Buying property in Mexico is not as overwhelming a task as it is often perceived to be, however, there are some things any foreign citizen interested in buying property in Mexico should be aware of before entering into negotiations for an investment property or second home in paradise. Originally, in accordance with Mexican Constitution established in 1917, foreign citizens were prohibited from purchasing real estate in Mexico located within 50 kilometers of the ocean or 100 kilometers of a national border for reasons of national defense. Constitutional amendments made in 1993, which dealt specifically with the issue of foreign citizens buying property in Mexico, dramatically changed previous rulings and opened up Mexican real estate to foreign investment, helping to spur economic growth. Since that time, foreign citizens have been able to obtain full ownership of property in Mexico through the establishment of a land trust or fideicomiso.

   The property deed must be registered with a local bank of the foreign citizen’s selection, and a land trust must be set up between the foreign citizen and the bank with which the property deed will be registered. By law, land trusts established on the behalf of a foreign citizen are granted for an initial term of fifty (50) years and can be renewed for another fifty (50) year term. Once the Mexican property has been purchased and the trust has been established, the foreign buyer, being the trust beneficiary, will have full exploitation rights to the property while the bank holds the title. The trust beneficiary is thus entitled to use and enjoy the property however he or she may desire. If the foreigner wishes at any time to sell their Mexican property that is being held in trust, they may do so whenever they deem necessary, and for as high a price somebody is willing to pay for it. With the exception that the deed to the property can never be registered in their own name, the Mexican real estate is theirs to use however they wish for private dwelling purposes (e.g. vacations, seasonal living, as a primary or secondary home etc.).

   There exist two very distinct processes available to foreigners to buy property in Mexico which is located in the restricted zone (the area of Mexican territory located within 50 kilometers of the ocean or 100 kilometers of the national border). The first, as mentioned previously, is through the establishment of a land trust with a local bank. This is the process used by private foreign citizens who want to purchase property within the restricted zone for the intent to use for dwelling purposes, (e.g. vacations, seasonal living, as a primary or secondary home etc.). The second process through which a foreign entity may purchase Mexican real estate in the restricted zone is through the establishment of a Mexican corporation.

   In consideration of Mexican corporations with foreign capital, the Foreign Investment Act (“FIA”) and the Regulation for the Foreign Investment Act (“RFIA”), provide a legal window that allows such corporations to purchase property within the restricted zone (zona restringida) and to have fee simple ownership rights to it, provided that the property purchased is used for commercial purposes (e.g. time share, leasing, hotels, etc.), as per Section 10 of the FIA and Section 5 of the RFIA allow. To maintain ownership, a notice of purchase must be filed annually with the Ministry of Foreign Affairs (“MFA”). Should it later be found that a property owned by a Mexican company with foreign capital is being used for dwelling purposes and not commercial purposes as agreed, such company would forfeit its rights to direct fee simple ownership of the property. The company would then have the option to establish a land trust with a local bank in the same manner as a private foreign citizen would, for full exploitation rights of the property for the once renewable fifty (50) year term, with the exception that those full exploitation rights shall not include the right to use the property for commercial purposes.

   For clarification and reference purposes please find a more complete breakdown of the two legal vehicles available to foreign citizens when buying property in Mexico located within the restricted zone.

A. Land Trusts (fideicomisos) If a private foreign citizen wishes to purchase property located within the restricted zone (zona restringida) they must establish a land trust (fideicomiso) with a local bank in which the bank agrees to register the deed under its name and hold it on behalf of the foreign citizen for a legally statutory fifty (50) year term, which can be renewed for another fifty (50) years. The bank is legally prohibited from doing anything whatsoever with the deed without the direct written consent of the trust beneficiary. In the case the trust beneficiary decides to sell the property to another foreign citizen they will have to create a new land trust with a bank of their selection and will be granted a new fifty (50) year term once renewable. Through this legal process, established in Mexican Law in 1993, private foreign citizens are legally permitted to purchase Mexican real estate property located in the restricted zone. After the property has been purchased and the trust established, the foreign citizen will then have full exploitation rights to the Mexican property, granting them the power to use and abuse the Mexican real estate as they see fit.

B. Incorporating in Mexico When a foreign citizen wishes to purchase real estate in Mexico which is located in the restricted zone, with which they intend to develop for commercial purposes (i.e. develop hotels, time-shares, condos or homes to sell for profit, etc.) the foreign citizen must first establish a corporation in Mexico, if they have not already done so. After incorporation the company must apply to the Ministry of Foreign Affairs (“MFA”) for the rights to the fee simple title of the Mexican real estate under consideration. Once the property has been purchased and MFA has approved the company for fee simple title, the company will have full ownership rights and the ability to develop the property commercially. This legal window which grants foreign citizens the power to purchase property located within the restricted zone is specified by the Foreign Investment Act (FIA) and the Regulation for the Foreign Investment Act (RFIA) as per Section 10 of the FIA and Section 5 of the RFIA, Mexican companies with foreign capital are allowed to purchase and obtain full ownership rights of a property within the Restricted Zone provided that the property is to be used for commercial purposes.

Parties Involved When Buying Property in Mexico

   There are four different parties normally involved in a Mexican real estate transaction involving a foreign buyer who is a private individual when such Mexican property is located within the restricted zone: a Mexican real estate agent, a Mexican real estate attorney, a Public Notary as well as a local bank. In cases where the Mexican property being considered is located outside of the restricted zone, a bank will not be necessary because the establishment of a trust will not be required. The roles of each person or entity involved in assisting a foreign citizen in buying property in Mexico located within the restricted zone, this includes all beachfront property in Mexico, are as follows:

A. Mexican Real Estate Agent

   As is the case in most fields, utilizing the services of a professional should ultimately pay for itself in the long run. When buying property in Mexico, this assumption holds true as well more often than not. Good Mexican real estate agents pay for themselves two times over by assisting buyers in several stages of the purchasing transaction. First of all, they help buyers find the Mexican property which is perfect for their preferences, budget and value appreciation and rental income potential. In Mexico, it is often the case that the availability of a property is spread by word of mouth, and some of the hidden gems may only be found with the assistance of a seasoned and reputable agent. Some of the reasoning for this is that many neighborhoods (colonias) in Mexico are gated and entrance into them is strictly regulated. Often times, without the presence of a local real estate agent, potential buyers are prohibited from entering such communities to view the homes for sale within.

   Even if you are able to obtain entry into a gated colonia, the homes within are often surrounded by high walls temselves, obscuring your view of many homes and their beautiful gardens, (these high walls are notably less common in tourist areas such as Cabo San Lucas, Cancun and Puerto Vallarta). After you have found a Mexican property in which you are interested in, your agent can investigate the buy/sell history of the property you are considering and similar homes in the area. This will help you to uncover the true value of the Mexican real estate property and whether or not the seller is sitting on a “cold property” in which they paid far too much for to begin with and are trying to relay that cost to an unsuspecting buyer. Uncovering whether the seller is in a hurry to sell or is patiently waiting for their asking price, is another way a good Mexican real estate agent can help you save money by giving you more bargaining power in the price negotiation.

B. Mexican Real Estate Attorney

   As implied in the preceding section, an experienced Mexican real estate attorney is an essential member to the team of professionals required of a foreign national buying property in Mexico. Throughout the process of purchasing real estate in Mexico, your real estate attorney in Mexico shall be responsible for the drafting of contracts, assessment of the legal standing of the property, investigating the background history of the seller, and for the review of the various terms involved in the sale of the Mexican property being considered, all of which may help you avoid any possible legal contingencies which could arise if something is overlooked.

   Besides offering his professional expertise and advice in these matters, your real estate attorney in Mexico can be very helpful in saving you money as well. Mexican real estate attorneys work with the various governmental departments and private entities involved in real estate transactions in Mexico on nearly a daily basis. Because of this they often develop close relations with a number of important contacts within banks, notaries and the Mexican government offices. At the very least, these connections help keep attorneys that specialize in this area of law updated on the most competitive rates and fees implicated in real estate transactions in Mexico, information which helps them make sure the buyers they represent are given the best possible prices.

   With an experienced Mexican real estate attorney, buying property in Mexico can be a simple, nearly worry-free process. However, attempting to navigate the process without a Mexican real estate attorney, or simply an inexperienced on, could turn what had always been a dream into a nightmare. As is often the case, it could take years for any discrepancies left lingering by an improper handling of the property rights transfer to come to surface. Many of the potential legal contingencies which could develop ultimately spell headache and heartache for the foreign buyer. There are several common pitfalls made buy first time buyers and inexperienced Mexican real estate attorneys during the purchasing process, which an experienced real estate attorney in Mexico knows exactly how to avoid.

C. Notary Public

   The Notary Public plays a vital role in the process involved in buying property in Mexico. The job responsibilities of a Notary Public in a Civil Law system such as in Mexico and those of a public notary in an English Law system such as in the U.S., are as different as night and day. In the U.S. a public notary is an officer who can administer oaths and statutory declarations, witness and authenticate documents and perform certain other acts varying from jurisdiction to jurisdiction. With the exception to public notaries in the State of Louisiana, the roles and powers of a public notary in the U.S. are significantly more limited than those of their counterparts in Mexico.

   In Mexico, the position of Notary Public is directly appointed by the State Governor, the highest ranking public office at the state level. The Notary Public has the absolute power to witness and certify important documents such as property deeds or business documents which require absolute authenticity. The appointee of Notary Public in Mexico also holds the responsibility for the management and secure storage of original public records. Under Mexican Law, when buying property in Mexico, the deed of the property must be prepared by a Notary Public. It is extremely important that all important documents involved in buying property in Mexico are verified through a Notary Public. A good Mexican real estate attorney has plenty of experience directing this process, which should help expedite the filing and authenticating proceedings for the paperwork and documents required when purchasing real estate in Mexico. ........ If you are confused about where the responsibilities of the Notary Public end and those of your real estate attorney in Mexico begin, be sure to ask for clarification from your Mexican real estate attorney.

D. Bank

   As we have already mentioned, when purchasing real estate in Mexico which is located within the restricted zone, a foreign citizen must set up a land trust with a Mexican bank. Trust agreement (escritura) set-up fees with the bank can range from $2000-$3000 and annual service charges can run anywhere from $500-$1000.

   It is very important that your Mexican real estate attorney carefully review this trust agreement (escritura) before agreeing to its terms. Many foreigners unknowingly sign over the rights for banks to unilaterally raise the annual service charges as they deem necessary. The only way to escape from these increased rates once agreed to is to transfer the trust to another bank. This involves another round of set-up fees and taxes that are best avoided.

   In most cases your real estate attorney in Mexico should be aware of which banks in the area offer the best rates and which ones have a tendency to sneak a clause into the trust agreement which grant them the power to raise rates over time. Utilizing your Mexican real estate attorney in this manner will save you the time from having to shop around from bank to bank to find the best rate.

Pitfalls to be Avoided When Buying Property in Mexico

   When buying property in Mexico one must be very careful to avoid some of the commonly made mistakes which often lead to stringent fees and penalties and possibly even the confiscation of the property itself, including everything which has been constructed upon it since purchased. Immediately below you will find a brief explanation of some of the most commonly made mistakes that can be avoided if an experienced real estate attorney is leading your purchase transaction.

   It is not our intention that you take any of the information included below or previously mentioned in this document as direct legal council from our firm. We are merely offering this publication as an informative to help prepare you for your future purchase in Mexico, and as so must recommend that you solicit council from a real estate attorney in Mexico once you are prepared to proceed further. The information provided is our opinion and should not be perceived as absolute fact.

A. Ejido Land

   A significant percentage of Mexican real estate is located within community owned parcels of land called ejidos. Ejidos are common grazing pastures or community lands that were provided by the government to population centers in order to provide food for the members of that community. After suffering through years under the encomienda system, in which the Spanish conquerors and their inheritors were granted trusteeship over the indigenous people residing on their plantations, land reform was one of the principal objectives of the Mexican Revolution and the resulting Constitution of 1917. In the Constitution of 1917, land was established as a constitutional right of the Mexican people, and ejidos were created a few years later to meet that constitutional requirement.

   The size of an ejido depends upon the size of the population center which has been granted title to it, either by inheriting it or by application and approval, as well as the productivity of the land being considered. Members of the ejido are permitted to construct homes and cultivate the land which it embodies. Before 1992, it was impossible for any body but an ejidatorio to obtain property rights to ejido land. Constitutional reforms championed by President Carlos Salinas de Gortari, citing the low productivity of communally owned land, eliminated the constitutional right to ejidos and opened the door for its conversion into private property. Communities that so choose, may apply to have their ejido converted into private property which may then be divided evenly amongst the ejidatorios to then be used as they deem appropriate.

   If a person unknowingly purchases property in Mexico which is still included in an ejido land claim, whether merely by a small percentage of the property or by entirety, their rights in the case of any legal proceeding are decidedly subordinate to those of the ejido land holders. To put it simply, if a person purchases Mexican real estate property which is later deemed to be ejido land, such person will either lose all rights to the property and any permanent structures which have been built on it, or face an extremely long and costly legal battle in which they will have little or no chance of winning. For these reasons it is extremely important for you to select a Mexican real estate attorney experienced in real estate law in Mexico. Mexican real estate attorneys are much more scrupulous in their investigation into the seller and the property, if for no other reason, because they are aware of exactly what pitfalls need to be carefully avoided.

B. Pre-existing Liens, Unpaid Taxes and/or Utilities

   Under Mexican Law liens are passed on with the title of the land. Therefore, when purchasing real estate in Mexico it is extremely important that your Mexican real estate attorney performs a series of checks to ensure that the Mexican property under consideration has a clean history and there are no pre-existing liens, such as an old unpaid mortgage. It is also recommended that you be sure and verify with the Notary Public that all of the necessary land taxes have been paid for up to the l-ast five years and that all utility bills included within the last two years have been settled as well. Mexican Law does not hold you liable for any taxes or utility bills beyond these time frames.

C. Existing Structures are Tax Registered and Up to Code

   Some other important tasks to be performed by your Mexican real estate attorney are to check that all of the pre-existing structures on your property have been tax registered, and that all of the installed utilities in those structures were done so in legal fashion. The potential consequences in not performing these tasks are not quite as severe as the other potential pitfalls listed, but failure to identify and correct any pre-existing aberration of the law in regards to building codes or any previous failure to accurately register the property with the tax authorities, could potentially lead to some stringent fines and penalties which are better avoided.

D. The Seller is Legally Permitted to Transfer Ownership

   This may seem self-evident, but it is all too often the case that a foreign buyer will enter into negotiations with a potential seller in Mexico, who is not legally endowed to sell the property, usually because the property is jointly owned. If this is the case, both or all owners must agree to sell. If a buyer enters into and completes negotiations with a seller and it is later uncovered that the seller was not legally permitted to sell the property because there were other joint owners of the property in question, the rights of the buyer in regard to the ownership of the property will be substantially less than those of the original owners that never authorized the transfer of ownership.