The following is a reposted article written by John M. Vernon, Esq. and was published by the CIPS Network of the National Association of REALTORS®
In representing U.S. clients in the acquisition of real estate to Mexico, a common question I am asked is whether Americans can own real estate in Mexico. Generally speaking, the laws of Mexico regarding the purchase of real property are similar to those of the U.S. For example, Mexican law recognizes real estate mortgages and various types of security interests in personal property.
In addition, in most real estate transactions, Mexican banks can act as escrow agents or trustees. However, there are a number of differences as well. Often, when Americans participate in their first real estate purchase in Mexico, they are surprised to learn that title insurance is not widely available.
Foreign purchasers should take steps to ensure they have full title insurance.1 Also, there is no widespread use of purchase and sale agreements as such documents are understood in the U.S. In the U.S., we are accustomed to an escrow period, a closing date subject to certain conditions precedent, the transfer of title, and the payment of the previously negotiated purchase price.
The Role of NotariesIn Mexico, notary publics play a critical role in the closing of real property transactions that is vastly different from their role in similar transactions in the U.S. Also, the tax implications of real estate transactions are much different than in the U.S. and non-Mexican individuals are restricted from holding “fee simple title” to real estate property in a defined area known as the Restricted Zone (Zona Restringida) along the coasts and borders.
Finally, as a result of the above factors, Mexican title to real property is often held and transferred through the use of trusts. The transfer of title to real property in Mexico is regulated by both the Civil Code and by the Commercial Code. In the U.S., the parties normally execute a purchase and sale agreement and a warranty deed evidencing the fact that title to the real property has been granted.In Mexico, the purchase and sale agreement is the deed and no other document exists evidencing title to the real property. Title to the property is transferred automatically upon the execution of the purchase and sale contract. Once executed, the transfer document is recorded in the Public Registry of Property where the real estate is located. Most real estate transactions in Mexico involving the transfer of real property require the notarization of the executed purchase and sale agreement.
Notary publics in Mexico are attorneys licensed by the local authorities to practice as notaries. They have a unique role in the conveyancing of real estate and the authentication of documents in Mexico. They are considered legal experts in real estate. Their primary function is to grant “public faith” that what they notarize is true and correct. They certify the identity of the person signing the documents, the veracity of the signatures, as well as the contents of the documents being signed.
In Mexico, unlike in the U.S., notaries must calculate the taxes due and owing, income tax, value added tax and public registry fees. Also, they are given the duty of withholding taxes from the purchase price to pay the appropriate taxing authority. Notarized deeds which effectuate the conveyance of title to Mexican real estate usually include a narrative whereby the notary public describes all relevant information relating to the transfer of the real estate, such as any existing real estate liens, property descriptions, taxes owing and any encumbrances. The notaries’ duties also include the certification of all contents of the purchase and sale agreement, taxes to be paid, any special terms and conditions of transfer, and an appendix of all exhibits prior to recordation in the Public Registry.
Foreign Equity Participation. Acquisitions of real property by foreigners or by Mexican legal entities with foreign equity participation are regulated by the Mexican Foreign Investment Law. Mexican nationals may acquire real property anywhere in Mexico. Mexican legal entities with foreign equity participation may freely acquire real property anywhere outside of the Restricted Zone. Article 27 of the Mexican Constitution defines the Restricted Zone as land that is located in a path 100 kilometers wide along Mexico’s borders and 50 kilometers wide along the Mexican coasts. Within the Restricted Zone, such legal entities may acquire real property intended for non-residential use, as long as the acquired property is registered with the Mexican Foreign Affairs Ministry.
It is important to remember that registration with the Mexican Foreign Affairs Ministry must be completed before the purchaser obtains legal title to the real property in question. Foreign natural persons or legal entities acquiring interests in real property in Mexico’s Restricted Zone may only acquire their interests through a trust.
In Mexico, a trust is a contract that has as a trustee a Mexican bank; a trustor who places the property in trust; and a beneficiary for whom the trust is intended to benefit. For acquisition of real estate like hotels or restaurants in the Restricted Zone, a trust is often used by foreign purchasers to acquire title to the beneficiary interest created by the trust.
Title to real property is actually vested in the trustee and the purchaser holds title to the beneficiary rights, not the real property. Title to real property is “indirectly” transferred to the beneficiary immediately upon execution of the agreement. Mexico holds many opportunities for acquisitions and expansion but you must be very careful when entering a new market for the first time.
The Brooks & Heinze Team can assist you with your real estate needs in La Paz, Loreto, Los Cabos, Puerto Vallarta and Merida (Mexico). For more information please contact us at 206.276.5827 or log on to http://www.propertysalesmexico.com/ .