IN THE INTERIOR OF MEXICO FOREIGNERS CAN OWN AND HOLD TITLE IN THEIR NAME. THE MEXICAN CONSTITUTION DOES PROHIBIT FOREIGNERS FROM OWNING PROPERTY WITHIN 50 KILOMETERS FROM ALL COASTLINES AND 100 KILOMETERS FROM THE BORDER. HOWEVER, FOREIGNERS CAN BUY BEACH PROPERTY THROUGH A LIVING TRUST OR FORMING A MEXICAN CORPORATION.
MEXICO’S COASTAL AND BORDER PROPERTY LAW HISTORICALLY REMEMBERS THAT CALIFORNIA, COLORADO, TEXAS, ARIZONA, NEW MEXICO AND NEVADA WAS ONCE NORTHERN MEXICO. Foreigners, who were allowed to move in, took it away from Mexico.
ALL THE BENEFITS AND SECURITY OF OWNERSHIP
The dream of millions of Americans is to own a home at the beach. The only obstacle for most folks is money. A postage size lot in Southern California, with an ocean view, costs in excess of one million dollars. In Ensenada, a beachfront home and land can be had for less than $350,000.00 – In San Felipe $450,000.00.
If the beach is not your cup of tea, you can buy a three bedroom two bath home in a middle class Ensenada or San Felipe neighborhood for $65,000.00. I have never seen a better market in twenty years of living in Baja. With zero unemployment and proximity to the border, we are attracting workers from all over Mexico and Latin America. Foreign owned manufacturing (maquiladoras) are spreading to Rosarito, Mexicali, Ensenada and Tecate as Tijuana has become industrially saturated. Tijuana is home to almost one half of the entire country’s maquiladoras.
Consequently, Baja is the fastest growing state in Mexico. This is reflected in the lack of rentals available. Consequently we have since a significant increase in U.S. and Canadian citizens buying Baja properties as income-investment property. The housing demand has doubled rents in the past five years. In the past, the problem for Mexican buyers and sellers of property, has been the unavailability of credit. After the peso crash of 1995 the banks were broke and had to be bailed out by the government.
The credit situation is turning around as Mexican banks are being bought by foreign banks. Citigroup now owns Mexico´s largest bank – Banamex. Current Interest rates are significantly higher than in the U.S. with Mexican peso mortgages at 12% per annum and dollar loans to U.S. citizens purchasing Mexican property at about 9%. This is the first time in Mexico’s history that U.S. financial institutions are entering the Mexican mortgage market. This should unleash a wave of new buyers and cause home values to appreciate significantly. Seller financing is still the most common form of home financing, with interest rates and payment schedules that often compare favorably with stateside mortgage contracts.
BAJA PROPERTY – A SAFE INVESTMENT?
The safe way to buy property in Baja is a process that is no different (exactly the same) as the process used to assure a safe investment in the United States:
- Check title and certify property is free of liens at the County Department of Public Records
- Certify that no property taxes or utility bills are owed
- Obtain an appraisal on the property by a licensed appraiser.
- Legally transfer title, pay the applicable taxes, and register the title change in the Department of Public Records.
- Buy title insurance.
Foreigners, who do not speak Spanish, typically use Mexican lawyers or consultants to complete the due diligence and manage the transfer process. Banks will become involved in the purchase if you are a foreigner wishing to buy a personal residence. If the coastal property is for your personal residence (non commercial use) the law requires a trust. Commercial use by foreigners allows them to purchase property “fee simple” in a 100% foreign owned Mexican Corporation.
Mexican trusts (fideicomisos), provide all the advantages and security of ownership: sell the property to a third party, either foreigner or Mexican, and pass the property rights on to your heirs in perpetuity. You can be assured that the bank will insist on all the proper due diligence. You will not find trust departments in small town banks. In Baja California, most of the banks who have trust departments are located in Tijuana. The only other city that has a trust department is La Paz. .
REAL ESTATE TIPS
Don’t invest in property leases. Mexican leases are only valid for ten years, unless it is ejido land (farm cooperative). Ejido leases can be written for a maximum of 30years. There are so many good investment opportunities for purchase I see no good reason to improve somebody elses property with your money.
Buy a home already built unless you plan to daily supervise the construction. It is difficult enough to manage a contractor in the States. Add language, cultural and business practice differences and your dream home could become a nightmare. If you do choose to build, ask for foreign client references of contractors, get three competitive bids and create a written contract with the builder you select. Get legal assistance in writing the contract. Notarios are a good option because the contract will be made part of the public record.
NOTARIOS in Mexico are keepers of the public record. Lawyers who give up private practice to assure that all documents that become “public” are done in accordance with proper legal protocol. They are the gatekeepers in the transfer of all property tittles and must sign the title transfer documents before acceptance by the Department of Public Record.
Don’t pay a developer the full price of your purchase until all subdivision improvements are completed. The state enforcement of completing all subdivision obligations is weak. Civil suits against developers for non infrastructure completion is often the only recourse. A legally registered homeowner’s association can fight those battles effectively and distribute the legal costs to reduce the individual homeowner’s burden.
If a homeowner association exists or is in the process of formation make sure it is a legal entity now or in its formation. An “Associacion Civil” is a non profit corporation under Mexican law that, in a dispute, is guaranteed the same rights of a Mexican citizen . In addition to legal defense with developers, without becoming a legal entity, a home owner’s association has no clout. You can be assured that many homeowners will not pay maintenance dues and you will be stuck with a deteriorating subdivision.
Federal Zone Concession Rights – If your beach house is not 20 meters from mean high tide you are on the federal zone and you cannot be there by law without a special concession. The federal zone belongs to the Republic. If the home is on the federal zone make sure that said presence has been approved by SEMARNAP, the agency that governs the federal zone. If the property, either on the federal zone or adjoining the zone, does not have a federal zone concession, apply for it. Be sure that the concession does not belong to someone else. If it does belong to someone else they could develop “your beach”.
Apply for an FM-3 resident permit from immigration. If you have property in Mexico you are required to have said documentation. In order to defend yourself in a legal dispute or solicit permits that affect your property you must have an FM-3.
BAJA MERCANTILE AND CIVIL LAW CODES RECOGNIZE ESCROW-USE IT
The concept of escrow is not understood by most Mexicanos. It is not understood because it is not part of most of the 38 states’ legal codes. Mexico City, the nation’s centrist capital, is within the State of Mexico. This state does not have escrow specified in the law, therefore, not available without the aid of special bonding and security institutions. The transaction is bonded as opposed to a simple escrow in which a third, uninterested party, holds monies according to buyer and seller instructions.
TITLE INSURANCE CAN BE PURCHASED ANY TIME
If you follow the above guidelines you should have a safe investment that you and your heirs can enjoy without fear of losing it. If you have any questions about the above or wish a consultation to review a property I will be happy to provide same at no charge.
WHAT CAN GO WRONG IN A GRINGO/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 Mexican 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 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.
BUY IT LEGALLY AND MANAGE THE PROFESSIONAL CONSULTANT
Notarios are attorneys who approve the transition of property title. A Notario cannot represent you in litigation but can advise you in preventing litigation. Attorneys who give up private practice to become agents of record. They are required by law to assure that the propertys are free of liens “Certification Libre de Gravamen” and that the true property owner is the seller. The notario must receive an appraisal by a licensed appraiser to determine the tax obligations in transferring title. He assures the state that the foreign buyer is properly represented by a Mexican bank in a property trust or that the foreign owned Mexican corporation, that acquires the property, is duly constituted and registered.
With the assistance of a competent Notario the foreign buyer can be reasonably assured that the process will be completed properly. However mistakes do happen and you may want a consultant, accountant or attorney, experienced in foreign investment, to oversee the proper completion of title transfer. What to look out for:
- That the title, at completion of sale in the Notario’s office, in fact gets registered at the Department of Public Records – it is not automatic and a failure to follow through can result in the property not changing owners of record. Allowing the possibility of future liens against the seller affecting your right to clear title. A lack of follow through by busy Notarios is not uncommon and can have disastrous results.
- The buyer should insist on receiving a copy of the bank trust document. Unless requested the buyer is usually not given a copy. On occasion the names of beneficiaries are in error or a husband is named as a single primary beneficiary and the wife listed as the secondary beneficiary along with the heirs, usually their children. We have a case pending in which the wife should have been listed as the co beneficiary with her husband. The wife was mistakenly listed as the secondary beneficiary with another individual, unknown to the family or the bank. Since the husband died in testate two court trials will be required to unravel the bank error at a cost to the widow of eight thousand dollars in legal fees.
- Since reasonable financing is difficult to secure in Mexico, many properties are purchased with a mortgage held by the seller. It is important that the buyer has a mortgage registered at the department of public record and not simply an unregistered contract of sale. The risk of postponing title transfer until the mortgage is paid off is that the property is subject to liens for credit problems of the seller before actual transfer of property is completed. A mortgage, called a Hipoteca, sp., registered in the Department of Public Records, safeguards the buyer from potential seller credit problems.
So what are you waiting for? Come on down and take advantage of some wonderful beach property bargains. And feel free to call me if you have any questions or advice on a piece of property. The first consultation is free
REFLECTIONS ON PUNTA BANDA
Since the Punta Banda debacle, just south of Ensenada, in which numerous Americans were evicted from their luxury beach homes, my U.S. friends and family members ask: “Did you lose your property in Punta Banda?” Hell no, is my response. Do you think I have been spending the last seventeen years of buying and selling property for foreigners in Mexico to lose my own property due to legal problems?
I really get annoyed at the question that implies I might be stupid enough to buy property whose title is not legally secure. It is not just ego that causes my annoyance. I have never had much credibility with my family anyway. What is most annoying is the assumption that buying any property in Mexico is risky.
Most of the Punta Banda buyers knew the property was in litigation when they bought it. When I relay that fact to skeptics, they look at me incredulously. Not convinced that it was a case of “leaving your brains at the border”. I vainly attempt to convince Mexico detractors that property laws do exist in this country. Laws that will protect your investment if you follow them.
In 1986, I addressed 150 members of the homeowners association that were evicted. My presentation was intent on convincing them that their law suit was doomed. I had done the due diligence on this property in 1984 and realized that the duly registered and legal owners of the property were their adversaries in the law suit.
The farming cooperative (ejidos), representing themselves as the legal owners, aligned themselves with the developer. Unfortunately these ejido members were really squatters. My advice was to negotiate a settlement with the legal title holders. However, their lawyer’s convinced them to litigate. Their lawyers earned large fees in taking the case “all the way” to the Mexican Supreme Court.
When I tout Mexican Real Estate to my friends their facial expressions reflect a look that says: “Sure, Amate, I remember your Berkeley lifestyle in the 60’s, your brain is fried”. I persist in explaining that I have successfully purchased properties throughout Baja California and Baja California Sur for more than 200 different foreign families or foreign owned Mexican corporations. Yes you can own your beach home risk free with a bank trust or a Mexican corporation. .Despite my proof sources most U.S. citizens hold fast to a “I don’t trust Mexico” position.
The negative media barrage about Punta Banda, and other negative press, has damaged my consulting practice, foreign investment and tourism in Mexico. Unfortunate that a greedy developer, dirt poor peasants and buyers wanting to believe what was too good to be true, caused so much distrust for Mexican foreign investment. Avarice had a lot more to do with this tragedy than corruption in Mexico. The con man always uses greed to get your money. These upper middle class folks from Orange County could not believe what a “steal” these beach properties were at 45 to 175 thousand dollars, depending upon when they purchased.
They created a buying and new home construction frenzy propelled by the developers U.S. marketing team who spoke no Spanish and knew nothing about Mexico, let alone real estate property law. That is correct, gringos sold gringos-Mexican sales people were not welcome on the sales team. In addition to new lot sales, U.S. citizens ran the two major construction companies, who built the majority of beach homes. A real estate office was opened to handle resales as gringos began buying multiple lots for speculation and building condos for rental income purposes. You guessed it, the realtor handling resales and property management was a U.S. realtor. Did Mexico screw these buyers or did their countrymen?
Now you know the whole story. So come on down and take advantage of great beach property bargains. I will tell you how to do it safely. If you don’t believe me ask Chicago Title, they can provide your title insurance.