Financing and Foreign Ownership of Real Estate in Mexico Term Paper

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Financing and Foreign Ownership of Real Estate in Mexico

Due to the similarities of real estate transactions in general, many Americans assume that the basic real estate terms and principles of the United States also hold true in Mexico (Peyton, 2003). Because much of the American real estate terminology is adopted for real estate transactions in Mexico, a lot of the paperwork appears to be similar.

However, many aspects of Mexican real estate are completely different. Therefore, a foreigner who wishes to purchase real estate in Mexico may face many obstacles to acquiring simple ownership.

Real estate experts recommend investing a significant amount of time before investing in residential real estate In Mexico. It is important to understand the terrain, its problems and advantages, as well as the area, the people and the corresponding real estate values.

Different Laws in Mexico

According to Rose (1998), even people who are highly experienced in buying and selling real estate in the United States may not be prepared for the Mexican experience, as the laws and regulations in Mexico are very different from those in the U.S.

For example, under the terms of the Mexican Constitution (Rose, 1998), only Mexicans have the right to own land or receive mineral or water rights. Foreigners have the right to own real property, as long as they do not call upon the protection of their government.

Basically, this means is that all disputes concerning land ownership will be tried in Mexican courts, treating foreign landowners the same as Mexican nationals. Foreigners cannot take the case to the legal system of their own countries. According to Rose (1998), "this is done to prevent the historic recurrence, prevalent in Latin America in the past 200 years, of a capital-exporting country meddling in the sovereign affairs of another nation to protect a private party's economic interests."

In addition, foreigners are explicitly prohibited from directly owning real estate within what is known as the "Forbidden Zones" of 100 kilometers of the Mexican border and 50 kilometers of its coasts (Rose, 1998).

However, recent laws have made it possible for foreigners, foreign firms, and Mexican firms with foreign participation to acquire interests in coastal or "forbidden" real estate through a bank trust (Neptune Realtors, 2003). Still, for foreigners who want to buy property in these restricted areas, foreign ownership can be obtained under a bank trust, which is also called a fideicomiso.

The Mexican Government created the fideicomisos as a solution to the problems involved in developing the restricted zone and to attract foreign capital (Peyton, 2003). These trusts allow foreigners, as beneficiaries of the trusts, to enjoy unrestricted use of land located in the restricted zone legally.

Although direct ownership of real estate by foreigners in these areas is not permitted, foreigners can purchase the right to hold, occupy, use, improve, develop, rent and sell real estate by purchasing a beneficial interest in a fideicomiso. This bank trust is similar to trusts set up in the United States, yet a Mexican bank must be designated as the trustee, holding title to the property as the owner of record.

These bank trusts are typically created for a 50-year period, although they may be extended. The bank acts as a trustee, holding legal title to the property. The buyer holds beneficial use.

Foreigners may also use fideicomisos to purchase land in non-restricted areas for a variety of reasons. For example, these bank trusts allow multiple or successor owners. In addition, they are easy and inexpensive to set up.

Based on the current tariff, the bank charges the investor an initial fee of approximately $500 to draw up the agreement and establish the trust, in addition to a percentage based on the value of the property (Neptune Realtors, 2003). The bank may also charge an annual fee for its services as a trustee, which is based on the value of the property.

Title of the property is transferred to a trust with a Mexican bank acting as the trustee. The trust agreement is created when a permit is obtained from the Mexican Ministry of Foreign Affairs. The investor is designated as beneficiary in the trust and the beneficiary rights are recorded in the public record.

Another important factor to consider when buying real estate in Mexico is zoning. In many residential areas, zoning restrictions are not apparent yet certain areas may have building codes for historical preservation (Rose, 1998).

For example, in areas that enforce a historical building preservation code, private land ownership may be prohibited in forested areas, natural protected areas, reserves, biospheres and other environmentally protected areas (Rose, 1998).

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In addition, many historical preservation laws have limited large land-holdings in agricultural areas, placing restrictions on the amount of farmland that can be owned by a single party.

Basically, Mexican real estate transactions are carried out in a different manner than U.S. real estate transactions (Peyton, 2003). The buyer is required to retain professionals to assist in the transaction.

In addition, Mexico has yet to regulate real estate transactions. Therefore, real estate agents and brokers are not legally licensed in Mexico, as they are in the U.S. Therefore, foreign investors must proceed carefully when buying property in Mexico.

Buying Property in Mexico

Traditionally, most people who invest in real estate forego financing mechanisms in favor of paying for their properties in cash. Mexico's lack of capital markets and high interest rates have made buying real estate through financing a poor option for the foreign investor (Rose, 1998).

However, as the Mexican economy opens, new sources of financing are becoming available, yet high mortgage interest rates and unfamiliar terms often make foreign investors wary of financing.

Some U.S. companies now offer dollar-based mortgages on Mexican property (Foster, 2002). However, the rates are fairly steep and usually have only 5-20-years amortization. In some cases, owner-carry situations can be found. Generally, these are 3- to 5-year contracts. However, these can be really sticky if problems arise.

For real estate deals in Mexico, the closing costs are significantly higher than those in the United States (Rose, 1998). Basically, the buyer must pay the transfer tax, which is two to six percent of the appraised value of the land and notary's fees, usually two to three percent of the appraised value. The appraised value used for deed purposes is usually much lower than the actual sales price. The seller pays any capital gains tax and the agent's commission.

On the brighter side, property taxes are very low in Mexico. On a $200,000 house, property taxes may be below $100 annually. However, foreigners must also pay an annual trust maintenance fee to the bank that holds title-in-trust (the fideicomiso) to the property, which can be several hundred dollars.

For all real estate sales in Mexico, a notary is needed to close the deal. However, the definition of a notary in Mexico differs from that of a notary in the U.S. In Mexico, a notary is "a quasi-governmental official who reviews all documents of importance with respect to the sale of real estate (National Law Center for Inter-American Free Trade, 1997)." notary in the United States "typically has minimal training and responsibility. In the U.S.A., a notary typically attests to the fact that a person has signed a document." In Mexico, a notary's job is to see that certain formalities have taken place in real estate transactions, while a U.S. notary is simply a witness.

Financing and Deeding

According to Foster (2002), potential investors should consider only already-deeded property, excreting extreme caution regarding two potentially risky areas: developer-financed property and ejido property.

While Foster (2002) maintains that most developers are legitimate, structuring things so that foreign investment are protected, he says that many developers are still "much more sloppy."

Many investors have fallen prey to poor advise from developers who go bust. Later they discover that their contracts, which were never legal transfers under Mexican law, are completely worthless. The investors lose all their investment, and have no recourse.

Another common mistake occurs when investors buy ejido (non regularized, non-deeded,) communal property (Foster, 2002). While this property is considerably is cheaper, it also holds greater risk for the buyer.

In Mexiso, it is not legal for the ejido to sell property to a foreigner, but that does not prevent it from happening. In some cases, the ejido is able to "regularize" and deed the property after the fact; often it cannot. This makes it a shaky investment.

Obtaining Title and Title Insurance

Mexican deeds are public instruments, which can be researched at the local Public Registry of Property (National Law Center for Inter-American Free Trade, 1997). There is a Public Registry of Property in most cities and towns throughout Mexico. These government offices are where documents are registered so that third parties can research the ownership of land titles and liens on such titles.

A deed must be finalized and signed by a Mexican notary. The deed lists the parties involved in the transaction, including the notary, seller, buyer,….....

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