RISKS IN BUYING MEXICO REAL ESTATE FOR U.S. & CANADIAN CITIZENS
DO YOU HAVE CLEAR TITLE?
INVESTING IN REAL ESTATE IN MEXICO
reprinted courtesy of U.S. Embassy web site, Mexico City 3/31/05
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The following information is provided to assist American citizens interested in purchasing property in Mexico. While the Embassy offers this general guidance for consideration, anyone needing more specific information or assistance should consult with a reputable Mexican attorney versed in property and investment law.
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MEXICO'S CONSTITUTION IN ARTICLE 27 FORBIDS FOREIGN OWNERSHIP OF COASTAL REAL ESTATE AND PROVIDES RESTRICTIONS FOR ALL FOREIGN OWNERSHIP ELSEWHERE IN MEXICO .
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GENERAL INFORMATION:
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While only citizens and nationals of Mexico may freely acquire real property in Mexico, foreigners may be granted the right to own real property only under very specific conditions. The current conditions are contained in the Foreign Investment Law of the United Mexican States, published in the official Gazette of the Federation dated October 27, 1993.
The purchase of real property in Mexico is far more complicated than a similar purchase would be in the United States. This is true for Mexicans, as well as foreigners. While there are some restrictions which apply only to foreigners, there are a few pitfalls for any unwary would-be purchaser. The first difficulty is determining the owner of a given piece of property. While property ownership and sales may be registered in Mexico, registration is not required. The registered owner may not, therefore, be the actual owner and may not have the right to transfer title to the property. As there is no formal title search in Mexico and no title insurance, the buyer has little recourse, except through the criminal courts, in the event that the sale later turns out to have been fraudulent. If this happens, the investor can expect to spend many years and an amount of money at least equal in value to the price of the property before receiving a ruling.
(Attached as page 7 is an extract of a current "classic" case.)
Because property sales in Mexico are taxable with the tax falling on the vendor, vendors frequently request that the sale price as stated in the sales contract be lower than the price actually paid. It must be the decision of the purchaser whether to comply with this request, but, in the event of problems, the purchaser will only be able to recoup the official price stated in the contract. Further, if your property is taken from you, the basis for any settlement will probably be the declared taxable value, far below replacement value. Before you invest, remember to take all those precautions you normally would follow in connection with an investment in the United States. Also be aware that investing in a foreign country with unfamiliar customs and laws and where you must communicate in a foreign language can further complicate the problems you may encounter. For these reasons, the Embassy recommends that all property purchases be made through a reputable real estate agent and that the purchaser obtain the services of an attorney.
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The only legally binding contracts in Mexico are those written in the Spanish language. If the only sales contract is in the English language, no matter how official it appears, it is invalid and unenforceable. If two contracts are signed, one in English and one in Spanish, it is important that the English version of the contract be as exact a translation of the Spanish version as possible; in the case of any discrepancies, the Spanish version will apply. Contracts written in Mexico are written as much in "legal jargon" as those written in the United States and the purchaser should not depend on his or her less-than-expert understanding of the language. If only a Spanish language version of the contract is to be signed, it is extremely important that the purchaser understand its provisions. Almost certainly, one of the provisions will be "I fully understand and agree to all parts of this contract which should be immediatly binding". For these reasons, the Embassy recommends that the purchaser obtain the services of a licensed, expert translator ("perito traductor") to verify language and to avoid misunderstandings. To depend on the vendor's interpretation of contractual obligations, no matter how well-meaning or truly helpful he appears to be is not prudent.
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Only the provisions of a legal, written and signed contract are enforceable in Mexico. Obligations and responsibilities of either the purchaser or the vendor which might be contained in "gentleman's agreements," letters of intent or other instruments which might be judicially enforceable in the United States have no meaning in Mexico. Any such conditions should be spelled out within the contract.
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Once the contract is signed, it should be registered immediately, even though this is not standard practice in Mexico. The purchaser should also obtain certified copies of the registered contract(s) from the notarial office and have those certified copies authenticated by the United States consular post having jurisdiction over the place of registration. While the registration of contracts is not a guarantee of legality, it does provide the greatest protection available under Mexican law. The purchaser should not depend on the vendor to register the contract as he has no interest in paying the taxes he may owe upon registration.
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The fees for the services recommended above will not come cheaply, and must be borne by the purchaser. These services, however, are the purchasers only protection against possible problems later.
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CONDITIONS OF PURCHASE:
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The Mexican Constitution prohibits direct ownership by foreigners of property within fifty kilometers (approximately 31 and one-quarter miles) of the sea coast and one hundred kilometers (about sixty-two and one-half miles) of Mexico's international land boundaries -- the prime areas for retirement and/or vacation homes and apartments. As noted above, there are laws to allow or encourage foreign investment throughout Mexico. Foreigners can have the use of property placed in trust with a Mexican financial institution. Under the trust agreement, a bank is the trustee, or actual title holder, of the property. The foreign buyer is the beneficiary of the trust having all rights to use, enjoy, and sell the property, but is not considered the legal owner of record and his exercise of his trust rights depends on the specific wording of the trust agreement from which he benefits. All trusts must have the approval of the Secretariat of Foreign Relations before final documentation can be delivered to the beneficiary.
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Mexican financial institutions naturally charge a fee for trust services, sometimes as a percentage of the assessed value of the trust property or as a percentage of the actual sale price or the stated sale price. Any person deciding to benefit from a trust deed should discuss the costs directly with the bank holding the trust.
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There is one type of property in Mexico which a foreigner can never purchase: "ejido" land or common land which has been granted by the Mexican Government through the Agrarian Reform Secretariat to Mexicans ("ejidatarios") for collective agricultural cultivation and production. This land can only be sold by the Secretariat of Agrarian Reform, if it recovers the land from the ejidatarios for lack of cultivation or other specific reasons. Any foreigner, regardless of his migratory status, may purchase and own outright property in other parts of Mexico. However, before the purchase can be completed, he must obtain authorization from the Secretariat of Foreign Relations in Mexico City. A condition of that authorization is that he agree, in a statement sworn before the Ministry, to consider himself as a Mexican national in respect to such property and declare that he will not invoke the protection of the government of his nationality in matters relating to that property. Indeed some trust agreements may have a clause to the effect that intervention of a foreign government may allow the trust to be declared null and void. Thus, further limiting the Embassy's role in such cases.
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Tourists and other non-residents may only purchase property in Mexico using the trust arrangement described above. They may also lease property, principally for habitation, but they should obtain the services of an attorney to sign the contract as their representative.
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PROBLEMS ENCOUNTERED:
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Investment in resort areas always carries a greater risk than other types of real property investment. Such areas are more likely than others to attract the least reliable developers because of the transient nature of investors. Someone who does not reside locally and may not speak the language is less able to properly evaluate a vendor's history and probably is not aware of the available sources of reliable information.
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When considering the purchase of any property in a partially completed or planned development, there are certain issues to keep in mind. Real estate developers in Mexico are not required to invest any of their own funds, nor are they required to capitalize the development prior to offering it for sale. What this generally means to an investor is that the funds obtained from unit sales will go directly to construction costs - salaries for laborers, building materials, fittings and fixtures; a portion of such funds may also be intended for the purchase of the development site. Clearly, with even the most reliable and responsible developer, such financing practices carry great risk -- variables such as exchange rate fluctuations, increases in materials costs or labor costs or natural disasters, which would not affect a properly capitalized development in the United States can, in Mexico under these financial conditions, cause total failure or to not complete the contracted development stages on time or at all and, ultimately, the developer may enter into bankruptcy with the development. In the hands of a disreputable developer, such practices are a "license to steal."
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"Time/share" investments in Mexico are also problematic. Many of these agreements have worked successfully for years; others have run into considerable difficulties. As "time/share" resorts have aged, many have been sold by their original owners or have changed management companies. The new owners/managers have not lived up to the original contract obligations. They have been uncooperative in exchanging periods of use or type of accomodation, although the investors' contracts have provided for such exchanges. Many new owners/managers have failed to accept the validity of the original contracts, and have re-sold already contracted time. Some have allowed the level of service and the conditions of the accomodations to decline. Others have changed the governing provisions in violation of contracts, failed to pay penalties called for in the original contracts or failed to bill "owners" for maintainance and thereby brought about forfeiture of the owners' rights. There is little that the Embassy can do to assist these investors beyond forwarding their complaints to the Mexican Consumer Protection Agency (Procuraduria Federal del Consumidor "Profeco" or PFC), which is already over-burdened with these cases, or recommending that the investors obtain an attorney to attempt to enforce contractual obligations through the Mexican courts.
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Before purchasing or leasing property in Mexico, it is advisable to consult with a reputable real estate agent. Other sources of information are the various Mexican banking institutions that have real estate investment departments, such as Centro Bancomer and Banamex. It is also important to verify the reputation and financial backing of the developer selling the property, for example, by contacting the Mexican Consumer Protection Agency (PFC) in Mexico City. Any specific legal advice should be obtained from a Mexican attorney.
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DOCUMENTS:
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In Mexico, property is conveyed by one party to another by means of a document called an "escritura." An "escritura" is similar to a deed, but there are some important differences. The original document is not given to the purchaser, but is inscribed in the notary's ledger. The purchaser and the vendor are given copies of the original entry into the ledger. The copy may be either hand-written or typed on official, notarial paper or may be photocopied; but must have an original signature of the notary, and should provide information on the entry of the original transaction in the notarial ledger. Be very careful to verify all information to be contained in the "escritura" prior to its entry into the ledger, correcting inaccurancies and misspellings at a later date may require the payment of all of the title transfer costs a second time.
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Before a reliable notary public will prepare the "escritura", he will require a document called a "Certificado de libertad de gravamen." This document, which can be obtained from the "Registro Publico de la Propiedad" either by the purchaser or by the notary, declares that the property is free of liens and encumbrances. While not .infallible, this document is another protection for the purchaser.
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COMMERCIAL INVESTMENT:
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Commercial and business investment in Mexico is even more complicated than residential investment and should be approached with extreme caution. The office of the United States Foreign Commercial Service and the Mexican Secretariat of Commerce and Industrial Promotion are both good sources for information regarding the legal ramifications and procedures for commercial investment.
A few of the real estate related points in the 1993 investment law include:
Corporations divide into companies allowing foreigners to participate and those which exclude foreigners in their by-laws.
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A 49 percent limit exists and applies to holdings of series T (land ownership) stock in enterprises that hold interest in agricultural, cattle and forest lands.
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The 1993 Foreign investment law also allows minority (and when approved by the Foreign Investment Commission, majority foreign ownership in farm land and for the Mexican subsidiaries of foreign corporations and Mexican companies with foreign participation border and seacoast purchase for industrial, hotel and commercial purposes.
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PROPERTY DISPUTE UPDATE: BAJA BEACH AND TENNIS CLUB
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The Baja California Supreme Court found in favor of a group of Mexican private landholders, American citizens may be faced with having to "repurchase" the land upon which their homes are built. Local newspaper reports have indicated that Yucatan Governor-Elect Victor Cervera Pacheco and Sinaloa Governor Renato Vega Amador may face charges of falsifying official documents (when they were Secretary and Under Secretary, respectively, of the Secretariat of Agrarian reform), the act which reportedly allowed the illegal transactions to take place.
The possible legal outcomes include the potential for the Americans of having to pay for the property that they already purchased in good faith, and then having to pursue their own legal remedy against either Carlos Teran del Rio or against Reforma Agraria.
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The State Supreme Court's June 23 decision would seem to be a step forward in a land title dispute that goes back at least 22 years. The pace of Mexico's legal system is frustrating for American investors and Mexican landowners alike.
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W&W
1646w/pg 79-85
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Reprinted courtesy of U.S. Embassy, Mexico City 3/31/05
For questions please contact:
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Citizens' Consular Services
American Embassy Mexico City
Reforma Ave 305
Col Cuauhtemoc
Mexico, D. F., Mexico CP 06500
Tel: (011)(52)(55) 5080-2000, ext. 4780 or 4543
Hours: 8:30 a.m. to 2:00 p.m. & 3:00 to 5:00 p.m.
e-mail: ccs@usembassy.net.mx
website: http://mexico.usembassy.gov/emenu.html
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LINKS TO MORE INFORMATION AND RESOURCES:
http://www.el-universal.com.mx/ -- El Universal
http://www.economista.com.mx/ -- El Economista
http://www.cronica.com.mx/ -- Cronica newspaper
http://state.gov -- U.S. State Dept site - embassies & consulates worlwide
http://travel.state.gov -- travel info from State Dept.
www.visitmexico.com -- Mexico tourism board
The article below from the L.A. Times appears also at:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/10/31/MN77416..DTL
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Americans Evicted In Mexico
Homes on disputed land in Baja California
Ken Ellingwood, Los Angeles Times
Tuesday, October 31, 2000
Ensenada, Mexico -- Mexican federal authorities moved forcefully yesterday to begin evicting U.S. retirees from homes built on beach property that is at the center of a long-running land battle.
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Backed up by more than 400 police officers, officials of a federal land agency went door to door to carry out an eviction order handed down last week by Mexico's Supreme Court to settle the ownership dispute.
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Residents in some cases were given no more than a few minutes to abandon homes on a scenic finger of land about 18 miles south of the port city of Ensenada.
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``It's like somebody dying and you have to say goodbye,'' said Guadalupe Limon, tears trailing under her sunglasses.
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Limon and her husband, Juan, had to pack up their belongings and leave the two-story house across the street from the beach where they lived part time for 12 years.
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The eviction had been feared for a week, after the court's ultimatum to land agency officials to give the disputed land to former owners. Officials at the agency, called the Agrarian Reform Ministry, said yesterday that they planned to transfer ownership of nearly 200 acres settled largely by American retirees.
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Police arrived about 8 a.m. in a caravan that included busloads of unarmed police, ambulances and a tow truck and other equipment to move aside cars and a sand pile that formed a makeshift barrier.
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A phalanx of 60 officers had to push through a blockade of U.S. citizens and local members of a peasant cooperative who locked arms in unity against the evictions. The peasants' group, called the Ejido Colonel Esteban Cantu, insisted that it owns the property, which it has leased to the Americans.
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There was minor scuffling between the officers and ejido members, but no injuries were reported.
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Agrarian Reform Ministry officials said that although the Americans were required to move out immediately, they would be allowed to store their belongings inside for 30 days -- time enough to attempt to negotiate fresh lease terms with the new owners. Some of the U.S. citizens were talking with the owners about how much they would pay to retain use of lots for which they had paid up to $90,000 for a 30-year term.
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``If we can come up with enough money, we can stay here,'' said Margaret Harms, 78, a retired airline ticket agent from Riverside, Calif. ``If it's just too much, we'll have to walk away.''
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The disputed land was ceded as a communal land grant to the peasants' collective in 1973 by presidential decree. The group then leased the land, allowing development of a 96-room hotel -- the centerpiece of the Baja Beach and Tennis Club -- and more than 200 homes in the club and along the peninsula nearby.
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But the Supreme Court ruled that the land, in fact, belonged to several private companies that had gone to court to seize the land. Representatives of one of those companies, Purua Punta Estero SA, took control of the hotel yesterday and began evicting homeowners.
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Chronicle news services contributed to this report.
reprinted courtesy of U.S. Embassy web site, Mexico City 3/31/05
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Note: another article with similar information appeared in the Wall Street Journal on 10/25/00.
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