Buying in Mexico

Buying Real Estate in Yucatan

I. A BRIEF HISTORY

Understanding the dynamics of the real estate market in Mexico requires a reflection on the socio-economic conditions that have developed in Mexico over the last several decades. The large middle class that has emerged in the last 40-years has provided for a more robust market. Additionally, with the growing foreign interest in living and investing in Mexico, the market is becoming more dynamic and secure for investment and ownership.

Historically, Mexico was a country of basically two large economic groups; the rich and the poor. The poor rarely owned real estate and the rich tended to subdivide what real estate they had and pass it to their heirs.

The current real estate market (where two previously unknown parties come together to buy/sell real estate) is still a relatively new business in many regions of Mexico. This is the reason why, in most of Mexico, there is no MLS, no real estate licensing requirements for agents, no governmental over-sight, limited institutional financing and few large organized real estate companies or real estate professional organizations, like the NAR (National Association of Realtors) in the USA.

The exceptions to this current scenario are Mexico City, Monterrey, Guadalajara and many of the coastal resort areas like Mazatlan, Puerto Vallarta, Acapulco and Cancun, where there are limited MLS’s, large broker firms and functional professional organizations like AMPI.

It is important to remember that Yucatan has been like an “anonymous region” separated from Mexico for decades. Yucatecos tend to think of themselves as Yucatecans first and Mexicans secondly. Rules, regulations and new businesses practices have tended to evolve here more slowly than in other regions of Mexico.

Historically, in Yucatan, when two individuals come together in an agreement to buy/sell real estate the parties have utilized a “promise to buy/sell real estate” agreement. The agreement is typically drawn up by the Buyers notario (the Buyer is responsible to pay the notario and closing costs). Upon signing, the Buyer gives the Seller a deposit to hold as “earnest money” to seal the deal. In return, the Seller provides the notario with current and notarized escrituras (title documents), cedulas (tax statements), planos (lot plan), personal data and corresponding information.

This “Promesa de venta” is a vehicle still popularly used in Yucatan and it is not unusual for a Seller that is not represented by a real estate agent to require this contract with the understanding that the Seller will hold the earnest money deposit. Should the Buyer fail to buy, at no fault of the Seller – the Buyer will forfeit the deposit. Should the Seller for no fault of the Buyer, refuse to sell, there is a penalty clause in the contract stating the Seller must return the amount of the original deposit and pay a penalty equal to the amount of the deposit - to the Buyer. If the Seller does not return the deposit and pay the penalty, the Buyer will have a very strong document for filing a lien against the property and quite possibly gaining title to the property after the legal process terminates.

II. BUYING PROPERTY ON THE YUCATAN PENINSULA

Today, in most of the large communities across the peninsula, there are real estate agents that provide tailored services to foreigners wishing to purchase property in a safe and secure manner. These services include; bilingual agents and administrative staff, standardized contracts, secure earnest money and escrow accounts, legal assistance, title insurance, funds wiring, monetary exchange banking, closing statements and continual brokerage services. A good real estate firm will build solid relationships with their clients, helping them with a range of issues that will confront the foreign Buyer wishing to live and/or do business in Yucatan.

Additionally, a good real estate firm will have good connections for the best (often multi-lingual) attorneys, accountants, contractors, architects, doctors, etc.

After selecting an agent, the Buyer needs to check the various real estate websites and choose the properties that they would like to tour. The agent will then need to contact the various owners and agents to schedule appointments. It is a good idea to try and keep your selections to fewer than 6-8 properties a day. Trying to tackle more will prove to be frustrating and confusing. If you are looking for property on the beach, or in the countryside (ranches, haciendas or quintas), the driving times can be considerable. If you are searching for homes in Merida, keep in mind that traffic in Centro Merida can be daunting and parking is often at a premium.

Invest a few days to do a thorough search of the properties that fall within your parameters. It will not take long for a prudent Buyer to establish a sense of value and know the best buys available to them. Your agent should be able to help you to know if a property is over-priced or a good buy. Some agents may charge a small daily fee for taking you around to see property. Their time has value. Many foreign buyers are here on exploratory trips, gathering information and getting a feel for the area prior to investing in a foreign country. Many do not buy. It is only fair to compensate the agent for his/her time and gasoline. Most agents will refund the fee at closing if the prospective Buyer turns out to actually be a Buyer. A knowledgeable agent is worth the fee. They can provide a ton of invaluable information that they have been garnering for many years in the business and in the region.

After you have identified the property you wish to make an offer upon, your agent will draw up a standardized “Offer to Buy” contract. The offer will be presented to the Seller and they will either, decline, accept or counter the offer. Negotiating on purchase price, closing date, inclusions and other details is common. However, do not be disappointed if the Seller holds out for full price.  Every Seller, like every buyer is an idividual.  (If your agent tells you that there is a general rule as to how much you should offer on a property - find another agent.)  If your offer is accepted and everything is signed, it is time to provide for the earnest money deposit and meet with your Notario/attorney.

THE BUYING PROCESS (Fideicomiso or FOMC)

While touring properties with your agent, you will want to engage in a conversation about Fideicomisos and FOMC (Foreign Owned Mexican Corporations) to determine which is the best vehicle for you to utilize to hold title. Both have advantages and disadvantages.

The fideicomiso (bank trust) is a trust agreement that you establish with a bank to hold title of the property with you (you and the bank are both named in the title documents). The bank has a fiduciary responsibility to represent your interest in the property.

Advantages of the fideicomiso:

If the title papers, property dimensions and corresponding documentation are not perfect, the bank will not issue the fideicomiso. We will discuss title irregularities in a future segment.

The main disadvantage of the fideicomiso is that it is restricted to hold a property of, NO MORE THAN 2000 square meters. (There are exceptions and you can request a permiso for acquiring a fideicomiso that allows for a property larger than 2000 square meters. It is a complicated process requiring an invest plan, time line, inspections, architectural renderings, business plan, governmental red tape, etc. The exception is designed for an investor that plans to make a significant investment in the property.) Another disadvantage of the fideicomiso is that it is limited to one specific property. Sometimes you can put two adjoining properties into the same fideicomiso. But, generally speaking the fideicomiso only is usable for one piece of property.

The FOMC (Foreign Owned Mexican Corporation) is a vehicle that allows foreigners to open a business and work in Mexico. The corporation is a Mexican entity, and as such, has the right to hold title to real estate. An attorney or notario can help to set up your corporation. It is important to know what your goals are in respect to the property, business and type of investment prior to setting up the corporation. Creating the corporation requires a minimum of 2-individuals (stockholders), of any nationalities, that are at least 18-years of age. One of the stockholders will be required to be the managing partner. The managing partner will be required to acquire and maintain an proper visa.  Additionally, the corporation is required to make monthly reports to HACIENDA (the Mexican Department of the Treasury) reporting income and expenditures. The reporting needs to be done by a certified accountant.

Advantages of the FOMC:

Disadvantages of the FOMC:

THE NOTARIO/ATTORNEY

A notario is an attorney that specializes in real property law and is specifically licensed by the state to legally transfer real estate from one party to another. The number of notario licenses is limited by the state. An attorney whom wishes to become a notario must first attend classes and then pass a board. It is a demanding process and many do not make the cut.

For those few attorneys that do pass the test and are eligible to become a practicing notario, they enter a waiting list for the next available notario license from the state. The wait is usually many years. Frequently, a law firm will have one or two of the junior partners who have completed the notario board exam and can become the notario for the firm . A notario license is extremely valuable and dearly guarded by the firms that have them.

The notario is ultimately responsible to ensure that a clean, merchantable title is passed from the Seller to the Buyer, that the property taxes, transfer fees/taxes and any capital gains taxes are paid at or prior to closing. They are also responsible to properly record the transaction in their personal books and with the office of the Catastro (office of property titles). Should a notario fail to discharge their responsibilities in an honest, fair and complete manner, they could lose their notario license.

Choosing a notario is usually not difficult and your real estate agent will be able to suggest a good notario that is versed in transferring titles to foreign Buyers. You may also choose to work with an attorney who is not actually a notario but is connected to a notario. Frequently, these attorneys have passed their board to become a notario and are awaiting their turn. In the meantime, they are skilled at checking titles, ordering fideicomisos and setting up corporations.

If you are setting up a corporation, it is a good idea to find an attorney/notario that understands the mechanisms of the proper corporation to best execute your business plan and objectives. Having your corporation worded properly the first time will save money, time and frustration.

Notario fees will vary from one firm to another. Many fees are based upon the amount of the operation (appraised value of the property). Taxes and transfer fees are based upon this appraised value or the actual purchase price. Frequently, the appraised value of the property is much less than the actual purchase price.

THE CLOSING PROCESS

You have found your property, negotiated and signed a contract, paid your earnest money deposit and contracted with a notario/attorney to handle your closing. You have decided to either utilize the fideicomiso, corporation or both. Your attorney/notario has copies of your passport, visa, the contract, and perhaps a POA from you to sign on your behalf.

The ball is now in your attorney’s court to prepare all the necessary documentation for closing. This documentation includes checking to see that there are no debts or liens against the property; that the taxes are paid, the meets and bounds description are correct, title is clear and in the name of the Seller listed in your contract, order the permiso for your fideicomiso or create your Foreign Owned Mexican Corporation.

Standard closing time from signing the contract to actual transfer of title is a process of 4-6 weeks. If there are problems with the title or meets and bounds it may take longer. Usually the “Offer to Buy” purchase contract provides for an automatic extension of 90-days to acquire proper documents if there is a problem. Should the documentation problem take longer to repair, the Seller and Buyer will need to sign a contract to amend the closing date.

Most foreign buyers wire the proceeds for closing to our earnest money account a few days prior to closing. If the Seller wishes to be paid in pesos, we exchange the proceeds into pesos on the day before closing and order certified checks to pay the Seller and the notario. We issue a final closing statement for review by the Seller, Buyers, agents attorneys and bank the day prior to closing

There are no title closing services available, so the broker acts as a closing agent and disburses funds. If the Seller wishes to receive their proceeds in a USA or foreign bank or other currency, we set up the bank wires and execute them upon signing.

The notario will provide the Buyer with a copy of certified escrituras at closing, after all signatures are collected. Afterwards, the notario will send the new escrituras to the office of the Catastro for recording of the new owner and title. The Catastro will then send the newly recorded title either back to the notario, the Seller or the sellers agent or accountant. The Office of the Catastro is notoriously slow. It is not unusual to wait many months for the new escrituras.

The offices of Catastro in the states of Yucatån and Quintana Roo are in the process of moving all the title and property tax information from paper files to electronic files that will be digitalized and stored electronically. This process has caused additional delays in receiving new title documents from the Catastro.

“RECTIFICACION DE LOS MEDIDAS” (Rectifying the property measurements)

Well, this means there is, most likely, going to be a delay in closing. Essentially the escrituras on file with the Catastro and the Sellers copy of escrituras have a (usual small often infantesimal) difference in the meets and bounds measurements stated in the documentation. If the property is to be held in a fideicomiso, the bank requires that the escrituras of the Seller and the escrituras filed with the Catastro be absolutely the same. If they are not, the Catastro will need to send an engineer to the property to re-measure the property and record it properly. After the engineer re-measures and issues the new measurements, the owners of all the properties that bound the re-measured property, must, literally, “sign off” on the new measurements and how they will effect the adjoining property owners. Needless to say, this can be a long and arduous process, especially if the property has numerous neighbors that adjoin the property.

TAXES

ANNUAL PROPERTY TAXES in the sates of Yucatan and Quintana Roo are relatively very inexpensive.

Example: A property with an appraised value of $1,000,000.00-mxp will be accessed annual property taxes of less than $5000.00-mxp per year.

It is important to remember that property taxes are based upon the Catastral appraised value of the property. The homeowner should receive a predial (tax bill) every year that shows the property tax that has been accessed. Usually, if you pay the tax early you receive a discount.

CAPITAL GAINS TAXES (called ISR or Impuesto Sobre la Renta) are accessed when you sale a property. The current rate is 29% of the gain. The calculation used to arrive at the tax owed will depend upon several factors:

  1. Years of ownership.
  2. Citizenship or immigrant status.
  3. Title held in Fideicomiso or Corporation.
  4. Square meters of property.
  5. Square meters of construction.
  6. Electrical or Telephone receipts in Owners name that reflects the address of the property.
  7. Proper ID of the Seller that reflects the property address.

 

If the property qualifies as your primary residence you can usually avoid a substantial amount of the ISR. To qualify for this exemption, as a foreigner, you will need to have the following:

  1. A current visa that reflects your name and address as it appears on your escrituras/fideicomiso.
  2. Electrical and/or telephone receipts that also reflect the name and address recorded in the escrituras.
  3. The property must be held in a fideicomiso (corporations do not qualify to avoid the ISR tax).

Currently, a home owner that qualifies to avoid a percentage, or all of the ISR are allowed to exercise that privilege once every 5-years.

CORPORATION CAPITAL GAINS taxes are a little more complicated. If you are holding title by utilizing a FOMC (Foreign Owned Mexican Corporation) you are going to definitely want to employ a good accountant. They will be able to help you reduce your ISR debt when you sell.

CLOSING COST

Typically the Buyer will be paying the closing cost. One exception to this general rule is when a foreign person is selling their home to a National or Mexican Citizen. If the seller is holding title with a Fideicomiso, they will need to pay a fee to the bank to cancel the Fideicomiso when the property is transferred to the buyer. Following is a list of closing items that will generate fees to the Buyer:

Generally speaking, the closing cost will run as low as 4% of the purchase price but can run higher depending upon the vehicle used to hold title and the “valor” value of the property.

BUILDING/REMODELING

One of the great benefits of building or remodeling in Yucatan is that it is relatively inexpensive compared to construction costs in Canada, Europe and the USA. Labor is relatively inexpensive and materials: hard woods, stone, marble and cement are reasonable. It is a very good idea to hire a reputable architect or Builder that either has a construction crew or works closely with a good contractor. Trying to save a few bucks by hiring your own guys and running the construction yourself is not always a good idea.

When it comes to getting the permits, buying the materials, managing the laborers, paying employee taxes and understanding local customs and workers expectations and requirements, a good local architect/contractor can save you money, time and a lot of frustration.

Just about everything in Yucatan is currently constructed out of cement block. When constructed properly, using the correct mixtures of sand, concrete, water, experience and expertise – the structures are extremely durable and virtually indestructible. This is why damages from hurricanes are usually limited to windows, doors, windmills and vegetation.

Due to the humidity in Yucatan and the absorbent nature of cement and mamposteria, concrete and stone structures should have at least two good coats of sellador applied to them before they are painted.  Wood finishes should also be well sealed and maintained to avoid deterioration by humidity and insects.

Albiniles (concrete construction tradesmen) are currently in high demand as the growth of Yucatan continues to boom. Finding good, experienced albiniles is important. If you are building on the beach, you especially want to make certain that you have employed albiniles with the integrity to make certain that the concrete is being mixed with sweet water (not salt water). Many of the decrepit buildings on the beach that have been destroyed by hurricanes were poorly constructed because the cement mixture contained salt water.

Finally, and again, find a good architect/contractor to help you with your project. You will be glad you did!