Realty Executives

Uncertain about investing in Mexico, Part II

We understand…and we’re here to help

Wayne Corcoran

Chief Operating Officer

Realty Executives Mexico

  My article, published in the March 2008 edition of the Rocky Point Times sparked numerous conversations with fellow real estate professionals about how we can help buyers reduce their risk when it comes to purchasing real estate in a foreign country. Real estate is generally one of the safer investments you will make, but there are numerous risks involved in any purchase transaction whether you are buying previously owned properties or buying into a new development. The risks are naturally higher in foreign countries where you don’t know the laws or speak the language.

  I was asked to discuss the article at our AMPI (Asociacion Mexicana de Profesionales Inmobiliarios) meeting. AMPI is the professional real estate association that frequently meets to discuss and try and solve real estate issues and concerns. I received support and input from fellow members who offered to help me come up with the Buyer’s Checklist (to your left). I have taken the questions from last month’s article, added a few more, and organized them into a chart that agents and buyers can use alike. The checklist is designed for you to copy (or cut out of the paper) and carry around with you when you decide which property or properties you are interested in purchasing. Each month the list of questions will, no doubt, be added to as I receive additional input from real estate professionals in Rocky Point. On our website, at www.realtyexecs-mexico.com, you will find the articles printed in the RPTimes in chronological order as well as the latest Checklist. We want all buyers to be educated, ask the right questions, and know they are getting the right answers.

  This month’s article will focus on ownership and title risks, which seem to be the most written about topic, and one that still remains a mystery to the majority of buyers.  Next month’s focus will be on financial related risks.

  Let’s start with the first question on the checklist, and one that was listed last month: “Can the government take my property away?” The simple answer is no, because in 1973 a Constitutional Amendment, known as the Foreign Investment Law, allowed foreigners to purchase real estate anywhere in the country of Mexico except in the “restricted zone”. And, in 1993, the Constitution was amended again allowing foreigners to purchase real estate within the “restricted zone” by means of a Fideicomiso (Bank Trust). Foreigners can also own property in the restricted zone through a deed, not a bank trust, but a Mexican corporation must be formed…more about that later. Now, where exactly is the “restricted zone”? It is any area within 100 kilometers (64 miles) of the International Border and/or within 50 kilometers (32 miles) from the coastline. (Yes, Puerto Peñasco falls within this zone because we are on the coastline.)

  The flipside to the above question (a “yes” answer) would be in cases – just as in the United States and Canada – where the Mexican Government enforces imminent domain. Southern California springs to mind when talking about imminent domain where entire neighborhoods have been demolished and residents forced to relocate to make room for more interstates.

  The majority of the population believes and fears that Mexico is not as stable as Canada or the United States, but the fact is that Mexico is now in its 3^rd term of very stable government rule with foreign-owned property rights built right into their Constitution. Few people know that real estate is the major industry that underpins the Mexican economy and each President is careful to help it expand. And it is also common belief that foreigners can only “lease” land in Mexico for 50 years, but not actually own it, which is completely false.

  Since you are looking to purchase property in Rocky Point, which is within “restricted zone”, I’ll start with the Fideicomiso (Bank Trust). The Fideicomiso is set up through a Mexican bank for a period of up to 50 years and can be renewed for an additional 50 years. With a bank trust in place, the buyer can lease, sell, transfer or even will the property to an heir. (In order to acquire the property, the purchaser must obtain a permit from the Ministry of Foreign Affairs. This is a permit which basically states that you are qualified in Mexico to go ahead with your purchase.) At the end of 100 years, the property can be sold and another bank trust can be established, this can also be done at any time during the 100 years to renew the 100 year time. Bank trusts, in their present form, have only been in place since 1993, so it is expected that regulations and rules will improve by the time the 100 year mark rolls around. Some even speculate that a direct deed will be issued to the owner, but that is not the law at the present time. You might be asking, “What if the property is passed down from generation to generation? Does the heir that owns the property in 100 yrs. have to sell it?” Right now, they just basically have to sell it to themselves – a formality so a new trust can be issued. Like I said, the process will most likely change many times before then.

The Fideicomiso (Bank Trust) has 3 elements to it:

1) Fideicomitente (Trustor  or Settler) which may be a physical or legal Mexican National (person) who is the owner of the property to be placed in trust. (A “physical” Mexican person may be a bank that is holding the bank trust.)

2) Fiduciario (Trustee) which, by law, may be only a credit institution that holds the raw real estate. (The bank is known as the trustee and holds the deed (escritura) for the person(s) purchasing the property (beneficiaries.)

3) Fideicomisarios (Beneficiaries) who are the legal or physical foreign person(s) who are the beneficiaries of the trust and who obtain the use and benefit of the property. The beneficiary has all ownership rights to the property and may sell, lease, mortgage, or will their property as desired under the rules of the law.

  I have given you the two ways foreigners can own property within the restricted zone – by having a deed or a bank trust - so why are we seeing other variations of “ownership” such as private contracts or ownership held through LLC’s?

  Private Contracts were a necessary purchase vehicle until a few years ago when Fideicomiso’s (Bank Trusts) were limited to full ownership trusts – meaning that if the property was not paid in full, a bank would not issue a trust. Even though bank trusts have been issued since 1993, banks did not feel comfortable, or perhaps not had the means to carry a mortgage on property purchased by foreigners. In the past few years however, most banks have started to use “Warranty Bank Trusts”, which have a high degree of legal flexibility and can handle third party debt (carry the balance of the loan in other words).

  Private Contracts were (and are) used to expedite the sale of property whereas establishing a bank trust takes longer and costs more money. With a private contract, the buyer and seller agree to establish or transfer a bank trust. The Contract transfers ownership rights from the seller to the buyer, but does not legally transfer the documented ownership in the Public Registry. Because the transfer/sale is not recorded in the Public Registry, the Capital Gains taxes are not collected. (Yes, you must pay Capital Gains and transfer taxes in Mexico.) And Capital Gains liabilities need to be calculated to ensure the buyer does not unknowingly assume this tax liability. This is a problem that plagues many transactions as some buyers and sellers are not aware that they owe Capital Gains taxes. In most cases a compromise is reached between the buyer and seller, but it is a very important issue you need to be aware of whether you are a seller or a buyer.

  Private Contracts are still common practice as they save time and defer immediate costs for the buyer, but are still risky because the official title has not been legally recorded, therefore the previous owner still “officially” owns the property. In addition to being risky, the government has not been able to collect the appropriate capital gains and transfer taxes and the liability to the new owner increases over time – with or without their knowledge. The seller needs to sign off on the official bank trust documents when the buyer decides to establish one, but what if the seller is not available or is incapacitated, then what? This is a significant risk many owners currently face. This is one of many risk factors that can be solved if the seller grants Power of Attorney to a third party escrow company, OTP for example, then the seller will not have to be present to transfer ownership. Again, this is just one solution to many problems that occur when Private Contracts are used. There have been, and are, many cases where property has transferred between several owners without being registered in a bank trust. As I stated in my first article last month, you have to determine the risk level you are comfortable with and willing to take.

  Now, with Warranty Bank Trusts available through the bank, Private Contracts are not required and should no longer be used. Real estate professionals should be warning their clients about the risks of using Private Contracts, and associations like AMPI, are considering discontinuing these contracts and recommending that buyers should steer clear of them. The short term savings are not worth the associated risks.

  Limited Liability Corporations (LLC’s) are another way that buyers use to defer or avoid costs associated with real estate transactions. When property is held in a LLC, the sale of the LLC can be quick and easy to complete however, there is disagreement about LLC’s. In the U.S., an LLC is used to reduce liability risks and is very effective, but the legal system in Mexico is very different and the validity of LLC’s has been called into question. The disagreement where LLC’s are concerned is whether the sale of an LLC should be recorded in Mexico since the bank trust has name of the LLC registered and not the name(s) of the individual owners. However, some Notario’s (Notaries) say that, according to Mexican law, when the owners of an LLC change, the bank trust must be updated, and the sale must be recorded as a sale in Mexico. If you are buying an LLC that owns Mexican property, talk to a Notario to get the sale recorded and your bank trust updated.

  The wisest and safest thing to do when purchasing property in Puerto Peñasco is to get a bank trust in your name as part of the purchase agreement. You simply cannot afford the long term risks associated with Private Contracts or the uncertainty of Mexican law where LLC’s are concerned. Besides that, you want to enjoy your time here on the Sea of Cortez, not run around from office to office and worry about whether you legally own your dream property.

  After my discussion with AMPI members, and fellow real estate professionals, we thought it best that bank trusts, private contracts and LLC’s be covered first, since that is usually where most of the risk will start. Be sure to use the Checklist and contact me at Realty Executives at (602) 288-8649 if you have anything to add. If you cannot download the articles and checklist off of the internet (www.realtyexecs-mexico.com), give is a call and we’ll get you hard copies. AMPI is working to streamline the selling/purchasing process here in Rocky Point and to make sure that each and every client has the facts and full disclosure.

  Next month’s article will mainly focus on financing risks, as this is another very important issue that needs to be discussed, and I will also answer more questions from the checklist if space allows.