|Mexicomatters, specializing in foreign investor representation|
What can go wrong in a mexican real estate transaction?
What can go wrong? The answer - everything. However, with competent counsel, a real estate sale in Mexico can be as safe as one in the United States. Understanding Mexican property law can safeguard the investment.
The primary cause of Mexican real estate transactions going bad is that the legal process is not followed or all of the steps in the process not adhered to. This "loose" approach to property title transfer is not exclusive to foreign buyers. Mexicanos also get stung by private contracts that go wrong when property is purchased in a careless fashion.
The best way to assure title and your purchase of a Mexico Coastal property is to enlist the aid of a Mexican bank to establish a Bank Trust. The Mexican constitution limits the form of foreign coastal property ownership. Foreigners must purchase coastal property via a bank trust.
The bank trust (sp. fideicomiso) is similar to a living trust in the United States. Property transfers from the Mexican seller to the bank who places the property in trust. The buyer is the primary beneficiary of the trust and lists the heirs who continue the trust after the primary beneficiary's death. Heirs name their heirs and the trust remains in perpetuity with each new generation naming their heirs. Trust renewals are required every fifty years.
MAJOR PROPERTY PURCHASE BLUNDERS
The most extreme example of foreigners recklessly investing, without legal protection, is the "PRESTA NOMBRE", translated - borrow a name. A Mexican "fronts" for the foreigner and holds the title in his name to avoid the laws of foreign real estate ownership. Prior to the 1973 formation of the fideicomiso (bank trust) this was a common method for foreigner's to posess coastal or border properties in Mexico other than leasing property.
The risk is incredibly high in this situation, even with documents that guarantee the foreigner recompense for property titled to a Presta Nombre. The parties in a Presta Nombre are breaking the law. Committing fraud against the state. Therefore, unprotected from non compliance to an agreement intended to subvert Mexico's foreign investment laws. Many beautiful homes, hotels, commercial and industrial properties were acquired by Mexican families as a result of a Presta Nombre backfire.
The "amigo" who agrees to hold a Presta Nombre sometimes aint and ends up the benefactor of an illegal act. In other instances the amigo truly is your amigo but he dies and his kids are not interested in your amigoship. Or the third uncontrollable risk: your amigo's bank takes the property for his defaulting on a loan.
I have seen all of the above happen, and more, in Presta Nombre arrangements. Thank god and ex presidents of Mexico Echeverria and Salinas that it is no longer necessary to use a Presta Nombre for property acquisition in Mexico.
PROPERTY LEASES IN MEXICO
Thousands of Baja California property owners have invested in home construction, some in the tens of thousands of dollars, while others in the hundreds of thousands, in what they think is a legally binding 30 year lease. Mexican law clearly stipulates that residential leases are valid for ten years and no more. The exception are 30 year Ejido leases, discussed below. If it is not stipulated otherwise in the lease contract, improvements to the property belong to the lessor at the end of ten years. Property improvements are also the lessors in U.S. leases unless otherwise stipulated.
The typical leases I see of 10 years with renewals are usually not written to defraud the foreign investor. Mexican property owners, as well as their foreign lessees, believe that ten year lease contracts with renewal options are valid and most are renewed by honorable lessors. However, the lessors death, credit problems or sale to a third party does not obligate the new owner(s) to honor the unenforceable renewal options.
Most Mexican landowners and Ejidos (Farming Cooperatives) who lease land to foreigners are simple, noble people. Rural folks who care about their reputations in a small community they will never leave. They believe in keeping their word, including promised lease renewals. However, problems often arise on the anniversary of the first ten years.
The law dictates that a ten year renewal must be treated as a new lease. Therefore, the lessor can set the new lease price at any figure he deems fair. What the landlord thinks is fair is often disagreeable to the lessee, but too bad. The lessee need not hire a lawyer who says he can litigate a better lease renewal. I have seen this happen repeatedly: five thousand dollars later (that always seems to be the magic figure), and repeated unreturned phone calls, the lessee is $5,000 poorer. Worse, he must now negotiate with an angry landlord whom he threatened with litigation.
I have seen a dozen cases that followed the preceding scenario. I have negotiated for over a thousand gringos in Baja California with homes, on somebody else's land, starting at $40,000 in improvements to the most expensive home at about one million dollars. Typically, the lessee ends up paying about the same amount requested by the landlord with or without hiring a lawyer..
Recent liberalization and privatization of Ejido lands (farming co-ops) has permitted Ejidos to sell their lands to foreigners in trust or enter into joint ventures with investors for acricultural, indurstrial, vacation or retirement home use. Ejido leases can be written for 30 years. But why lease? The purchasing of property in a trust or 100% foreign owned Mexican corporation, eliminates the need to improve land belonging to someone else.
Ensenada, Mexico: (646) 176 6759 US: 1(619) 819 9369