Legalities
Buying Property South of the Border However, buying south of the border is not like buying
property in the U.S. and purchasers must always remember that they are
not in the United States. The Mexican legal system is not the same as
its American equivalent. That is not to say that real estate transactions
(operaciones) in Mexico are totally different or more complicated than
in the US, but common sense should always be exercised. The worst a
purchaser can do is to remain ignorant of the law and procedures involved
in the conveyance of real estate in a foreign country. Mexico is not
the "wild west" as some may perceive where anything goes and
the prevailing Mexican attitude is "trust me, no problema."
It is inherently important for non-Mexican buyers to understand that
Mexico has formality of law with authorized regulation of real estate
development procedures at all levels and this formality is coupled with
a statutory government framework for the legal conveyance of real property. 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 (regimen 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.
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 an agreement that produce or transfer obligations and rights.
In general, real estate contracts in Mexico must be protocolized 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. 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! 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. 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!! Trust purchasing "fideicomiso" For the purpose of the terms set forth in Article 5,
Title Two of the Law, real estate used for "residential purposes"
shall mean any real estate destined "exclusively for residential
use of the owner or third parties." The following activities, without
limitation, shall be deemed real estate held for non-residential purposes:
(I) those destined for time-share use; (II) those destined for any industrial,
commercial or tourism activity that may simultaneously contain a residential
component; (III) real estate acquired by credit institutions, financial
intermediaries, and auxiliary credit organizations to recover debts
owed to them and in the ordinary course of business; (IV) real estate
used by entities in the course of their business consistent with sale,
development, construction, sub-division and other activities included
in the development of real estate projects, until these are sold to
third parties; and (V) generally, real estate destined for use in commercial,
industrial, agricultural, cattle, fishing, forestry, or service-related
activities. When in doubt whether real estate is deemed destined
for residential purposes, the Ministry of Foreign relations shall resolve
the matter in ten business days from the date the party consults the
Ministry on the subject. If at the end of ten business days, the Ministry
fails to respond, the use in question shall be deemed for non-residential
purposes. Further, Article 6 of Title Two specifies that when in doubt
on whether real property is located within or outside the restricted
zone, the Ministry of Foreign Relations, on consultation with the National
Institute of Statistics, Geography and Data Processing, shall decide
as appropriate. And lastly, Article 7 of Title Two provides the notification
procedure which interested parties must give to the Ministry of Foreign
Relations. That is, (I) the location and description of the real estate;
(II) a clear and accurate description of the uses to which the real
estate in question is destined; and (III) an ordinary copy, in annex,
of the public instrument, known as an "escritura", that records
the formalization of the acquisition. When one condenses and 'boils down' all of the language
and definitions of law, coupled with the resulting legal effect that
must be understood, what does a foreign purchaser really glean from
this information? Simply, that Mexico's Constitution and Foreign Investment
Law are very specific regarding foreign acquisition of real estate,
and particularly in the restricted zone. Most importantly, we as foreign
buyers of Mexican properties must realize that title to real estate
in the prohibited zone can only be vested one of two ways for our benefit:
either in a 50 year renewable Mexican bank trust (fideicomiso ); or,
in a Mexican corporation that can solely and exclusively be owned by
one or more foreign stockholders with no Mexican ownership participation.
Make no mistake buying public. There is no gray area concerning Mexico's
constitutional or foreign investment law. The title to houses on the
beach, villas, condominiums, townhouses or single family lots within
Mexico's restricted zone can only be in conveyed into a fideicomiso
with foreigners having renewable beneficiary interest. The assertion
by some that title to residential real estate can be vested in a Mexican
corporation for foreign ownership purposes simply is not correct. However,
all other real estate, non-residential in nature, can be conveyed to
foreigners in fee simple provided the title is in a Mexican corporation
whereby foreigners can have exclusive ownership. And one final, salient
point. Whether title is vested in a fideicomiso or a Mexican corporation,
in either case, all of these properties can be insured by a U.S. contract
of indemnity more commonly known as a title policy. Stewart Title Guaranty
de Mexico can provide Owner's and Lender's policies for guaranteeing
ownership rights in Mexican real estate, for more information about
title insurance policies, contact international@stewart.com The following scenario is typical regardless of the
geographic locale and doesn't seem to vary much between Los Cabos, Puerto
Vallarta, Puerto Peñasco or the Cancun corridor. A foreign buyer
identifies a house, condo, villa or lot on the beach they want to buy.
Usually they employ the services of a local real estate agent in that
market who informs them that in order to proceed to a contract, an initial
deposit is required. The deposit may range from $1,000 to $5,000 and
the check is written to the agent or to the seller. Generally, the deposit
is not tied to an escrow agreement with a third party acting as the
escrow agent, and commonly it goes directly into the bank account of
the agent. The buyer is told that the deposit is required just to get
the process started and more times than not, the deposit will become
non-refundable. Keep in mind, buying public, once you write the check
and hand it over in Mexico, how are you going to get it back without
an escrow agreement.
The sale of real property between Mexican nationals
is a fairly simple and expeditious transaction via a compra-venta. They
are not concerned nor do they have to be with Mexico's foreign investment
laws. This is not the case, however, when they sell to foreign purchasers
in the restricted zone. Their attitude is, "Why should I wait for
my money just because you have to get a bank trust. That's your problem,
just pay me." Secondly, this attitude has been pervasive because
some, not all, real estate agents push it and expect it. If the seller
receives all of his money, the agent gets paid his commission. Why should
the agent be concerned with whether the buyer gets his fideicomiso established
once he has received the fee due from the seller? Besides, many agents
will tell purchasers nothing can or will go wrong, and that is a fallacy.
What if the seller dies before the conveyance? What if there are title
defects or undisclosed lawsuits, maritime matters or lien issues? What
if an agent, who receives the money via a deposit, doesn't give the
seller all that he expects? Then who will execute the deed? What if
there are unexpected problems with obtaining a trust permit or notario
problems? Or what if the seller has sold the property twice, unknown
to you or the agent? The simple truth is you have given the seller your
money with little or no chance to get it back other than a lawsuit in
Mexico. In every real estate deal, buyers have choices. There
are many properties for sale in Mexico. Buyers need to be smart and
educated about the deal, deposits, title and conveyance matters. Many
real estate developers sell their property with a percentage down at
the time of the promise to trust agreement, with the balance paid when
the public deed can be executed to establish the trust. Many developers,
and more and more real estate agents, are utilizing third party escrows
in the U.S. to protect foreign buyers. Full disclosure of potential
issues is becoming more prevalent. Any property in Mexico can be researched
and a title investigation can be done in order to issue an Owner's Policy
of Title Insurance. Purchasers can be insured when they release their
money to the seller upon execution of the escritura publica and the
issuance of the notario's preventive notice to the public registry of
property. At the end of the day, foreign buyers have a right to a transaction
process that ultimately protects their investment and minimizes their
risk. Those who participate in the sale of real estate in Mexico must
strive to protect that which "feeds and prospers them." When
they don't, purchasers should walk away and buy elsewhere. Article 27 of Mexico's Constitution allows the federal
government of the United Mexican States to create agrarian lands for
the benefit of their citizens. With its constitutional inception in
1917, Mexico began the process to provide 'campesinos' (farmers) a beneficiary
interest to land owned by the government. Entitled under "La Ley
Agraria" (the Agrarian Law), these government parcels, known as
"ejidos", are recorded with the Registro Agrario Nacional
(National Agrarian Registry) in Mexico City. The ejidatarios can live,
farm, homestead and construct dwellings on the property but they do
not own it. Under Agrarian Law, the ejidatarios can not sell, lease,
subdivide, joint venture, contribute, mortgage or encumber the property.
In essence, they have the use and benefit of the land, but they do not
have title to it. Mexico is not the 'wild west' that some foreign purchasers believe
it to be. With formality of law, as in other real estate matters,
regularization of an ejido is a legal process requiring time, procedure
and lots of patience. The ultimate goal is to get private title to
each parcel that can then be conveyed to a trust or Mexican corporation
for the benefit of non-Mexican purchasers. However, there are a number
of steps along the way that you, the buying public, should be aware
of in order for ejido land to be privatized. THIRD: Can the ejidatario provide a plat or other acceptable plans that define the parcel with a metes and bounds description and the total area of the land? FOURTH: Has the ejidatario petitioned the general assembly of the
ejido to request approval to convert the ejido parcel to one of full
dominion? TOP The ejido itself is normally a large tract of land that
is utilized by all of the ejidatarios for their sustenance. Managed
and operated in a similar fashion to that of a farm cooperative, the
ejido has no land subdivision or individual parcels. Subdividing the
ejido into "parcelas" is what the regularization process accomplishes.
Typically, the privatization of ejido land can take six (6) to twelve
(12) months to complete, but it may take longer. Though this time period
would appear lengthy, one must keep in mind that there are many individuals
involved that must come to a unified and collective decision to privatize
the ejido. Negotiations within the ejido on whether to privatize or
not could take several months. Then, even when an ejidatario or a group
of ejidatarios want to sell, lease or joint venture their particular
private parcels to a third party outside the ejido, they must offer
a first right of refusal to all of the other ejidatarios. This process,
known as "derecho al tanto", usually means that the ejidatarios
must give notice to the comisariado of the ejido (president) of their
intent to sell, lease or joint venture. The president should provide
a public disclosure of the intent and if, after thirty (30) days, there
are no purchasers or objections, the ejidatarios may proceed. There are many examples of ejidos being properly regularized
and the subsequent wonderful developments that have come from these
once government lands. Whether in Puerto Peñasco, Los Cabos,
Puerto Vallarta, Mazatlán, Guadalajara, Reynosa, Querertaro or
many other cities in Mexico, residential, resort and industrial developers
on both sides of the border have undertaken the process to successfully
privatize ejido property knowing the inherent value of the future project.
Buying land that was entitled as an ejido can be a safe and prosperous
personal or business venture. The caveat, buying public, is to make
sure that the land has been fully privatized or is in the process of
regularization. And to be certain, purchase an Owner's Policy of Title
Insurance for your property. A title insurance policy, issued on Mexican
land, can insure that the land is not ejido. With the title insurance
policy in hand, protecting your ownership rights, you'll probably sleep
better at night. The issue of capital gains tax has long been a troubling
problem for many foreign purchasers of residential property in Mexico.
Many sellers, whether Mexican or foreign, have tried to reduce their
tax liability on the sale of a residence by using a lower "declared
value" in the transaction rather than using the actual sales price.
As a result, an unknowing buyer can inherit additional tax consequences
when they ultimately sell the home in question because their "basis"
in the property is less than what they actually paid. For several years
now, some real estate agents in Mexico have advised their non-Mexican
clients not to worry about capital gains taxes because they would qualify
for an exemption. They often advised the prospective buyer that he or
she would be able to demonstrate to the local public notary (notario
publico), who is responsible for the collection and payment of the capital
gains tax, that the residence was their primary residence and therefore
qualify for the exemption. At the very least, this was misleading and
poor advice to receive from a seller or real estate agnet. At its worst,
it could be considered tax fraud. Pursuant to recent amendments of the Mexico Tax Revenue Code, a foreign
national who is a "homeowner" may qualify as a "Resident"
of Mexico for Mexican tax purposes and may qualify for a capital gains
tax exemption on the sale of residential property in Mexico. The following
are some points you may consider to determine whether you qualify
as a Mexican "Resident":
Title insurance on Mexican real estate is more than
just a title insurance policy. It is an in-depth examination concerning
title documents, and real estate closing process. In order to issue
an Owner's Policy of Title Insurance , and assume the inherent monetary
liability that comes with the policy issuance, the insuring company
must be as certain as possible regarding all of the various elements
in the property transfer. It is often said that it is the responsibility of the
notario to provide title assurance, and that they have the same requirement
of certification as would a title insurance company. That is true. However,
it is not often understood that in Mexico a title policy not only protects
against liens, encumbrances, and tax issues, but also against fraud,
misrepresentation, impersonation, secret marriages, incapacity of parties,
undisclosed heirs and other hidden risk as provided by the policy. Even
the best of notarios or attorneys may be unable to discover these title
problems.* Since title policies are fully negotiable contracts
of indemnity, a title company can consider and insure a variety of title
matters for the benefit of the proposed insured. For example a title
insurance policy has the ability to provide affirmative coverage and
endorsements that protect purchasers against risks that may be discovered
in the title search process. How can any one individual, even a notario
publico, give these types of assurances that have real dollars standing
behind the assurance and that ultimately will protect a buyer in the
event of a loss. A Title Insurance Policy It has long been said and preached that "if a purchaser
is willing to give money to the seller or the agent in a real estate
acquisition, be prepared not to get it back!" There can be no truer
words to live by in Mexico . Unfortunately, it is a sad reality and
the reality has reared its ugly head in Mexico. Purchasers in a particular
Mexico market " the particular market not being the issue"
deposited funds in good faith and entrusted these moneys to the agent's
"broker trust account." One would think that the term trust
would imply some sort of confidence and security in the deposit vehicle,
yet in this case, it was an oxymoron. The stark reality is that the
money is gone, and it's a huge amount of money. The agent is gone as
well, having fled Mexico and leaving these unprotected "good faith"
buyers to ponder what now. Their sole remedy and recourse to date has
been to file complaints with Mexico' s consumer protection agency, "PROFECO."
The likelihood that any of them will recover any of their money is slim
and none, and slim already left Mexico ! The alternative to broker escrows or giving money to
the seller is to utilize third party escrow accounts. Some Mexican banks
will handle deposits for real estate transactions, charging an escrow
fee of approximately $450 to $500. There are however several drawbacks
to Mexican bank escrow accounts. First and foremost is that Mexican
banks do not utilize formalized escrow agreements that have been negotiated
and executed per mutual agreement between the seller and the buyer and
additionally signed with acknowledgement by the bank as agent. Mexican
banks simply hold the money until notification to release it. They traditionally
do not invest the money into interest bearing accounts for the benefit
of the depositor as well. It has also been the practice of the banks
to use the funds internally. The end result is that the subsequent refund
or transfer of the deposited amount is not readily available nor is
it handled in a timely and expeditious manner. The best and most favorable manner to handle earnest
money and escrow deposits involving Mexican real property transactions
is with a U.S. title insurance company who has a fiduciary obligation
and responsibility as the "escrow agent." Some agents and
developers in Mexico do not like to utilize escrow accounts in the United
States for one simple reason: they do not control the money! Understanding
that there is a total lack of construction financing in Mexico, an overall
level of illiquidity in lending of any type, and the subsequent upfront
deposits required by many developers to begin construction notwithstanding,
there is still no reason why third party escrows should not be used
to protect the foreign buying public. Or for any buyer! The prevailing
concept of "passing the money" when the seller and buyer enter
into a promissory agreement is antiquated, self-serving, and at best
a huge risk for purchasers. As in the United States , consideration
or the purchase price due -less any earnest money deposit- should be
paid when a buyer is able to receive a protocolized deed by the notario
publico and the transfer of the real property interest. It should not
be when the buyer can get the keys to the condo or "possession"
of it. |