FIDEICOMISO: TRUE OR FALSE?
Buying Property in Mexico
Debunking Some Myths
If you go to Mexico, enjoy the beautiful sandy beaches, and experience
an intense desire to have your own property there, you have a lot in common with many other Americans and Canadians. Buying property in Mexico can be a good investment, financially as well as emotionally, since Norteamericanos, as the Mexicans call us, enjoy approximately six times as much buying power in Mexico as in their home countries. Recent changes in the economy suggest that this may even be a conservative estimate.
But many foreigners are afraid to buy property in Mexico. Often their fears are based on stories they've heard at third hand, or confusions between past history and present practice. Here are some of the myths I hear most often, followed by an explanation of the facts of each situation.
1. Foreigners can't own real estate in Mexico
In most of Mexico , Americans, or any other foreigners, can own land outright with what's called fee simple title, the same kind we have in the United States . Only in the restricted zone50 km. (31.05 miles) from the ocean and 100 km. (62.1 miles) from the bordersis it true that foreigners can't hold fee simple title. The entire Baja Peninsula is considered a "Restricted Zone". Perhaps the main reason for establishing the restricted zone is that the Mexicans lost so much territory to the U.S. in the 19th centuryabout 1/3 of their country: Texas in 1845, and in 1848, through the treaty of Guadalupe Hidalgo, which ended the Mexican War, the territory that became California, Nevada, Utah, most of Arizona, and parts of New Mexico, Colorado, and Wyominga huge expanse (see map). The U.S. paid only $15,000,000 (and failed to pay it in full, I might add) for all this land. And in 1854 through the Gadsden Purchase the U.S. acquired the rest of what is now Arizona and New Mexico . It's not surprising that Mexico was a little nervous about allowing foreigners, especially Americans, to acquire any more land. But old wounds heal, and now the U.S. and Mexico are significant trading partners in each other's economy. NAFTA has promoted good business relationships, but even before NAFTA, Mexicans wanted to encourage foreign investment in their country, so in 1971 they developed the bank trust ( fideicomiso ) as a way for foreigners to buy residential property in the restricted area.
2. Americans can't own real estate unless they have a Mexican partner.
It used to be that for a partnership or corporation, foreigners had to have Mexican partners who owned at least 51% interest. This is no longer the case. Under the new Foreign Investment Law of 1993, a Mexican corporationlike ourscan be owned 100% by foreigners, and the corporation can buy and own any property with fee simple title, as long as its use is non-residential.
3. A bank trust is a lease agreement.
Under a bank trust the beneficiary (buyer) has all the rights of ownership: the right to buy, sell, lease, use, bequeath, improve, transfer, and encumber. A lease grants only the right to use. If a lessee makes improvements, such as building a house, on the property, that house belongs to the landlord. Nor can the lessee sell the property or borrow money on it.Before 1971 the Bank Trust was not available, and leasing was the only option for Americans.Apparently some of them were confused about the difference between a long-term lease and ownership; thus they built homes and made improvements on the land they were leasing. Under Mexican law, a lease must be renewed at least every 10 years. After the Bank Trust was initiated, some leases expired and the landlords declined to renew, which was their legal right. The tenants then lost the houses they had built. This frightened other Americans, who thought that their compatriots had had their ownership rights taken away, when in fact they had never possessed such rights. In many cases, however, the former lessees were able to regularize their situations by purchasing the property under a bank trust.
4. The Mexican government can take away foreigners' property at any time.
The bank trust is established by the government and gives foreigners the same rights of ownership as Mexican citizens. The only difference is that they never receive the actual fee simple title. It is held in trust for them by a bank. When first established, the term of a bank trust was for 30 years only. In 1989 it was made renewable for another 30, and in 1993 the term was extended to 50 years, renewable for another 50. Not long ago the U.S. media featured a group of Americans in Baja California who complained that they were being evicted from their property. They had purchased homes in an upscale development in 1986. What had happened was that a certain group of landowners got their boundary lines redrawn, then sold the land thus acquired to an unscrupulous American developer, who built the homes and offered them for sale to other Americans. These buyers went ahead with their purchases even though many had been warned that the developer's title to the land was in dispute and that litigation was pending. The courts eventually decided in favor of the Mexican landowners, and the Americans were dispossessed. In the U.S. it was reported that the Mexican government had taken away their land. In fact, it was simply the law being enforced. A similar thing happened in Cholla Bay, a small fishing village just north of Puerto Peñasco, which grew up haphazardly before regulations were in place. Its spontaneous growth was part of its charm, but also the root of many problems. Before the bank trust was available, vacationers had to lease their land from Mexican owners. They often put up little fishing shacks; then gradually they built larger houses on land that they didn't own. Some of them believed that their land was in the Federal Maritime Terrestrial Zone, which extends back 20 meters from the high tide line, and belongs to the Mexican government. They stopped paying rent to the landowners.Years later, after a lengthy lawsuit, a Mexican court ruled that they had been on private land all along and thus owed thousands of dollars in back rents. Then
the Mexican owners decided not to renew some of the leases for non-payment of rent. Although the Americans were outraged, the property owners were entirely within their rights. Again it was a case of the law being enforced.
The Phoenix and Tucson papers from time to time have published negative stories dealing with the alleged injustices to a few Americans in Cholla Bay . Most of these stories have been ill-informed and one-sided.
In any country, including the United States , title discrepancies exist, lawsuits get filed, and in some rare cases, buyers lose property.
Some Americans, I have noticed, have an irrational fear that the Mexican government can take away property at any time for any reason. This is absolutely not true.
Other Americans are incredibly gullible and will pay over money to almost anyone if they believe they are getting a bargain. Rather than fearing the Mexican government, foreign buyers would do better to be wary of unscrupulous developers like the ones mentioned earlier. New Mechanisms for Buying Mexican Real Estate The country of Mexico is attempting to accommodate foreign investors in the real estate industry. In concert with U.S. title companies, banks, and appraisers, it is simplifying the process of determining property values, which will make it easier for buyers to purchase property and for lenders to make loans.
Financing It can be extremely difficult to qualify for vacation home financing, as well as very expensive. Real estate loans offered in Mexico through U.S. banks are typically considered "unsecured" loans, as today there is no viable means to put a mortgage on the property. Qualifying for this type of loan is difficult, time consuming and usually expensive. On the flip side, currently, if a buyer is successful in obtaining a loan for property in Mexico , they will be rewarded with a Form 1099 Mortgage Interest Statement for use as a deduction on their U.S. Federal Income Tax.Seller Financing Seller Financing is a another means of obtaining a vacation home.
Sellers often own properties free and clear, and appreciate the benefits of a long term payout with a higher interest rate than they may obtain on a traditional investment. Obtaining a credit report adds to the seller's peace of mind. Often, an uninvolved third party collects, records and distributes the funds, and holds the necessary title
Home Equity Loan
A home equity loan, on the buyer's primary dwelling is often the easiest and most affordable way to obtain the necessary funds to purchase a vacation home. In addition, a Form 1099 is usually provided.Finally, fractional ownership, for instance with another family, is another option. A carefully worded contract with explicit shared-use and property-disposal clauses is an absolute necessity.
These are just a few examples of fairly typical financing arrangements. Creative financing arrangements are best left to a finance professional, and as always, it is best to consult an accountant and attorney to verify the appropriateness of the transaction.
Title Insurance It is now possible to get U.S. title insurance on some Mexican properties.
While this costs more and takes longer, it is worth it to American buyers to ensure peace of mind.Title searches in Mexico are usually done through a Mexican law firm. The attorneys verify the owner and search for liens, encumbrances, and anything else that could affect the title. Since Mexico 's registries are not automated, this can be a lengthy process, taking approximately eight to ten weeks, as opposed to one to five days in the United States . After the search is completed, the Mexican law firm prepares its legal opinion of status of title, which will include owner of record, easements, liens, restrictions, and anything else pertinent to the property ownership. The closing of the transaction is done in the office of the notario, and funds disbursed through escrow.
Computerized Property Valuation Access to public records is taken for granted in the U.S. , but comparable sales are not readily available to the public in Mexico. The MLS BCS is working diligently to make mandatory disclosure of sales prices and terms available to the agents. This will make it possible for real estate agents to do comparative market analysis and determine fairer and more consistent pricing.Bank Trust /Fideicomiso
The question many foreigners ask is, "Can I own property in Mexico ?" The answer is, "Yes, you can!"In 1970, a Presidential Resolution to the Mexican Constitution allowed foreign ownership of property in the restricted zones by way of a Bank Trust or Fideicomiso. Under the Bank Trust agreement (Fideicomiso), the foreign owner is able to purchase property in the restricted zones, such as the Baja, with the property held in trust by a Mexican Bank. As a beneficiary under the trust, a foreigner is then able to enjoy the same rights as a Mexican citizen owning property in Mexico .
Originally the trust was set for a 30-year period. However, In November 1993, the government announced an amendment to the trust law extending the term of the trust to 50 years.After the initial 30-year term, owners would be able to apply for renewal of the trust for a 50-year term. New trusts granted will be for 50 years. If the property is already in trust, the term remains at the original 30 years. Six months to a year before the expiration of the 30 (or 50)-year period, the owner would apply for a renewal. Upon approval, the renewal period would be an additional 50 years.The property owner has the obligation to pay the annual trust fees to the bank holding the trust on their property. Normal fees run between $350 and $550 U.S. annually, depending on the bank.
Courtesy of L. McHattan