The thing about buying property in another country is that very few of us have done it before, which can create a lot of apprehension and anxiety. Our job is twofold – to help you find the perfect property, and to educate you about the process and make sure you feel confident in your transaction. Here are a few of the most frequently asked questions, so start here and know that we are available to talk you through the process and any other questions that come up.
Q. Can foreigners own property in Mexico?
Yes, foreigners can own property in Mexico! In most of the country, non-Mexicans can own property directly, however there is a “Restricted Zone” along Mexico’s borders where foreign ownership was historically prohibited completely, but now is allowed via purchase through a Bank Trust known as a “Fideicomiso” (see below). The restricted zone consists of 100 km/62 miles inside the land borders and 50 km/31 miles inside the sea borders.
Q: But how?
In order to permit foreign investment in these areas, the Mexican government created the “fideicomiso,” (FEE-DAY-E-CO-ME-SO) which is, roughly translated, a real estate trust. This type of trust is similar to trusts used in the United States, but a Mexican bank must be designated as trustee. The trust, “holds” the property for the foreigner, and the bank, as trustee, then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary. The trust beneficiary retains and enjoys all the rights of ownership just as a Mexican would do. The foreigner is entitled to use, enjoy, and even sell the property that is held in trust at its market value to any eligible buyer. You determine the use of the property and make all the investment decisions. It is NOT a lease, you have irrevocable control over your property, in order to use, rent, sell, make improvements, and appoint substitute beneficiaries (heirs).
Q: How long does the “real estate trust” last?
Real Estate trusts are valid for a period of 50 years and according to the Foreign Investment Law passed in 1993, trusts can be renewed for an indefinite number of successive 50 year periods. In effect they run in perpetuity.
Q: That sounds complicated and expensive….?
It’s not complicated – we handle it through the closing process as a matter of course. When you buy a property in the restricted zone you will either create a new Fideicomiso, or transfer an existing Fideicomiso if you are buying from other foreigners – the trustee banks charge about the same amount to do either one, and that will be included in your closing costs, typically around $1500 USD. Additionally, the banks charge an annual fee for their “services” as Trustee – right now they are all charging around $550 USD/year.
Q: What are my rights as an owner?
The Trust is a legal substitute for simple ownership. As Beneficiary, you have the right to sell your property without restriction. You may also transfer your rights to a third party or pass it on to named heirs. You have the same rights as a Mexican citizen; you just need to notify the Bank before selling the property since your Trust will be cancelled or transferred.
Q: Is owning a property in a Fideicomiso/Bank Trust legitimate?
YES! Property ownership through a real estate trust is completely legitimate! Real estate trusts were established by the Mexican government specifically for the purpose of encouraging foreign ownership in the restricted zone. In fact, there are numerous federal statutes and a constitutional amendment which designate this process as the method of foreign ownership and guarantee a foreign investor’s ability to hold title in this way. And, in case you were wondering, the Mexican government also realizes that the Fideicomiso requirement is not ideal — people don’t like it, and prefer outright ownership. Until they are able to change the Constitution of Mexico, however, the requirement will remain.
Q: But do I have title? Is my investment secure?
Absolutely. Trustees (banks) are federally approved to hold real estate trusts. These trusts are NOT considered assets of the bank. Should a bank close, merge, etc., the trust must be transferred to another approved bank. Property owned in a trust is eligible for Title Insurance from several title companies, including Stewart Title and First American Title Company. While we don’t necessarily recommend the purchase of title insurance for your investment (see below), the very fact that these major companies are willing to insure properties held in trusts speaks to their legitimacy and security.
Q: I still don’t like the bank trust thing, can’t I just open a Mexican corporation instead?
No. Although there was a time when it was popular to open a Mexican corporation rather than to utilize the Fideicomiso, the government has made it clear that this is not appropriate and prohibits ownership of purely residential property by a Mexican corporation. Furthermore, it’s very expensive over the long run, as Mexican corporations must file taxes each month, have annual reporting requirements, etc. There are a few limited scenarios where it’s appropriate to have your Mexican corporation buy your property (it’s a bed and breakfast or other non-sole-residential use issue) but it is important to talk with an attorney and/or accountant to determine which method of ownership is best if there is any question.
Q. What if my US/Canadian/foreign corporation or trust buys the property – will that get me out of having to open a Fideicomiso?
Your foreign corporation can purchase and hold property in Mexico, but it will have to be in a Fideicomiso. There are special requirements when a foreign corporation or trust purchases, so let us know in advance and we can walk you through how that will work and the added costs.
Q: Can the Mexican government take my property?
It is a common misconception that the government in Mexico can randomly seize property. It is false. Under the North American Free Trade Agreement (NAFTA) Mexico may not expropriate land except for a public purpose, such as building a road. In the extremely rare case that the land where your home is needs a road through it, the government pays market value for the property. It is the same process as Eminent Domain in the US, Expropriation in Canada or Compulsory Purchase in the UK.
Insider tip: When you see news reports of the government “taking” property in Mexico, dig deeper — you will find in all cases it was after prolonged litigation, usually over “Ejido” land, which is similar to tribal/Native American land in the US and Canada and cannot be sold outside the “Ejido”. It is not impossible to purchase and title “Ejido” land, but it’s very complicated – you must work with an experienced attorney to get this done correctly and avoid future litigation over title.
Q: What are my financing options?
Properties that are purchased by foreigners in Mexico are generally purchased with cash. At this time, there are no banks offering traditional mortgages against these properties in Mexico, the US or Canada.
There are several options that may be available, depending on your financial portfolio and the property you are interested in purchasing.
- Developer or Owner Financing: Oftentimes, developers of new construction offer payment plans for the purchase of their properties. Likewise, some owners are open to paying for their property in the form of payments. Typically, this type of financing is shorter in term than a traditional mortgage and can typically vary from 1-5 year terms.
- Private Loan or Equity Loan: Currently, U.S. and Canadian banks will not allow purchasers to use their foreign property as collateral for a loan. However, some buyers have leveraged other assets owned nationally or used home equity to acquire credit from their local, national lenders.
- U.S. Citizens: Self-Directed IRA funds can be used to purchase foreign real estate.
- Co-Ownership: Mexico allows multiple parties to be legal property owners. So, how about going in on a vacation property with family or friends?
There is no great mystery about the purchase process in Mexico – we generally follow the same pattern as in other parts of the world. Although each property and negotiation process may vary a bit, in general, once you have decided on a property to purchase, the process is this:
Negotiation – typically with written Offers to Purchase and Counter-Offers, culminating in an agreement on price and terms, which is finalized in an Offer/Acceptance Agreement.
Earnest Money Deposit – As part of your negotiation, you will have agreed upon an earnest money deposit amount. Once the Offer/Acceptance is signed, you will proceed to pay the earnest money. We strongly recommend that you open an Escrow Account (an independent account to hold funds until such time as the transaction is completed – these accounts are not in Mexico, as Mexican banks do not offer them. We like to use Secure Title – an international title company with offices in Playa del Carmen. Secure Title’s escrow accounts are at Citibank in NYC) and deposit the earnest money there via wire transfer/electronic transfer from your account. There are also other options for escrow accounts that we can discuss at the time. No funds will be released to the seller until such time as the transaction is completed and you have agreed that funds may be released.
Formal Contract (Buy/Sell contract)- Shortly after the earnest money deposit is received, the parties will enter into a more formal contract (In English and Spanish) detailing the legal terms of the transaction and penalties for failure to perform under the contract.
Preparation for closing – You will either hire a closing agent/attorney to get everything ready for closing, or hire a Notario directly to close the transaction and work directly with the Fideicomiso bank.
Special Note – Notarios A Mexican Notary (Notario Publico) is a licensed attorney, certified by the state and Federal government to act as an official and unbiased representative of the government of Mexico. A Mexican Notary is very similar to a notary in Canada and has far greater responsibility than a notary in the US. A Mexican Notary has passed stringent exams required by the Mexican government and is a government official. They provide strict security of original records and documents and they record the documents with the Public Registry of Property. A Notary’s role is taken very seriously in Mexico in that the Notary could be held liable in both civil and criminal terms. Their oversight and seal of approval is required for the title to be transferred and registered. They are responsible for the accuracy of the transaction and collecting the proper amount of fees and taxes due the state and federal governments. The notario does not represent any party to a transaction, although he is typically paid by the buyer to perform the closing.
This process generally takes 30-45 days, providing that seller’s paperwork is in order, the buyers have cash ready for closing, and that government offices are operating under normal hours (government offices essentially close from mid-December through mid-January).
Q: Should I hire an attorney for this?
Unless you are going to be purchasing title insurance, an attorney is optional for buyers during the closing process. However, a good attorney can really be an asset during the buying process. All legal documents that you will be signing and reviewing are in Spanish. Further, the contracts are not uniform, so a careful review is important. Your attorney serves as your advocate during the transaction and looks after your interest. They are a great asset when making a foreign investment of considerable value in a foreign language. We have worked with a variety of reliable English speaking professionals and are happy to give you a referral.
Q: Can I hire an Attorney from my country or do I need to hire one from Mexico?
Investors should hire competent Mexican legal counsel if necessary when completing any real estate transaction. Mexican laws and practices regarding real estate are different from other countries. We work with several English speaking attorneys in the area and are happy to refer you when necessary.
Q: Should I purchase Title Insurance?
The purchase of title insurance is optional and is a one-time purchase that is very reasonable in price. While a Notario is required to perform a title search for every real property transfer, the title research required to obtain title insurance is much more in-depth than what is performed in an ordinary closing. The title research must be performed by an attorney that is approved by the title insurance company, as this attorney will be writing the legal opinion for your policy. These attorneys’ competence and past performance have earned the confidence of the insurance companies and serve as a good referral in your selection of an attorney.
You’re buying peace of mind with a title insurance policy. There is no statute of limitations regarding real estate issues in Mexico. Theoretically, any party can make a claim against title of the property and raise it before the courts as a challenge to ownership. While this scenario is extremely rare – it is within the realm of possibility. Title Insurance will protect your investment and pay any legal costs associated with defending the authenticity of your title.
Q: How much are closing costs and who pays them?
Buyers typically pay closing costs, and they can range from 6 – over 10% of the purchase price, depending on the price of the property. At the under $100,000 USD price range, closing costs can be 10% or more. Around the $300,000 USD price point, they are around 8-9%. Around $500,000 USD they are 7-8%. Closer to the $1 million USD + price point they will be around 6% of the purchase price.
The quotes above include everything a buyer is responsible for paying — the cost of an attorney to represent your interests, the cost to set up an escrow account (you NEED THIS), the cost to set up or transfer the Fideicomiso (the asset trust), the cost of the Notario, the purchase acquisition taxes (3.3% in Puerto Morelos) and other municipal and state registration fees.
Sellers pay their ISR tax (Mexico’s version of capital gains tax) and the real estate commission.
NOTE: CLOSING COSTS ARE STEEP, BUT ONGOING OWNERSHIP COSTS ARE MUCH MORE AFFORDABLE!
COSTS OF OWNERSHIP and MANAGEMENT OF PROPERTY
Q: So, once I buy a property, what are the ongoing costs?
- Annual Property Tax (“Predial”) – this tax is quite low – it’s around a quarter of one percent of the purchase price. To get an idea of what your annual predial taxes will be consider .0028 x purchase price/year. Quite low. And if you pay in December, you’ll get a discount. Lately it has been 15%.
- Annual Real Estate Trust Fee – paid to Trustee Bank (Approx. $550 USD)
- Annual Federal Beach Tax (“Zofemat”)– only assessed to beachfront properties and based on meters of beach frontage.
- Utilities (Gas, Water, Electricity, Phone, etc.)
- Condominium or Homeowner’s Association Fees, if applicable
- Property management/vacation rental management fees
Q: I’m not going to be able live here full-time, how do I take care of my property and pay my bills when I am not in Mexico?
This part is easy! Many homeowners here are in the same situation, i.e., they aren’t here all the time. There are several professional property managers around town who can be hired to manage your property and pay your bills while you are away.
The responsibilities and costs of managers vary and you will need to meet with a potential manager and define what you want done while you are away (Do you want someone to air out and clean your house once a month? Pool maintenance? Obtain and pay bills? Keep the garden in check? Start your car?) and then you will mutually agree on a cost for these services.
Luckily, more and more businesses and utilities here are modernizing and allow online billing and payment, so bill paying has become less a necessary part of what is required from a property manager than it used to be. It’s also easier than ever to transfer funds to a property manager, so you don’t have to worry about leaving lots of cash every time you leave town.
The most important thing is to get someone in place before you leave the area, so that you can feel comfortable leaving your property in good hands! Our office maintains a list of reputable property managers in the area and we are happy to refer them upon request.
Q: I would like to generate some rental income with my property when I am not using it, is that an option?
Although Puerto Morelos has retained its small beach town charm, it has taken its rightful place as a favorite destination for travelers eager to experience the real Mexico, not the Spring Break version. The peak season for occupancy in hotels and vacation rentals is mid-December – April, however shoulder season bookings are increasing and we are moving towards a much longer rental season, more in line with Playa del Carmen and Cancun. Most rentals in Puerto Morelos book at least a year in advance for February/March, and approximately 6 months in advance for other high season months.
The most sought after vacation and longer term rentals are, naturally, closer to the beach, but over the past few years we have seen huge growth in the market for rentals further from the beach – either in the single family homes in the gated communities along the highway (Puntarena, Punta Vista, Regatta) or across the highway in the “Colonia”, where you will find duplexes and apartments, as well as single family homes. It seems the demand for affordable Puerto Morelos rentals is on the rise!
Q: I would like to generate some rental income, but I can’t be there to manage the rentals, what do I do?
Oftentimes your property manager can also manage your vacation rentals. They can greet your guests, be on call if there are any problems, and make sure that the property is cleaned before and after each rental. Again, the scope of services and compensation varies widely, so it’s important to meet with a potential manager and make sure you’re on the same page about what is expected and what the costs will be.