How to Purchase Property in Mexico
The first thing is to make sure that the agent you are working with is competent to get this done for you to your maximum advantage. At the very least your agent should be an AMPI Member. The local chapters of AMPI (The Mexican Association of Professional Realtors – affiliated with NAR) are some of the most pro-active in Mexico in terms of entry and on-going educational requirements.
Make sure you are comfortable with the agent you are working with because you are going to be depending upon that agent to cover a lot of ground on your behalf through to the closing.
The next thing you should be looking for is an agency that has been able to successfully sustain itself over the years and has a strong name in the community. Timothy Real Estate Group has been the number one agency in terms of sales in Puerto Vallarta and the Bay Area since 2001.
THE PURCHASE AGREEMENT
Although the Purchase Agreement used by most Real Estate agencies in Mexico has become fairly standardized over the years, they are still custom documents prepared in double column format – English and Spanish – and are usually about 12 pages in length. The agreement covers everything that you would normally expect to be in a well written real estate agreement – the parties, the price, deposit and payment terms, due diligence, boiler-plate clauses, closing date and signature block.
The question is often asked at what price should an offer be made relative to the asking price and how much, if any, negotiation takes place in the Real Estate Market in Mexico. The answer is that it varies – depending upon the market and the current price of the property. Your agent should be able to guide you with current market data for Real Estate trends in Mexico so that your offer is treated seriously while not being over-bid.
Once the offer has been accepted, it becomes a bilateral binding agreement and there is usually a period of 3 to 5 days within which time for the buyer to make his deposit into escrow. Before that can take place an escrow agreement must be completed and signed by the buyer, seller and escrow agent. The deposit amount has traditionally been 10% of the final agreed upon purchase price. This is more than what is usually provided for in most other North American Real Estate markets however it lines up with the more traditional notion in Mexico that almost always provides for a large amount of the price being paid at contract signing. The deposit will either be refundable until such time as all due diligence items have been satisfied – usually 10 to 20 days, or longer, after which time the deposit becomes non-refundable.
Escrow deposits managed by independent third party escrow and/or title companies are something relatively new but most welcome by all parties. The escrow protects all parties to the transaction and avoids the unsavory situation where an interested party, agent or other entity is charged with managing the deposit. For what are pretty obvious reasons this is critical to any properly written real estate agreement in Mexico or anywhere else in the world. These deposits can accrue interest at the option of the parties. In the event of default or disagreement, the wording in the contract will take precedent and failing that and failing the ability of the parties to negotiate the disposition of the deposit between them, the matter will become the matter of a lawsuit – something that has happened only in the most remote cases. There is a cost for the escrow which varies with each escrow company in Mexico. Generally, the cost can be anywhere
from $700 USD to $800 USD depending upon who you are dealing with, these costs are often considered to be to the account of the buyer.
THE DUE DILIGENCE
The Real Estate Purchase Agreement may often call for some points of due diligence – everything from boilerplate items such as copy of the deed and copies of the tax and HOA receipts to a full engineering inspection. All Real Estate Due Diligence items must have date frames and either methods to cure or provisions for cancellation in the case of catastrophic discoveries, built into the agreement. Once the Real Estate Due Diligence items have been signed off, the agreement then becomes unconditionally binding on both parties and the closing process can begin.
THE CLOSING COSTS
At this point, the agent should provide the buyers, who will be responsible for 100% of the Closing Costs with a Closing Cost estimate. It is an estimate because the exchange rate fluctuates in Mexico and it can have an effect not only on the fees and expenses but more importantly upon the value of the property which is often ‘sold’ in terms of US Dollars but always registered in terms of Mexican Pesos.
The buyer will be asked to advance about half of the estimated costs to the notary to cover his out-of-pocket expenses, and the balance is usually paid by transfer to the notary at the closing or it can be deposited into escrow and disbursed directly to the notary’s account at closing.
The Closing Costs in Mexico consist of various fees and expenses and generally total about 4% to 6% of the actual purchase price. These costs are always the responsibility of the buyer. (The seller will bear the cost of the real estate fees and his capital gains taxes, should they be applicable). These fees are generally as follows: (these fees – in USD – are to be used as a guideline only and are approximate. They will vary according to the size of the transaction and the exchange rate at the time).
· Transfer tax – 2% State Tax
· Trust Permit –$1,000 Department of Foreign Affairs Mexico City
· Foreign Investment Registry - $800 Department of Foreign Investment Mexico City
· Trustee Bank Acceptance Fee - $650 Wherever the Trust Division of the Trustee Bank is located in Mexico.
· Trustee Bank First Year’s Trust Fee - $650 Wherever the Trust Division of the Trustee Bank is located in Mexico.
· Appraisal for Future Tax Assessment – The appraisal for Future Tax Assessment in Mexico varies with property size with locally certified appraiser
· Non-Encumbrance Certificate – The Non-Encumbrance Certificate in Mexico is $25 LRO
· Preventative Notice Advice – The Preventative Notice Advice in Mexico are $40 (for 2) LRO
· Registration Fees in the Land Registry Office – Registration Fees in the Land Registry Office in Mexico varies from .5% to
· Notary’s Fee – The Notary’s Fee in Mexico varies from .5% to 1% depending upon transaction size.
There is a saying in Mexico that next to God, the Notary’s are the most important people in the country – and there are some that would even debate that! Notaries must pass the Mexican equivalent of the bar exam, they are then required to take two years of extensive study while practicing in a Notary’s office following which they are subjected to a 3 day examination program and finally must be appointed by the state to a specific office in a City of which there will be only a set number of Notario offices appointed.
This is much different from the concept of a notary in the US or Canada obviously. Notaries in Mexico are the only entities that are recognized by the Commercial and Land Registry and are empowered to collect taxes for all 3 levels of government.
At the appointed time, the buyer, seller and their respective agents will meet to ‘close’ or as it is known in Mexico, ‘formalize’ the Real Estate transaction in the Notary’s office.
One can get a basic idea of the documentation required and the various entities that are depended upon in order to generate these documents. Over the past 8 to 10 years paralegal offices have opened that are typically owned and operated by ex-employees of notary offices. These people employ a full staff and are fluently bi-lingual (which most of the employees of the notaries offices are not).
They perform a lot of the preliminary work necessary to affect the closing on behalf of the notary’s offices, and they are also able to explain and help the Real Estate buyer and Real Estate seller and their Real Estate agents work towards an orderly closing. In addition, they review the draft trust deed for approval by the trustee banks – there may be one or two depending upon the nationality of the buyer and seller.
This is a process that may involve several reviews back and forth between the notary’s office and the bank. At the closing, the head of the firm will also appear at the notary’s office and usually walk through, answer any questions and translate the 40 plus page trust deed to the buyer and seller should they so request. Once the names have been verified as being correct in the document, the identifications have been verified, all taxes have been collected (from buyer and seller), the notary himself will appear to observe the execution of the deed after which very politely thank everyone and excuse himself from the room while keys are passed and congratulations are passed around.
Once the Notary has stamped the trust deed, it will immediately be
PDF’d together with copies of the certificate of non-encumbrance and the preventative notice to the escrow company by the notary’s office. The escrow company will have received a letter of disbursements signed by the seller and the buyer setting out exactly to whom and how much is to be wire transferred according to the detailed information set out in the disbursements letter.
Upon receipt of the PDF’s, the escrow company will execute the disbursements and funds are generally received that same day. While the actual trust deed will not be presented to the LRO for probably several days by the notary, everyone is protected from the possibility of any third party charges from being registered by means of the certificate of non-encumbrance and the preventative notice, both of which are generated by the LRO at the same exact time.
The preventative notice issued by the registrar freezes the title for a period of 45 days and is obtained at the same time as the certificate of non-encumbrance showing that the property is free and clear and is generally renewed at some time during the initial 45 day period for another 45 day period giving everyone sufficient time to close and present the trust deed for registration. The actual registration will take between 30 and 90 days and the buyer will be notified by his agent typically as to when it can be collected from the notary’s office.
You are now the proud owner of the beneficial rights of a trust the body of which is the property. Think of a glass of water – the glass represents the trust and the water the property. You have complete control of the glass. Same thing with a trust – you control it completely. You can sell the property, rent it, gift it or lend it – just so long as whatever it is you are doing with it is legal. You will also be obliged to maintain it and pay property taxes.
Property taxes are .08% of the assessed value – which was established when you purchased the property by way of the tax assessment appraisal that was registered with the assessment office (the ‘Catastro’). Property tax rates in Mexico are extremely low as they do not represent a significant source of governmental income and must be held to the lowest common denominator.
The trust has a 50 year lifespan. Unlike a lease, at the end of the 50 year period it will become renewable for a filing fee of approximately $1,000 USD. Thereafter it is renewable for subsequent 50 year periods in perpetuity.
The bank acts as trustee – almost all banks in Mexico have trust departments to manage trusts (fideiocomisos). They charge an annual fee of about $600 USD and each bank charges vary slightly.
The trusts in the banks are ‘off balance sheet assets’ in that in the event of a bank closure or dissolution (there has never been a bank failure in Mexico – ever), the trusts are not considered assets of the bank and would be assigned to another bank under the auspices of the Bank of Mexico.
When you sell real estate, you will become subject to capital gains tax based upon your cost base – in Pesos – in your deed, which was or should have been, your actual purchase price at the exchange rate of that day and, the sale price. The capital gains tax at the present time is 35% approximate of the gain and is subject to certain deductions, one of which is the real estate fee. If you have a resident visa, a RFC tax number and have lived in the property as your principal residence you should be exempt from capital gains tax - otherwise not.