REAL ESTATE MARKET CONDITIONS IN MEXICO
There is no doubt that the real estate market in Mexico is highly influenced by conditions in the US. Yet, there are those who insist that even with its heavy reliance on the US for trade, Mexico and real estate in Mexico is able to stand on its own two feet. In most areas of Mexico, property taxes are still holding at about 0.1%.
Even with the surge in real estate development in Baja California Sur, property tax rates are still in the 0.1% to 0.2% range. Stateside in California, by comparison, the maximum amount of tax on real estate is limited to 1% of the full cash value, ten times higher than in Mexico. Meanwhile, Mexican real estate is valued at approximately one third of similar US properties, despite the countries being so near. And proximity is key: the relative value and appeal of property in Mexico comes down to the three key factors: location, amenities, and accessibility to the United States. There is more "value" in Mexico when comparing property prices to other "sunshine" destinations, not only to Americans, but to Canadian and European investors as well. These features, combined with Mexico's lower land prices, construction and utilities costs make Mexico one of the top real estate investment hot spots. For decades many of the people worldwide who have enjoyed vacationing in Mexico are now looking at purchasing property in Mexico as the natural next step.
Economically, Mexico is healthier than you might expect. Mexico is actually classified at the top of the list of countries ranked by economic wealth, with an "upper-middle" average income rating. With the strong presence of a number of American multi-nationals (with trade links all over the world) in Mexico, and although heavily aligned to the US economy, the situation at the moment is very steady. While areas such as Mexico City have proved to be very popular with both foreign companies and foreign investors, the area is fast running out of affordable land. This has caused the property market to mushroom outwards from Mexico City, bringing many regions into play. In Baja California Sur alone, real estate is booming. The top ten locations are (in alphabetical order): Buena Vista, Cabo San Lucas, El Pescadero, La Paz, La Ventana, Loreto, Los Frailes, Mulege, San Jose del Cabo and Todos Santos. Since the Mexican government has put foreign investment in tourism and real estate development high on its list of priorities and have been encouraging foreign investment, real estate property investors with an eye on Mexico are poised to take advantage and snap up some of the prime sites available. Whether the investment is a "maquiladora," a tourist development involving the construction of hotels or condominiums, or simply the construction of summer homes by foreigners, the Mexican government is maintaining its "open door" policy for foreign investment.
HOW REAL ESTATE TRANSACTIONS IN MEXICO DIFFER FROM THE US
Because of the similarities of real estate transactions in general, it is easy to assume that the basic terms and principles which are familiar in the United States also hold true in Mexico. Much of the paperwork is similar, if not exactly the same, as that used in the US. Although, there are many aspects of Mexican real estate transactions that are identical to procedures carried out in the United States, there are many aspects that are completely different.
The buyer must retain professionals to assist in the transaction and since Mexico has yet to regulate real estate transactions, some research and due diligence is inevitable, just as purchasing property in any location requires research, planning and preparation. Currently there is nothing similar to a Real Estate Commissioner or a Department of Real Estate in Mexico. Some states are beginning to look at some kind of real estate legislation, but it might be some time before this is a reality. The American Embassy and the American consulates in Mexico are good places to start when trying to determine if a real estate company is reputable. Some of the real estate companies have established quite a reputation for themselves at some of the Consulates. It seems almost inevitable that the property sector in Mexico will be regulated fairly soon, with pressure from the US authorities who are keen to arrange protection for a number of their nationals who have interests in the area. Mexico tends to follow the US in most cases, as they depend heavily on trade and employment opportunities. The North American Free Trade Agreement (NAFTA) and significant changes in Mexican laws enacted in the early 1990s have made safely owning property along Mexico's coast a reality. Today, more than 1.5 million Americans own real estate in Mexico.
There are several aspects of Mexican law that deal specifically with real estate investments by foreigners that are worth reviewing. Legally, only a licensed Mexican attorney can and should provide advice on the law. No part of what you read here should be misconstrued as legal advice. However, I am told that Americans and other foreigners may obtain direct ownership of property in the interior of Mexico. However, under Mexican law, foreigners cannot own property outright within the restricted zone -- for which there is a simple solution. For example, the Mexican Constitution prohibits direct ownership of real estate by foreigners in what has come to be known as the "restricted zone." The restricted zone encompasses all land located within 100 kilometers (about 62 miles) of any Mexican border, and 50 kilometers (about 31 miles) of any Mexican coastline. In order to permit foreign investment in these areas, the Mexican government created the "fideicomiso," similar to a US family trust (not a lease), but in this case a Mexican bank must be designated as the trustee and, as such, has title to the property and is the owner of record. The bank, as trustee, buys the property for the foreigner, and has a fiduciary obligation to follow instructions given by the beneficiary. Furthermore, it seems that under Mexican Law, the bank, as trustee, has a fiduciary obligation to respect the rights of the beneficiary. The beneficiary can develop and use the property to his liking and benefit, within the provisions of the law. As the beneficiary of the trust, you obtain all the rights of ownership while the bank holds title to the property. You are allowed to use, lease, sell, will, improve or encumber your property. A new trust is established for 50 years and is easily renewable.
WHO IS INVOLVED IN REAL ESTATE TRANSACTIONS IN MEXICO?
The following is an outline only, meant to provide you with an idea of what you might expect to happen when you are purchasing real estate in Mexico. There are usually four players involved in purchasing property in Mexico, besides the buyer and the seller: A real estate company (or estate agent), the buyer's lawyer, a bank and a Public Notary. Transactions outside of the restricted zone do not involve a bank since it is not necessary to establish a real estate trust in those areas. Otherwise the transactions are much the same.
In a real estate trust, the seller of the property, or trustor (el fideicomitente) irrevocably transfers title of the property to the bank. The bank, who acts as trustee (el fiduciario) and holds title to the property, is obligated to administer the property only for the benefit of the buyer or beneficiary. The buyer, or beneficiary (el fideicomisario) is entitled to use, enjoy, lease, or sell the property held in the real estate trust without limitation whatsoever. All four are helpful in their respective areas in assisting with real estate transactions. Assuming that no short cuts are taken, and the four parties are appointed by recommendation there is very little to fear from the purchase process.
A Mexican attorney should be involved to draw up contracts and to review the conditions and terms of sale. Additionally, an attorney can do a title search and point out any problems or alternatives a buyer may have. The buyer should always have his or her own attorney rather than using the attorney of the seller or some attorney used by a real estate company free of charge. As the old saying goes, you get what you pay for, and usually if someone's services are offered free of charge you are probably paying for them in some other way. A licensed Mexican attorney should always be consulted, and should be able to produce a "cedula profesional." This document is a registered license to practice law in Mexico and includes a photo of the attorney and his signature. To be sure that an attorney is licensed in Mexico, a foreign buyer should ask to see the attorney's license, or have the attorney's license number included in a retainer agreement before employing any services.
American attorneys are not licensed to practice law in Mexico and should not give advice on Mexican Law. This refers to individuals who are licensed to practice law in the United States, and not merely individuals who are citizens of that country. There are currently very few Americans who are licensed to practice law in Mexico. The fact that a person is licensed to practice law in the United States in no way allows him or her to practice law in Mexico: Mexican or United States law.
Besides formalizing your real estate transaction, an attorney can be very helpful in saving you money. This is because attorneys are involved in many different transactions and have contacts with banks, notaries, and the Mexican government on a regular basis. Because of this they are aware of the most competitive cost and fees involved in a transaction and can make sure that the buyer is given the best possible prices. An attorney can also inform the buyer regarding his or her legal options and by doing so can make sure that no opportunities are missed: tax planning considerations, closing costs which should be paid by the seller, and ways of taking title to the trust rights which make sense for the particular circumstances of a specific buyer. Very often one piece of good advice can save the buyer thousands of dollars in tax savings or other savings when the buyer eventually sells the property.
When looking for an attorney it is important to remember that any Mexican attorney can normally handle a real estate transaction. The buyer is not limited to only the local attorneys where the property is located. All real estate transactions involving a trust are governed by federal law. This means that all such transactions are carried out the same way regardless of the locations of the property. As in the US, when a transaction is agreed in principal there is a requirement to lay down a deposit (which is non- refundable), at which point the initial agreement would be drawn up. Then it is basically a case of the parties involved hammering out a deal and finance as soon as possible, and then complete the transaction.
FUTURE LOOK AT THE REAL ESTATE MARKET IN MEXICO
Property values in Mexico, like in the US, tend to increase year-over-year. As the demand for oceanfront property in the US has outstripped supply, it has become an unobtainable and unaffordable commodity for the average person. In Mexico, there are still numerous locations where one can still afford the ocean front home, condo or lot as prices started at a much lower price point.
The increases over the last couple of years have, for the most part, eliminated what we would call cheap housing, but on a relative basis, you can still find a 4 to 10 times differential in prices when compared to the US. And luxury properties are no exception to the savings. In Florida, property taxes are about 2.5% or $25,000 for the same million dollar home that you could own in Mexico for a fraction of those taxes.
With approximately 80 million people in the United States now over 50 years old, this segment of the populations is prone to seeking vacation homes, retirement locations and real estate investments. There is also more wealth worldwide than ever before, and much of this wealth prefers to invest in real estate. As more and more people invest in Mexico, additional services are built to support this trend. As this occurs, it often makes Mexico even more appealing to new investors. Many property investment experts believe that the long-term investment prospects in Mexico look promising. The country itself is becoming stronger economically and the opportunity for long-term real estate appreciation in most regions continues to be favorable, and Mexico real estate provides an attractive opportunity for both investment and enjoyment for decades to come.
The information gathered here should not be construed in any way as legal advice, nor is any content in this document in any way an authoritative source or necessarily up-to-the-moment current. Always consult a licensed Mexican attorney and enlist the advice of professionals in every aspect of your real estate transaction. |