Realty Executives : Bank trust, AMPI

Uncertain about investing in Mexico, Part II

Realty Executives Puerto Penasco — Fri, 11 Apr 2008 21:40:00 GMT

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.

Wayne Corcoran MBA PMP, is the General Manager/Broker of Realty Executives in Puerto Peñasco, Sonora, Mexico and the Chief Operating Officer for the master franchise Realty Executives Mexico. He brings over 30 years of risk based business management to the firm and can be reached at (011-52-638)

MEXICO IS WATCHING PUERTO PENASCO REAL ESTATE

Isabel Saborith — Mon, 10 Mar 2008 15:46:00 GMT

March report from our AMPI President

In Mexico City I recently had the opportunity to meet with AMPI presidents from around the country. There were approximately 500 representatives in attendance at this convention and swearing in ceremony for association presidents. It was apparent that all of Mexico's real estate professionals are paying attention to Sonora and specifically Puerto Penascos' successes. Each state soon will be working to follow suit with the licensing process Sonora has mandated for all agents. Everyone I listened to commented that the efforts we are pioneering are inspiring officials throughout Mexico, because with licensing, we will be able to enforce accountability. We are gaining huge momentum not only in the respect from Mexico's federal government but throughout the international real estate world because of our commitment to higher standards and accountability. AMPI national is very interested in learning from what we are doing.

We have established a Sonora Committee of AMPI presidents that has begun to research the possibilities of creating a pool of AMPI certified instructors that can help us with continual education in order maintain the highest of standards. We agreed to create a committee within AMPI where agents representing coastal cities, can discuss issues relative to their specific needs, such as Federal Zone issues and Fiedecomisos.

In Hermosillo, AMPI presidents from Sonora recently met and shared some great ideas. We will continue working together because the licensing process affects all of us. We discussed how we can together make it as beneficial as possible. It was agreed upon that the enforcement part of the process needed to be addressed as soon as possible and that AMPI should assist the state with mandates of compliance as well as the obligation only work with those complying with the law. Leaders from Hermosillo, San Carlos, Guaymas, and Puerto Penasco all then met with the Secretary of Economy of Sonora and had an inspiring dialogue. We were invited to share our concerns with Lic. Rodolfo Elias Calles, Sonora's representative in charge of the Real Estate licensing process. I enjoyed this meeting because he listened, he cared and he respects our experience and welcomes our assistance in the betterment of our profession which helps us protect our buyers and sellers. We all left the meeting certain that we were on the right path, and that together we really can make a difference.

Licensing is a giant step towards maintainable ethical standards. The diplomado course is the educational arm of the process. This state sponsored course is intended to provide actual and current technical and administrative skills to participants allowing them to improve their performance in real estate activities. It analyzes the legislation of both the federal and state judicial dispositions regarding Real Estate property, as well as covers issues pertaining to taxation, city development, appraisals, trusts, sales strategies, and ethics in the real estate field. The instructors are all national leaders in their respective professions, and came from all over Mexico. This class has forced 40 agents at a time to sit in a classroom for 109 hours and grow together. It has created such a unity among the agents that a movement started to align two real estate associations in Rocky Point. As of today we have had many meetings with the leaders of both groups. Our efforts have changed from better ways of working together to actually starting the process of becoming one organization. I believe this synergy was advanced by the friendships started within the diplomado classes.

The two real estate associations that exist in Rocky Point are both based on the values of high ethical standards and accountability. However, if two associations have similar agendas yet do not communicate properly, they are not working as effectively as they can. AMPI is Mexico's National Association of Realtors and PPREA (Puerto Peñasco Real Estate Association) is an association of local professionals. We each have our own "Multiple Listing Services", like systems, and we both understand the need for one source of information to better serve our clients. Both have done well in their quests. However, it is understood by all, that the need for one association is best for members and the real estate community as a whole. Together we can make a difference.

It is our position that any person who receives income based on commissions from sales of real property should be held liable for their actions under the law as it is applied to licensing and the standards that we represent. A realtor is one who has been approved by the National Association of Realtors. (Now International Association of Realtors) AMPI members are allowed to call themselves Realtors, which is a protected brand, not thrown around loosely. Our members will only work with other professionals in compliance with the laws of Sonora. The value to a buyer and seller is in the accountability factor.

Kent White

Realty Executives

A.M.P.I. President

What is AMPI and Why is it Important to Mexico and its Investors

Isabel Saborith — Thu, 25 Oct 2007 04:53:00 GMT

AMPI, the most widely accepted real estate organization in all of Mexico has made phenomenal progress here in Puerto Peñasco. This internationally respected association of real estate professionals officially became a reality last March and has already become one of the largest associations of any kind ever in Rocky Point with over 100 members. Our local chapter has representation from all of the major real estate companies that operate in and around Puerto Peñasco.

AMPI, having the full endorsement and cooperation of the federal government has the ability to regulate and oversee the ethics of its members. Only credible licensed realtors with continual AMPI approved educational courses can maintain membership of this organization. It is this proactive entity that will take the real estate industry into the future.

The timing could not be better for the positive development of a town that is expected to be one of the hottest resort communities in this hemisphere. Economists from Mexico City have projected our growth explosion to continue for years to come. These expectations are based partially on the fact that we have experienced such astounding progress on drive in traffic alone. The international audience is just starting to look our way with the official announcement of the approval of the Puerto Peñasco Airport, the Coastal highway to be completed in the very near future, connecting us to California, and the Nautical ladder which will encourage more oceanic tourism like small cruise ships.

Rocky Point has seen a housing boom rarely seen before anywhere in the world. Ten years ago there were no condo projects with more than 100 units. In 2000 there was only one project of any large scale. This changed in 2001. Now Sandy beach alone has over 1,600 condos sold, and over 30 condo towers are in some stage of vertical development.

Several towers were sold out in a matter of hours. One tower sold its 109 units in 3 hours and another, 114 in 4 hours. Condos seem to be the most sought after investment properties going in today’s market, partially due to the low maintenance and ease of rental income. Many condo owners boast amazing financial returns in the short term “Rental pool” market.

A new concept gaining popularity by a huge market segment is interval ownership. This is not time share. Interval Ownership, also known as fractional ownership or equity share is a practical concept, which offers the opportunity to own a fully furnished home at a fraction of the cost of purchasing an entire second home. Each purchaser as a shareholder owns an exclusive interest in a home and is entitled to occupy the unit each year for the time interval purchased. There are several large scale developments exclusively marketing this concept.

With newly available mortgage money at reasonable rates more and more people are able to take advantage of the current growth explosion we are experiencing. Others are turning self directed IRAs into real estate investments. Some people have chosen to split ownership on properties with friends, family members or other investment groups. If one truly wants an investment that they can enjoy, Puerto Peñasco is becoming a simple alternative to the less than predictable stock market.

It is very important to work with a reputable real estate professional, as bad investment council can haunt individuals throughout their investment period. The information is out there, and good sound advice is available. The unprecedented investment potential can be achieved, but it is so important to seek the advise of a real estate professional that has the training and the ethical standards that AMPI ensures. Rocky Point is a great place for anyone interested in owning a second home or a secure investment that allows staying at, and enjoying their own portfolio.”

Kent White

Realty Executives, Sonora

kentoblanco@gmail.com

President Elect AMPI