Closing Real Estate Transactions in Mexico from Minneapolis
By: PATRICK J. KELLY & LUIS G. RESÉNDIZ
I. Glossary of Terms Relating to Real Estate Transactions in Mexico.
- Appraisal/Avaluo. Appraisal of the value of the real estate done by an appraiser certified by the government. Note that the official appraised value of Mexican real estate is generally lower than the actual value.
- Beneficiary/Fideicomisario. The buyer, or the buyer’s designated beneficiaries, who have beneficial ownership of the real estate placed in the trust. Banks and mortgage companies in the U.S. and Mexico that finance real estate transactions in Mexico (not so common until recently, but becoming more common), may secure their interest in the property by being named the principal beneficiary under the trust until such time as the loan is paid in full. In the event of a default, the bank can instruct the trustee to sell the real estate, or transfer the real estate to a new owner for liquidation. The use of this method of securing real estate loans can allow the bank to avoid having to use the court system in Mexico (which could take years) to otherwise foreclose upon a defaulted real estate loan, although the debtor still has the ability to try to delay the sale process.
- Corporation/Sociedad Anonima. The Foreign Investment Law allows a corporation or a limited liability company (sociedad de responsabilidad limitada) owned 100% by foreign owners to purchase real estate in the Restricted Zone, when the real estate will be used for non-residential purposes, such as development. A foreign purchaser of real estate for residential purposes must purchase the real estate through a trust, although the beneficiary of the trust may be either a U.S. corporation or limited liability company or a Mexican 100% foreign owned corporation or limited liability company.
- Foreign Investment Law/Ley de Inversion Extranjera. The Mexican law that regulates foreign investment in Mexico, including the foreign investment in, or purchase of, real estate.
- Grantor/Fideicomitente. The seller who transfers the real estate into the trust. Once the seller transfers the real estate into the trust, and the purchase price is paid in full, the seller should have no rights under the trust agreement.
- Liens/Gravamanes. Mortgages, liens, litigation, taxes, or other claims asserted against the real estate. These should be satisfied at the time of closing, or the buyer may take the real estate subject to the claims.
- Notary Public/Notario Publico. Specialized attorney in Mexico who is licensed by the government to, among other things, authenticate different documents and legal acts, including real estate deeds. All real estate transactions in order to be valid and enforceable against third party claims, must be registered executed in front of a Notary Public and recorded in the appropriate Public Registry of Property.
- Power of Attorney/Poder. In order to have a third person who is not the buyer or seller execute purchase agreements on behalf of the buyer or seller, the person signing must have a valid power of attorney from the buyer or seller granting him such authority. Powers of attorney are used to avoid the need for the buyer or seller to travel to Mexico to personally execute the documents. The grantee of the power of attorney must personally appear before, and sign in the presence of, the notary public in order.
- Promissory Purchase Agreement/Contrato de Promesa de Compraventa. A type of purchase agreement frequently used to evidence the terms agreed upon by the seller and the buyer. It is called a “promissory” agreement, because the seller is promising to execute the public deed that accomplishes the transfer of the real estate to the buyer, or to a trust designated by the buyer, upon the buyer’s performance of his obligations under the agreement. It is not necessary for the seller and buyer to execute a promissory purchase agreement, because the terms of the transaction need to be set forth in the public deed executed in front of the notary public. The buyer and seller may forego the promissory purchase agreement and go right to drafting the public deed.
- Public Registry of Property/Registro Público de la Propiedad. The government registry where different documents and legal acts are recorded, including real estate titles, mortgages, liens, and corporate documents.
- Real Estate Taxes/Prediales. Real estate taxes assessed against real estate in Mexico based upon the assessed value of the property.
- Restricted Zone/Zona Restringida. The zone 100 kilometers from the border and 50 kilometers from the coast inside of which foreign ownership of real estate is restricted by the Mexican Constitution and the Foreign Investment Law.
- Trust/Fideicomiso. Pursuant to the Federal Investment Law, foreign purchasers of real estate in Mexico may not, in certain situations, purchase title directly to real estate in the Restricted Zone. The law does, however, allow purchasers to purchase the real estate in trust, with the purchaser being the beneficiary of the trust. The trustee of the trust must be a qualified Mexican financial institution. The title to the real estate is registered in the name of the trustee, but the beneficiary may use, transfer, gift, or sell the real estate. The trustee may not do anything with respect to the trust or the real estate unless directed by the beneficiary, or unless allowed by the trust agreement or the law. The trusts have an initial term of 50 years, which may be extended by application in writing for additional 50 year terms.
- Trustee/Fiduciario. The trustee under a real estate trust.
II. Steps to Purchasing Real Estate in Mexico.
- Buyer locates the real estate in Mexico.
- Determine whether the buyer may purchase the real estate directly, through a Mexican corporation or limited liability company, or through a trust:
- Is the real estate located outside of the Restricted Zone? If the real estate is not located within the Restricted Zone, the real estate can be transferred directly into the name of a foreign individual or corporation, subject to obtaining the necessary permits.
- Is the real estate located in the Restricted Zone? If the real estate is within the Restricted Zone, it is necessary to determine whether the real estate will be used for residential or non-residential purposes pursuant to the Foreign Investment Law.
- Residential Purposes. If the real estate will be used for a second home, a rental income property or primary residence, then the foreign purchaser must purchaser the real estate through a trust. The seller will convey title to the real estate to a trust, using a qualified Mexican financial institution as trustee. The buyer will be the beneficiary under the trust and may use, transfer, gift, or sell the real estate (directly or by instructing the trustee to do so). The trustee will charge a fee to establish the trust and an annual fee to maintain the trust. The term of the trust will be 50 years initially, but may be extended for additional 50 year periods by written application, which, as long as the purposes of the trust are the same as when the trust was created, should be approved. In order to make it easier to pass to children or other heirs, the buyer should name multiple secondary beneficiaries under the trust. The beneficiaries may be individuals, corporations or limited liability companies.
- Commercial Purposes. If the real estate will be used for a factory, store, hotel, tourist development, or for other commercial purposes approved by the Mexican Secretary of Foreign Investment, then the real estate may be transferred into a 100% foreign owned Mexican corporation or limited liability company.
- Ejido Land. Do not purchase! While there is a process for taking real estate out of an ejido, it is inadvisable to purchase ejido land until the process has been completed and completed correctly.
III. Due Diligence on Title to Real Estate.
In order to make sure that the purchaser has good title to the real estate, the buyer must look at the following:
- Review of current owner’s title. The purchaser should obtain copies of the public deeds from the public registry of property for at least the last two owners of the real estate. In the very least, the purchaser should make sure that the seller’s purchase was registered and that the legal description matches the description of what the purchaser thinks he is purchasing. If there are unregistered gaps in title, the gaps could represent problems for the purchaser. Title insurance is available in Mexico. Stewart Title, First American Title and others have been providing title policies in Mexico on Mexican real estate for a number of years.
- Obtain a real estate survey, showing the boundaries and measurements of the real estate. Surveyors in Mexico are making use of GPS to create detailed surveys. Make sure buildings and property lines are where the seller says they are.
- Request a certificate of no liens from the Public Registry of Property.
- Obtain a tax certificate showing that all taxes are paid in full. It is not uncommon for property owners in Mexico to fail to pay taxes for years at a time. In order for the public deed to be registered, the taxes must be paid in full.
- Obtain an appraisal of the property from a certified appraiser.
IV. Promissory Purchase Agreement (Optional).
Promissory Agreements are more common now that foreigners are buying real estate in Mexico. This agreement sets forth the names of the parties, the description of the property, the purchase price and other terms of the purchase, but is “promissory” in nature because the agreement stipulates that the seller promises to transfer title to the real estate by signing a public deed upon the performance by buyer of his obligations. It is not necessary to prepare a purchase agreement. Since the terms of the purchase are recited in the public deed, the parties can skip the purchase agreement and rely upon the public deed itself. However, nowadays it is very common for buyers to ask for earnest money while the due diligence is being performed and Promissory Agreements are very handy to set forth the obligations of the party in order to close the transaction in a timely manner and to provide the remedies available to the parties in case the purchase does not go through.
V. Public Deed.
Ultimately, in order for title to transfer, the parties must sign a public deed for the real estate in front of a notary public and verify that the public deed in recorded in the Public Registry of Property. The deed contains all the terms and conditions agreed upon by the parties regarding the sale/purchase of the real estate, and, in the case of trust, all the terms and conditions of the trust. The terms and conditions of the sale and, if applicable, the trust are negotiated prior to closing. Such negotiations usually occur by email or conference calls.
VI. A Closing from Minnesota.
Basically two things occur at closing: (i) the parties execute the public deed (purchase agreement or trust) and (ii) the buyer pays the purchase price to the seller. The parties can either appear in person in front of the notary to execute the deed personally or they can grant powers of attorney authorizing a third party (usually someone that works at the notary’s office) to execute the deed on their behalf. If a power of attorney is being used, the grantor has to verify that such power of attorney will be valid in Mexico. In addition, the grantor must verify that the power of attorney is carefully drafted so that, on the one hand, the grantee has sufficient authority to perform the actions and execute the documents necessary to close the deal, but, on the other hand, has no authority to do more than what the grantee has been instructed to do. The power of attorney must be executed in front of a notary public (a local U.S. notary) and then it has to be apostilled by the secretary of state of the state where the power of attorney was executed. The power of attorney is then sent to the notary in Mexico and the grantee executes the previously negotiated public deed on behalf of the grantor.
Regarding payment of the purchase price, the more common situations are: (i) the buyer brings a certified check to closing or (ii) the buyer wire-transfers the purchase price at the time the public deed is executed. Buyers located in the U.S. must take into account that money sent by wire transfer to an account located in Mexico may not show in the seller’s account until the next business day. Sellers are sometimes reluctant to execute the public deed prior to receiving the total amount of the purchase price.
VII. Post Closing Actions.
Buyers must verify that the deed is recorded in the Public Registry promptly after execution. The deed has no effects in front of third parties until it is recorded. Unfortunately, notaries in Mexico are not always as diligent as they should be in recording the deed.
In addition, buyers must file different documents and/or notices with the Mexican foreign investment authorities regarding the purchase of real estate. These filing obligations will vary depending on the particular transaction.