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Can foreigners own property in Mexico? What is a Mexican bank trust?
Yes, with the passing of the Foreign Investment Law in 1993,
Mexico permits foreigners to own land. However, Mexico segments
land within an area 100 kilometers from its borders and 60
kilometers from its coastlines (this includes all of Baja
California) as the “Prohibited Zone”. Foreigners
wishing to purchase land for residential purposes in the “Prohibited
Zone” must do so through a Mexican bank trust mechanism
called a “Fideicomiso”. The duration of a trust
is currently 50 years, and the term may be automatically renewed
for another 50 years upon request of any person having an
interest in the property. However, foreigners may acquire
property directly in the “Prohibited Zone” if
it is to be used for commercial (“non-residential”)
purposes such as a hotel, restaurant, or land for development
and resale through a Mexican corporation of which they are
the sole shareholder. Residential properties outside the “Prohibited
Zone” may be acquired directly by foreigners without
the need for a bank trust.
A trust is created through an agreement between the seller
(“fideicomitente”), the trustee (“fiduciario”)
which may only be a Mexican bank, and the buyer who is the
beneficiary (“fideicomisario”) of the trust.
The Mexican bank acts on behalf of the foreigner in all
matters related to the property held in trust. The beneficiary
retains the use and control of the property to mortgage,
encumber, improve, lease without limitation and sell without
restrictions and pass the property to heirs. Trusts for
real property must be recorded at the Public Registry of
Property of the location of the property. A bank does not
guarantee the title of the property and is not responsible
for any damages to the beneficiary in the event of a title
defect.
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Can the government take my property?
The Mexican government has the right to take your property
through legal condemnation proceeding for a public good
(i.e. road building) but it is required to compensate the
owner based on the assessed tax value.
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Basic
do’s and don’ts when purchasing property.
(1) It is important that prior to any sale, all individuals
or companies, either Mexican or foreign desiring to purchase
real property, verify the absence of any liens. A property
can be sold with a lien, and if the property is mortgaged,
the lien will follow the property. Therefore, the new owner
may have the risk of forfeiting such property in case of
the seller’s default on payment of obligations. The
Certificate of Freedom from Liens and Encumbrances, issued
by the Public Registry, establishes if the property is subject
to any lien or mortgage. Ask the seller to provide the following
documents and information to determine if he has or she
has legal, clean and transferable title to the property
before making an offer (the document will be in Spanish
and should be reviewed by your attorney):
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Copy of the current property
deed (“Escritura”) |
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Copy of a certificate of
freedom of liens and encumbrances (“Certificado
de Libertad de Gravamenes”) no older than 30 days.
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Certificate of no taxes
owed (“Certificado de No Adeudo”) |
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Subdivision authorization |
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Ask the seller if the property
to be purchased will be put into a bank trust at closing
(if located in the Prohibited Zone). |
(2) Do not purchase the property if the seller cannot convey
title or a bank trust at closing and not when the seller
offers you possession of the property.
(3) If the property is raw land undertake a physical inspection
of the property to verify that no one is in possession of
the property as Mexican law creates a presumption that a
person in possession of property is entitled to continue
in possession and has all related ownership rights. The
concept of adverse possession is referred to as “prescription”.
The possession must be under claim of ownership, continuous,
quiet and public. Acquisition by prescription occurs when
the property is possessed for five years in good faith or
by evidence of possession recorded in a Registro. In case
of bad faith, the period is ten years. Prescription does
not operate as to either ejido, federal zone lands or among
co-owners.
(4) Do not put earnest money and/or purchase deposits in
Mexico. In the case of a dispute with the seller prior to
closing it will be very difficult to get the money returned
to you.
(5) Hire an attorney who specializes in and has experience
with Mexican real estate purchases.
(6) Get title insurance and open an escrow account with
a U.S. title company.
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What
is a Notario Publico?
The office and responsibilities of a notary public differ
from the U.S. notary. A Mexican “Notario” is
an attorney who, after passing rigorous examinations, is
commissioned by the government as a public notary, holding
office for life, unless removed from office for cause. The
notario fulfills a public function delegated by the government
to draft documents, verifying the facts therein, the parties
and records the documents with the Public Registry of Property
(Registro Publico de la Propiedad).
The Notario is normally hired by the buyer and will serve
as an independent and neutral counsel to both the buyer
and seller or lender, as to their respective rights and
obligations, and ensures that all necessary steps have been
taken to conclude a valid contract according to the mutual
instructions of the parties. His responsibilities include
collecting and reviewing the sale contract, property tax
and water payment receipts; ordering a bank appraisal; freezing
the property’s file at the local registry (no documents
may be recorded in a property’s file during three
consecutive thirty day periods); reviewing the property’s
file to verify the legal ownership and search for liens,
encumbrances or anything that could affect the title (as
the majority of registries are not automated, this procedure
can take from 60 to 90 days); requesting the Registro issue
a “Certificate of Freedom of Liens and Encumbrances”;
and performing the Closing at his office where he handles
the escrow function, transfer of the Deed, collection, on
behalf of the government, of the taxes on the underlying
real estate transaction, and the recording of the documents
at the Registro.
A Notario does not insure title nor does he or she have
any legal responsibility for title defects except for fraud,
misrepresentation or gross negligence. Should a mistake
occur, there is little recourse to be had against a Notario.
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What
are ejidos?
The Mexican revolution of 1917 resulted in many large tracts
of previously owned land, primarily in agricultural areas,
to be expropriated by the government and made available
to agricultural cooperatives (“ejidos”). Originally,
the land was owned by the federal government and the members
of the ejidos (“ejidatarios”) were allowed and
required to use and work the land. Neither the ejido community
nor an ejidatario could sell, lease or use the land for
collateral. A new law enacted in January 27th, 1992, allowed
for the privatization and sale of ejido land. A contract
to purchase or lease ejido land prior to 1992 is invalid.
The new agrarian law requires the ejido communities to
establish procedures whereby the ejidatarios may obtain
private ownership of their respective parcel. Until parceled
off to individuals, all of the ejido property is deemed
to be owned by the ejido as a legal entity. An ejido community
also may transfer ownership of a portion of its property
to a partnership, corporation or joint venture in which
either the ejido or its members participate.
Ejido property is not registered in the public registry
of property. Evidence of its title will need to be obtained
from, and transfers must also be registered in the Agrarian
Registry with, the Ministry of Agriculture.
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What
types of real estate contracts are used in Mexico?
A promissory agreement (“Contrato de Promesa”)
is the preliminary agreement containing the basic sale transaction
details. Once the buyer and seller have executed the promissory
agreement, a second purchase/sale (“Contrato de Compraventa”)
formal contract will be executed by buyer and seller before
a Notario Publico which must be filed in the Public Registry
of Property to be binding on both parties. This second contract
is the single most important document the buyer will execute
with the seller since it contains the terms and conditions
of the purchase and it should be drafted by the buyer’s
attorney. Once the terms of the formal sales contract have
been fulfilled the Notario Publico will proceed to draft
the property’s deed (“Escritura”) and
schedule a closing for the parties.
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What
are the standard closing costs?
Normally the buyer pays for the property transfer tax (1
to 4% of the property’s tax appraised value depending
on the state) as well as all the other closing costs, including
the Notario fees and expenses which may range from 4 to
6% of the property’s value. Additionally, if required,
the buyer will pay an initial fee of approximately $500.00
to set up a bank trust, plus a percentage based on the value
of the property. The bank will also charge an annual trust
management fee.
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How does
title insurance work in Mexico?
Registration of real estate transactions without title insurance
does not provide the certainty of title ownership to which
U.S. investors, purchasers and lenders are accustomed. Although
the Mexican property transfer system is a relatively safe
one, remedies are limited in the event of a title problem.
There are three major US title companies and two Mexican
companies currently issuing title insurance on Mexican properties.
In general, their policies are designed to insure any recognized
land interest in Mexico such as direct ownership, leasehold
and trust or beneficial ownership (“Fideicomiso”)
covering commercial and residential properties, including
privatized communal farms (“ejidos”), beachfront
and border properties (the “excluded zones”).
Coverages include specific title risk coverage against marital
rights, fraud, mortgages, mechanic’s and/or tax liens,
easements, contractual obligations restricting the use of
the property, adverse possession by a third party, ejidos,
and forgery. Some cover other matters not of record (based
upon our receipt of acceptable surveys, surveyor’s
certificates or affidavits, seller’s affidavits and
real property tax certificates). Policies normally insure
against loss from defects in title unknown to the insured
prior to the date of the transfer of title or loan that
were not otherwise stated in the policy, regardless of whether
the loss results from errors in the Public Registry, errors
in the search of the Public Registry or any other cause.
They also cover access to the land. Coverage continues for
the duration of time that the insured holds its interest
in the real property.
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