Due Diligence and Obtaining Proper Documentation

When purchasing a hacienda (property), whether it is a villa, condo, beach front property or in Cancun or Playa del Carmen, you must do your homework. Doing your homework includes:

Ascertaining the status and transferability of the property
Acquiring title insurance
Making a physical inspection of the property
Acquiring a statement of no liens
Acquiring an appraisal

Status and Transferability

Determining the ownership status and transferability of a property is mandatory. For a property to be transferable there must be:

Possession of a title in the owner’s name
Transferability: a right to sell the property
No liens or encumbrances

Possession of Title in the Owner’s Name

A person must have rightful ownership with possession of title in his name. Mere physical possession of the title document does not determine ownership. It is important to determine the name of the rightful owner on the title.

It is not always clear on the seller’s deed how the title is held. Consequently, it is advisable to obtain consent of the spouse by having the new deed signed by both the holder of title and his/her spouse. This prevents problems that may arise if the property was acquired as community property, sole and separate property, or jointly owned property.

Right to Sell/Transferability

Merely having possession of title and rightful ownership does not mean there is a right to sell the property.

Ejido land/Co-propiedad
An owner of ejido land, land within the restricted zone, has proper title; however, he is prohibited from transferring the property to a non-ejidatario. Likewise, the same applies for land that is a joint ownership of private property within a family, a co-propiedad. Here, every descendant is assured a share of the family property. Because of this, clearing title may be highly challenging especially if the land has been in the family for several generations. Before land can be transferred, each co-owner has a right of first refusal and just locating all the co-owners may be a daunting task.

In both cases, if proper channels are not taken, you may be surprised when you have to hand over your property to the rightful owner in the event he comes to reclaim his property.

Regimen de Condominio.
Federal law requires condominium developments to have a recorded regimen de condominio. A condominium unit can not be legally transferred without this required regimen. A condo development must have an executive committee, an administrator, and established procedures for unit owner meetings. There must be a system for resolving conflicts between owners and a method for setting assessments. Some condominium developments also give a right of first refusal to other unit owners.

Fraccionamientos
Subdivisions, fraccionamientos, must be approved by both the local and state authorities in order for the land and/or the house to be legally transferred.

The Fideicomiso

The Constitution of Mexico provides that a foreigner may not own property within 50 kilometers (31miles) of the coast or 100 kilometers (62 miles) of the national border. As a result, most of the Baja Peninsula is within the restricted zone. Currently, approximately forty-eight percent of Mexico’s land is in ejido ownership.

In 1992, a process for privatizing/regularizing the land holdings was established so that ejidos could grant titles to members for their individual parcels, allowing it to be bequeathed to heirs, used as collateral, rented, and/or sold to other members. However, privatization entails a lengthy application process which requires a minimum of seventy percent of the members of the ejido to agree on privatization, for undisputed titles to be established, and for parcels of land to be defined. Thus, it can take five to ten years for completion of this process. Additionally, even if the land is fully regularized, the group may maintain communal land for markets, parks, town squares, and the like as well as communal ownership of community development land.

Before ejido land can be sold to outsiders, it must be fully privatized. Additionally, the first sale must include the right of first refusal. Thus, the process known as derecho al tanto, requires that all members with the right of first refusal to agree to the sale. The Derecho al tanto involves notification of intent to the ejido president who then gives public notice of the intended sale. The following is the order a property must first be offered to:

Family of the seller
Anyone who has worked the property for one year or more
neighbors
other members of the ejido

The sale may only proceed if no one among these four groups comes forward to purchase the property or raise an objection within thirty days. You must also take into consideration the challenge of locating all of the owners being that members and their heirs may be scattered.

Beware of purchasing ejido land via a promise, informal deal, or on the cheap. You must make sure privatization has been well established or the rightful owner may evict you without any compensation for your loss.

To legally own land within the restricted zones, a bank trust (fideicomiso) must be formed with one of the federally-charted banks in Mexico. The foreign buyer becomes the sole and controlling beneficiary with the bank being the owner of record for the property. As beneficiary, you enjoy all the rights of ownership which include the right to rent the property, pledge the property as collateral, tear it down to construct a new dwelling, or to bequeath it to heirs.

An arrangement of a trust includes:

Fiduciario: the trustee bank
Fideicomisario: the beneficiary buyer
Fideicomitente: the seller

A trust lasts for 50 years. Before expiration, the trust can be renewed for an additional fifty years. As long as there have been no changes in the terms and conditions of the trust or a change in beneficiaries, a renewal application must be made to the Secretary of Foreign Relations within a minimum of 180 days before its expiration. However, a renewal application may be made as early as 365 days before its expiration.

If the trust is terminated, ownership transfers to the party named by the trust beneficiary as long as he has the legal capacity to own the property. If the fiduciary has not received instructions regarding its transfer, the property may be sold with the proceeds (after expenses) of the sale going to the beneficiary.

Because rates and services differ among banks, it is a good idea to shop around. Banks charge an initial set-up fee which can range from $500 to $750. On top of that, banks charge an annual maintenance fee of .05 to 1% of the value, which is subject to change via reappraisal every one to two years. It is important to note that banks will not send a bill requesting payment for a trust’s annual fee. To avoid penalties you must make proper and timely payment arrangements.

There are many benefits in creating a trust:

A trust may be modified to allow for new beneficiaries using a fairly simple procedure
The interests of a trust may be passed to heirs without the need of a probate proceeding in Mexico
A beneficiary may instruct the trustee to lease or rent the property for up to ten years with the rental income going to the beneficiary.
Although not a guarantee of title, a bank will do its own title search before issuing a trust

If the property is later sold to another foreign buyer, the process involves transferring interests in the trust. A Contrato de Cesión de Derechos Fideicomisarios may be used. The new deed must be registered in the National Foreign Investment Registry and a permit from the Secretary of Foreign Relations must be obtained. The new buyer may either request a new trust for a fifty-year term or request an assignment of the rights. The request for a new permit will cost $1500 in addition to the $500 National Foreign Investment Registry (RNIE) fee. The request for an assignment of rights has no permit charge but you still must pay the $500 RNIE fee.

To determine whether or not to apply for a new trust or request an assignment of rights you must take into consideration the annual bank fees and the remaining term of the existing trust. It is probably more profitable to obtain a new fifty-year trust with a bank offering more favorable fees if the trust has annual fees of more than $500 and/or the term remaining is less than thirty-five to forty years.

Waiver of Secrecy of Confidential Information (Renuncia al Secreto de Infromación Confidencial)
When forming a trust, the trustee bank may require you to sign a waiver so that the bank may comply with requests for information from certain U.S. governmental agencies such as the IRS or the Department of Homeland Security.

Mexican Corporations
A fideicomiso can not be avoided by forming a Mexican corporation as the owner of the restricted property and having the foreign buyer be the sole stockholder. This strategy would never be legal under any circumstance. Mexican corporations are only intended for ownership of commercial ventures. This law is clear and is substantiated by both the Foreign Investment Act and the Constitution of Mexico.

Mexico Title Insurance

Title insurance protects the buyer from financial losses resulting from title defects and prior liens, excluding physical defects. It assures clear title and transferability. It protects the buyer from previously undiscovered circumstances that may arise to threaten a buyer’s ownership of the property. The cost of title insurance ranges from $5-7 per $1000 valuation. Title insurance should be reflected in your purchase offer. The following three companies offer title insurance for Mexican real estate:

Stewart Title Guaranty de Mexico S.A. de C.V.
First Mexico Group
Fidelity National

A search for title defects and liens will be conducted by the title insurance company before issuing a policy. Depending on the location and complexity of the property, the cost of the title search will range between $500 to $3000. Searches may take several days or as long as a month to complete. The purpose of the search process is to discover any condition that may encumber or prevent conveyance of the property.

A title insurance company is in the business of managing risk. Consequently, it is in the interest of both the policy purchaser as well as the insurance company to conduct a very through title search to uncover problems which may prevent conveyance.

Considering the low relative cost of coverage, purchasing a policy is worth the benefits arising from a title company’s thorough examination of records and its protection from financial loss.

A title policy guarantees the following:

Proper title to the estate or interests
Marketability of title
No defects, encumbrances, or liens
Right of access to and from property

A title policy does not guarantee the following:

Rights of eminent domain recorded after that date of the policy
Laws, regulations, or ordinances restricting the use of property
Assessments or taxes not shown as existing liens
Liens, encumbrances, defects, or adverse claims which have been suffered, created, or agreed to by the claimant, created after the date of the policy, or known by the claimant but not a matter of public record.
Water rights (Mexico only)
Mineral rights (Mexico only)
Facts, interests, rights, easements, claims, liens, encumbrances, discrepancies or conflicts in boundary lines, shortage in area, encroachment or other fact which could be ascertained by physical inspection of the property or by making and inquiry of those in possession of the property, or which a correct survey would disclose
Confiscation, expropriation or taking of land by agrarian reform, revolution, insurrection, or political action (Mexico only)

Physical Inspection of Mexican Property

Surprisingly, there are no disclosure requirements for real estate in Mexico. Accordingly, no disclosure is required regarding the physical condition of the property. Hence, the burden is with the buyer to discover any environmental or structural defects or conditions. Besides doing your own physical inspection, you may also want to hire an architect or engineer to inspect the property to determine its condition. Obtaining a soil survey is also recommended, especially when purchasing vacant land.

Statement of No Liens

Certificado de libertad de gravamen
A buyer should obtain from the seller a statement of no liens, unpaid taxes, or other encumbrances on the property better know as a certificado de libertad de gravamen. A gravamen should include:

A legal description of the property
The owner of record
Boundaries
Surface area

Certificado de no aduedo
You should also obtain a certificado de no aduedo, a certificate of no debt, provided by the local tax office

Escritura publica
The escritura publica, the public deed, should also be obtained

Affadavit Regarding Debts Related to the Property
A buyer should obtain an affidavit from the seller stating that all other debts relating to the property have been satisfied. This includes:

Verification that all homeowners’ association fees are up to date
Verification that all household staff such as a gardener or housekeeper, have been properly dismissed and compensated for in accordance with Mexico’s labor laws.

Social Security Clearance for New Construction (terminacion de obra)
For single family homes that are less than five years old a conclusion of work document (terminacion de obra) should be obtained from the seller. Secondly, a declaration that all worker insurance was paid during the construction should be obtained from the Social Security Institute (IMSS).

Appraisal (Avalúo)

To establish a value for tax purposes, an official appraisal (avalúo) of the property is required. The Notario orders the appraisal. An official appraiser (perito valuador) performs the appraisal. Based on the value of the property, an appraisal may cost as little as $150 or as high as several thousand dollars. The official appraisal amount may or may not be identical to the purchase price. The escritura should include both the official appraisal amount as well as the full purchase price paid for the property.

Lenders will require a second appraisal for property financed by a mortgage loan. This cost will be in addition to the initial official appraisal.

Secretary of Foreign Relations Permit and Registration

All foreign buyers who purchase real estate in Mexico must be registered with the Secretary of Foreign Relations. The permit fee is approximately $1500. To purchase real estate, foreign buyers must sign a Calvo clause statement stating that in case of a dispute regarding ownership, you agree to give up recourse to the laws of your home country.

Restricted Zone
If you are purchasing property locate in a restricted zone, you must obtain a bank trust permit. The new deed must be registered in the National Foreign Investment Registry.

The Secretary of Foreign Relations must grant any petition for a trust permit that complies with the stipulated requirements within five working days of its application to the central office in Mexico City or within 30 days of its application to one of the Secretary’s state offices. The trust registration or permit is considered authorized if the maximum requisite period passes with no action. However, the date submitted may be unknown to the buyer considering that its submission is done by the trustee bank.

Non-Restricted Zone
If you are purchasing property not located in a restricted zone, you must obtain a regular permit and register the new deed.

Vacant Lot
Permit requests for vacant land should include a general development plan detailing the construction time frame and the amount of money to be invested.

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