido owners had the right to take the land that they didn’t own, remove it from Federal Control, place it in the public land registry, and convert it to private property, thus allowing them monetary benefits.
Today, thousands of acres are being removed on a daily basis from the Ejidos, added to the public lands and being sold or leased.
INVESTING IN BAJA REAL ESTATE
Beginning in 1993, the federal government of Mexico liberalized ownership provisions of all property within the constitutionally protected area known as the “prohibited zone” with the Mexican Foreign Investment Law. Prospective buyers outside of Mexico’s borders seeking to buy tourist developments such as housing, condominiums and time share projects, rustic, industrial or urban property, can now enjoy greater legal freedom and ownership rights.
These foreign investment rules clearly indicate the Mexican government’s highly favorable attitude towards outside investors. With the rapidly improving Mexican economy, close proximity to the world’s largest market, low cost skilled labor, ample energy supplies and the Baja area being the fastest growing in all of Mexico, it is most definitely an excellent ongoing investment environment.
THE REAL ESTATE BUYING PROCESS
The process of buying real estate in Mexico is similar to that in the United States and Canada.
A Notario is a lawyer whose position is similar to that of an American or Canadian judge, and NOT that of a notary public. A Notario in Mexico has legal training, followed by difficult examinations and several years of apprenticeship. Some compare it to the bar and the CPA exams all in one. There are a small number of them in each State, and the States’ Governor must appoint them.
Their responsibilities include the practice of real estate law, accessing and auditing taxes. Notarios close real estate transactions similar to escrow officers’ duties in the US and Canada, but with expanded powers. Due to the fact that the Notario is History of Real Estate in Mexico a neutral party, buyers are recommended to hire their own lawyers if they need representation.
Closing costs run about 5-7% of the sales price. At the time you purchase any property in Mexico, you are required to pay a 2% acquisition tax; however this 2% is figured in the 5-7% closing costs fees.
As an investor in Mexico, it is good to know that procedures are constantly changing for the better. At this time, US based companies such as Stewart Title are offering title insurance in Mexico. This provides added security for foreigners. As the two countries become more similar in their real estate practices and procedures, buying real estate in Mexico will become even easier for American and Canadian citizens.
A Fideicomiso is similar to a living trust in the United States. It is a 50-year perpetually renewable and transferable Bank Trust through which Foreigners acquire irrevocable and absolute ownership rights to property in Mexico. This Trust is a legal substitute for deeded (fee simple) ownership and is provided specifically for non-nationals to own property in the formerly restricted zones (border and beach areas.) The Trust system of ownership is sanctioned by the Mexican government, provided for under the Mexican Constitution, and secured by the Central Bank of Mexico.
There are specific Banks authorized by the Mexican government to hold the Real Estate Fideicomiso. Title is delivered to the Bank authorized to act as the Trustee, designating the foreign buyer as the Beneficiary of the Trust (you). The Beneficiary (you) retains the use and control of the property and makes all the investment decisions. It is your Trust and not the property of the government or the Bank. The Bank reviews all paperwork of the current owner/developer to ensure that the documents are complete and legal. The Fideicomiso is not an asset of the bank. If the Bank should ever fail, the Fideicomiso is simply transferred to another authorized Bank.
The Beneficiary (you) maintains complete control over the trust (to buy, sell or mortgage, encumber, will or inherit) and is not tied to a Master Trust. In an Individual Fideicomiso, every Beneficiary (you) is responsible for payment of their own taxes. A non-payment by one property owner would not affect another property holder in the development. But in a Master Trust the developer is responsible for payment of taxes, then appropriating them for reimbursement proportionately to each Fideicomiso held under the Master Trust.
Mexican developers do not have any special dispensation under the law. If you do not have a Fideicomiso through an authorized Bank then you have, at best, a lease. Any other form of “ownership” such as share of a corporation, squatters, owning with a Mexican national partner, or any other gimmick is not legal and is circumventing the law!
The Real Estate Fideicomiso is designed specifically for non-nationals to own land in the formerly restricted areas (beach, border region) and is the ONLY legal way to own this land. It provides the same legal rights and protection of ownership as a Mexican has under the law.