Whether in an industrial park in Juarez, an artist community in San Miguel de Allende or popular beach locations such as Cancun, Puerto Vallarta or Cabo San Lucas, people from the United States are buying real estate in Mexico in record numbers. For those new to the experience, the process can be frustrating and confusing. International lawyers at Fredrikson help conduct due diligence, negotiate, document and close on commercial and residential real estate transactions all over Mexico.
Because the legal safeguards we enjoy and the process for purchasing real estate differ substantially between the United States and Mexico, it is important to seek the advice and assistance of experienced real estate and legal consultants when venturing into the Mexican real estate market.
Mexican Real Estate
One of the first steps in buying real estate in Mexico is to find the real estate in the first place. Mexican real estate is now listed on the internet and in U.S. newspapers. It may seem obvious, but the buyer should first visit the property to make sure it appears as advertised. Be aware that Mexican realtors are not regulated by state or federal government; while there are laws prohibiting fraud in Mexico, there are no seller or realtor real estate disclosure requirements such as exist in the United States. Buyers will encounter a wide range of expertise and professionalism. As in any transaction, it helps to have a recommendation from someone who can vouch for the realtor’s honesty and skill. Caveat emptor (buyer beware) is still the rule in Mexico.
Property Ownership
The next step is to determine whether the buyer can own the property directly through a bank trust (Fideicomiso) or through a Mexican corporation or limited liability company formed by the buyer. The purchase of real estate in Mexico by non-Mexican citizens is regulated by Mexico’s Foreign Investment Law of 1993. While non-citizens can directly own real estate in the interior of Mexico, purchases within the so-called “Restricted Zone,” an area within 100 kilometers of the border or 50 kilometers from the coastline, are restricted. Prior to enactment of the 1993 Foreign Investment Law, foreign purchasers could generally purchase commercial or residential real estate in the Restricted Zone only through a Mexican bank trust known as a “Fideicomiso.” While the Foreign Investment law was amended in 1998 to allow greater flexibility for commercial purchases by foreigners in Mexico, residential purchasers still must purchase real estate in the Restricted Zone through a Fideicomiso.
A Fideicomiso is formed by contract between the purchaser (beneficiary) and bank (trustee) to provide the beneficiary with beneficial use and enjoyment of the real estate purchased for a term of 50 years. The trust may have multiple beneficiaries and can be renewed for additional 50-year terms. The beneficiary may lease, sell or transfer the real estate at any time.
The agreement between the trustee and beneficiary sets forth the terms under which the trustee may take action with respect to the real estate held in the trust. The bank trustee takes title to the real estate on behalf of the beneficiary and obtains the required permits from the Mexican government. The trustee cannot encumber or transfer the real estate without the instruction and approval of the beneficiary. For foreigners accustomed to having direct title to real estate this arrangement may seem suspicious, but Fideicomisos are common and relatively easy to use.
Purchasers buying real estate for commercial purposes will be happy to know that the 1998 amendment to the Foreign Investment Law provides direct ownership opportunities for foreign buyers seeking to purchase real estate in the Restricted Zone for commercial purposes. As long as the commercial purpose is not otherwise restricted by the Foreign Investment Law, the buyer may purchase through a 100% foreign-owned Mexican corporation or limited liability company.
Title to Real Estate
Once a buyer has determined how to purchase the real estate, it is necessary to review title to the real estate. The Mexican registration system is not as convenient or user-friendly as registries in the United States. While some registries have been computerized, others are still indexed by hand and require local expertise to sift through. All real estate transactions should be registered with the Public Registry in the capital city or other large city within the State in which the real estate is located.
To review title to real estate, buyers must obtain copies of deeds evidencing ownership of the property. Copies of deeds may be obtained in the Registry office serving the area in which the land is located. Most residential and urban land will be registered. Failure to register is almost always a bad sign. Real estate can be registered in one of two sections of the Public Registry. Land having clear title is registered in the section reserved for actual ownership; land that has disputed title is registered in the section reserved for possession only, meaning that the owner can only be shown to claim possession, not necessarily ownership. The latter registration could mean that others may lay claim to ownership of the real estate, and, in the best case, could make it difficult to sell the property in the future.
No discussion of purchasing real estate in Mexico is complete without at least a brief mention of Ejidos. After the Mexican revolution, the government instituted a land reform program to break up large land holdings and distribute agricultural land to farm cooperatives known as ejidos. Historically, ejido land could not be sold to private landowners. While the laws have changed somewhat, purchasing land from ejidos is still very tricky and should only be undertaken with a clear understanding of the risks involved.
Horror stories abound about buyers purchasing ejido land, and developing commercial properties on the land, only to have the ejido later dispute the validity of the sale and sue to recover the now commercially developed property, with the improvements included. Suffice it to say, if you are thinking about purchasing land from an ejido, proceed cautiously, and only with good legal representation.
Buyers should next check with the tax authorities to see whether taxes are owed on the real estate, so that the amount can be accounted for and paid at the closing on the purchase. The tax office is found in the city in which the real estate is located, or the closest city for rural land.
Property Registration
It is customary for buyers to enter into a purchase contract with a seller, but keep in mind that what gets registered with the public registry is the notary’s summary of the agreement. The contract will be copied into the deed that will be filed in the Registry. It is still wise to outline the terms in a purchase agreement; we recommend that buyers who speak little or no Spanish insist on dual-language documents, although only Spanish-language documents may be registered in the Registry. Do not rely on a realtor or lawyer who tells you that their form is in both Spanish and English and has identical terms, unless you are able to read the Spanish version that will be registered.
We have many examples of transactions in which the buyer believed the versions were identical, only to later discover that key terms differed because the realtor or Mexican attorney failed to conform changes made to the Spanish registered version to the English version.
Documents filed in the Registry must be prepared and filed by a notary public. In Mexico, notary publics are attorneys who have special commissions from the government to authenticate and register public deeds and other important documents, such as wills, corporate organizational documents and real estate contracts and deeds. While most are professional and detailed in their preparation of public deeds, it is helpful to have someone who can compare the English version of the purchase contract with the Spanish version of the public deed to make sure the deed accurately reflects the agreed terms. It is also essential to follow up with the notary public to make sure that after the deed is prepared, it is duly registered. Notaries typically charge a percentage of the purchase price up to a cap for real estate transactions; be sure to obtain a written fee estimate and closing statement up front. Once the deed for the real estate is formalized and filed in the Registry, the purchase is complete.
A brief word on financing and title insurance. Most real estate transactions in Mexico are cash deals, unless the property is condominium property owned by a U.S. company that is financing the transaction through a U.S. bank. Most U.S. banks are still skittish about financing purchases in Mexico. U.S. banks holding interests in Mexican banks and U.S. mortgage lenders are now working to strengthen lenders’ remedies and streamline the legal process for foreclosing on defaulted properties in Mexico. Title insurance is now provided by some U.S. title companies for Mexican transactions. Most available policies are written in the United States and enforceable under U.S. law.
Legal Support
Buying real estate in Mexico can be a daunting undertaking. Buyers should proceed carefully and expect delays. Experienced legal counsel can help minimize some of the difficulties with purchasing or leasing real estate in Mexico.
If you have questions on purchasing or leasing real estate in Mexico, please call Patrick Kelly.
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