Buying Real Estate in Mexico
Learn From Our Personal Experience
If you get to the point where you are seriously interested in buying property in Mexico, you should find a better source than us for your technical advice. However, we have gone through the process of buying property there 3 times and selling it one other time so we do have some real life experiences in the subject that we’re happy to share.
If you’ve considered buying a place in Mexico at all, you are probably already aware that there are basically two forms of ownership of property near the coast that a foreign buyer can make use of:
- Establish a fideicomiso (FEE-day-E-co-ME-so) or real estate trust that is administered by a Mexican bank.
- Create a Mexican corporation or S.A. de C.V. that will own the property. The Mexican corporation has direct ownership of the property and the foreign shareholders can be set up to have 100% ownership of the corporation.
For what it’s worth, it is legal for foreigners to obtain direct ownership of property in the interior of Mexico but chances are, what you’re going to be interested in buying will be in a “restricted zone.” Restricted zone property includes land within 50 km (or roughly 30 miles) of the coast and land located within 100 kilometers of the international border of Mexico and another country.
Both ownership options have their own advantages and disadvantages that might impact your decision on which way to go. In our experience, we have used both.
Much like we would have done in the U.S., when we decided we were interested in buying a place in Mexico, we contacted several real estate companies, known in Mexico as Bienes Raíces and starting looking at properties. We found something we liked, made an offer and eventually agreed on a price with the seller. We hired an attorney to conduct a title search and to represent us in the transaction.
The first property we bought was a townhouse that was one side of a duplex. We bought it purely as a vacation home with the thought that we might be able to rent it out occasionally when we were not there. The property wasn’t going to be a part of an on-going business and we didn’t have any partners. For that one we decided to set up a fideicomiso. It is by far the simpler option.
At this point in our story, we have a buyer, a seller, a real estate company and a lawyer involved and pretty much the same routine we would follow back home. But that’s where the differences between buying in the US and Mexico began.
Difference #1: The fideicomiso is a contract between the foreign buyer and a Mexican bank. The bank acts on behalf of the buyer and takes title to the property. While the bank holds the title, the buyer receives all the rights of ownership including the right to sell the property to anyone he wants. The trust is set for a fixed number of years and upon completion of that term, the buyer can go through an administrative process establishing a new trust for an additional term. The buyer must pay an annual trust fee to the bank but the cost for that is really very reasonable. One tip, if you do set up a fideicomiso, be sure to pay your trust fees when they are due. While the trust fee itself is very reasonable, the penalty and interest for a late payment are very significant. We learned that lesson the hard way.
Difference #2: While banks do offer some form of financing, typically the interest rate is extremely high and most people buying property in Mexico do not finance with a bank. The seller we were dealing with offered to finance a portion of the price over 2-years at a reasonable interest rate and we took advantage of that but you should be prepared to come up with the bulk of the money to pay for the property in cash.
Difference #3: As noted above, the transaction as described so far includes a buyer, a seller, a real estate company and a lawyer. A bank has been included, not for a loan, but to establish the trust. However there is another key person involved in the transaction: the Notario or public notary. The position of Notary in Mexico is quite different than it is in the U.S. In Mexico, the Notary serves as the go-between the buyer/seller and the government. The Notary prepares the official paperwork and once the sale is consummated, he enters a record of the sale in “the big book” at the Hacienda or State Government House. Without the Notary’s seal and his entering of the record in the big book, the sale is not official.
To be very honest, in many cases the delays in the receipt of paperwork on the sale that you might have been warned about when buying real estate in Mexico can often times be traced back to the Notary. In the case of our first purchase, it took us over 4-years to get the final paperwork back on the purchase of our property. All along we were told not to worry and sure enough, in the end everything was copacetic.
- Hire your own attorney
- If buying real estate in Mexico, you should not use the same attorney representing the seller. You should hire your own attorney to protect only your interest.
The necessity of hiring of your own attorney and of him performing a thorough title search was demonstrated when we bought our 2nd property, which was the other side of the duplex our first house was a part of. In the title search, our attorney discovered that a bank held a lien on the property. It wasn’t all that difficult to deal with; the bank agreed to remove the lien in a document that was executed at the same time as the document that directed that a portion of the purchase price would go to the bank; but if we had not taken care of the lien at that point, we would have been opening ourselves up to a problem down the road that might not have been so easy to resolve.
One of the advantages of using the fideicomiso vs. setting up a corporation is that your annual taxes and administration fees will be lower with the fideicomiso. There will be a one time initial cost to set up the trust. You will pay an annual trust administration fee, which is minimal, to the bank, plus a property tax, which is significantly less than what you would pay in the U.S. If your property is in a city, you will also likely pay an annual garbage collection tax as well but that’s just about it. The only exception is if your property is directly on a beach, you will also want to pay a Federal Zone tax, which basically allows you to control the use of the shoreline directly in front of your property.
If you decide to set up a Mexican corporation for ownership, along with the one time cost to create the corporation, you would also have to pay the same annual Federal Zone tax (if applicable), the property tax and for the garbage collection tax (if applicable). In addition to those, you would have to pay an annual filing fee for registration of the corporation with the Ministry of Foreign investment, which in 2011 was $2,250 pesos. You would need to hire an accountant to prepare and file those and any other documents that are required. Currently, a fee of $900 pesos per month is a reasonable estimate of such services so you would be looking at $10,800 pesos per year in accounting fees for an S.A.de C.V. (corporation).
So why would anyone ever go to the added expense of using the S.A. de C.V. ownership approach?
For some foreign buyers, there is concern about the difference between full ownership like we know in the U.S. vs. setting up a real estate trust such as a fideicomis. Owning 100% of a Mexican corporation that has direct ownership of the property is closer to what they know and they feel more confident in that arrangement.
There are some restrictions about how you can use property with a fideicomiso title as part of an ongoing business. Typically there would not be a problem for someone who occasionally might rent out their vacation home but for more involved uses, you might draw some government attention.
In our particular case, we were buying our 3rd property along with 2 other investors. In addition to planning to use it in the tourist trade, being able to establish the ownership percentages through the percentages of stock shares owned by each was a clean way to set up the structure of our title.
There are also some advantages in the calculation of the capital gains tax when selling a corporation vs. selling a property. Since our plan for this property was to hold on to for 10-years and then sell it, we reasoned that this would balance out some of the added expenses during the time we owned the property.
So for our 3rd property, our group of 3 investors set up an S.A. de C.V. for the purposes of ownership. I am happy to report that while we did not get rich from the transaction, we have sold the 3rd property and did make a little money on it. So our ownership stake in Mexico is down to a duplex with 2 apartments.
Some Additional Notes
Before you get too deep into the process, do some research on the real estate companies in the city where you are considering buying. The licensing requirements for selling real estate in Mexico are much looser than they are in the U.S.. Just about anybody with the resources to get a business card printed can hang a shingle. Ask for references from people who have bought and sold through their company and ask other foreign buyers you know for their thoughts.
Once you do buy your property, it is very likely that you are going to need to hire a management company to take care of the property when you aren’t there and to handle rentals if you decide you want to go that route. Again, do your research. Some companies are going to be better at taking care of the property. Some others may do a better job generating rentals. Ideally, you can find one that will suit your specific needs.