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Purchasing Your Dream Home in Mexico Part 2
by Linda Neil
This article is the first of two parts to be published in the Baja Insider. It is a comprehensive work by author Linda Neil and will answer many questions for those interesed in buying property in Mexico. Linda Neil has been in the real estate business in Mexico for more than 30 years. Her knowledge and credibility are well respected throughout the real estate industry here in Baja. She is one of the founding members of AMPI, the Mexican real estate association. Linda works as a buyers representative in your quest for the Baja Dream home.
If you haven't read Part 1 of this series –
Click here
RULE NUMBER FIVE:
INSIST UPON RECEIVING A REGISTERED TITLE
The purchase/sale document signed by buyer and seller is generally legally valid between the parties to the transaction. It most likely contains the description of the property, the price to be paid to the seller, and any other special terms and conditions. It may be drawn up by the parties, their agent(s), or by a third party. It should be considered as an interim contract, however. Until the final deed is drafted by and signed before a Mexican Notary Public and duly registered, the transfer WILL NOT provide valid notice to third parties. This final deed must be recorded in the Public Registry Office of the municipality in which the property is located. Mexico's land registry system functions in much the same manner as those in the United States or Canada.
Unless the deed for the rights of the beneficiary has been recorded, there may not be a remedy for the purchaser who neglected to obtain a registered deed... his interest, his investment, may be lost.
When a foreigner is acquiring residential property for which a bank
trust is required, the purchaser should receive a deed which has been
signed by the bank trustee before a Mexican Notary Public. This will
name the beneficiaries and substitute beneficiaries of the trust in
accordance with the purchaser's instructions. A full description of
the property must be included, seller's capital gains taxes paid and
buyer's acquisition tax paid. These receipts should be included in the
deed document which may consist of eight or ten pages, or more. The
final page of the document should bear the stamp of the Public
Registry, together with Book and Page numbers and the date on which it
was recorded. If this stamp is not on the document, the transaction
has not been completed, the buyer is not fully protected.
CONSIDERATIONS IF FINANCING YOUR PROPERTY:
Until recently, most homes and condominiums were for sale for all cash
or financed by the seller. With the advent of NAFTA however, several
mortgage companies have entered the Los Cabos and Cancun, Riviera Maya
marketplaces and offer long-term financing for qualified buyers. If
you are considering financing your purchase, and are buying in a
location where financing is offered, it makes sense to investigate the
terms and plans available, select the company of your choice and make
lender approval a condition for the purchase.
If the seller will be financing your purchase, request that title be
transferred to you and a pledge guarantee contract executed
guaranteeing payment. Traditionally, sellers have preferred to hold
title to the rights in their name and transfer title to the rights
only upon receipt of payment in full from the buyer. Meanwhile,
however, the seller may die, may disappear, may go bankrupt... a risky
situation for the buyer. The prudent buyer will insist upon a transfer
of title and registration of a mortgage or pledge in which he gives
his rights in the property as security for payment of the remaining
purchase price. In the event of default by the buyer, the seller must
conduct a proceeding similar to a judicial foreclosure in the United
States and Canada. It is troublesome, as is any foreclosure in any
country in the world but not notably more problematical. The
registered title and recorded pledge or mortgage provide the buyer a
greater comfort level in his investment. The lender also enjoys
protection in having his loan recorded and will have an established
legal proceeding to follow in the event of default by the buyer.
CLOSING COSTS.... OR HOW TO AVOID UNPLEASANT SURPRISES.
Mexican law says that taxes must be paid on the higher of the
following: purchase price OR appraised value. Since many appraisals
are lower than the actual selling price your taxes will be
considerably lower if the appraisal value is declared. Payment on this
basis has taken place for many years in many parts of the country. It
is, however, illegal. Should you choose to pay your costs based upon
this basis, please be aware that: 1. it is violation of the law and 2.
your tax base will be low for declaration of value in the property
when you sell it. Furthermore, if you are financing your property
through an institutional lender, full value must be declared.
Following is an example of some of the steps involved in obtaining a
registered title. The costs for same will vary with the property and a
written estimate should always be obtained prior to initiating the
process.
OFFICIAL APPRAISAL:. The appraisal must be made by an appraiser who is
usually an architect and who is recognized as a Perito Valuador,
Official Appraiser, by the property tax authorities in the
municipality where the property is located. This is required prior to
completing any transfer of title. If an institutional lender is
involved, a commercial appraisal may also be required.
FOREIGN RELATIONS PERMITS: If the property you are purchasing is
already in a trust (fideicomiso) you may either: request assignment of
the rights to you, or may request a new trust for fifty years. If a
new trust, a permit from the Secretary of Foreign Relations is
required. Whether a new trust or an assignment of rights, the deed in
the new buyer’s name must be registered in the National Foreign
Investment Registry. When considering a new trust or an assignment of
rights, the factors to be considered are: 1. Remaining term of the
existing trust - when will it need to be renewed?; and 2.-What are the
annual bank fees under the existing trust?
If the permit has an unexpired term of less than fifteen or twenty
years and/or the annual bank administration fees are more than $500.00
U.S. dlls., it probably makes sense to obtain the permit for a new
fifty year trust with a bank offering more attractive fees.
NOTARY FEES - The Mexican Notary Public is an attorney who has
practiced his profession for at least five years and has been
appointed by the governor of the state in which he is practicing. His
duties and obligations include; drafting of the deed, calculation of
seller’s capital gains taxes and buyer’s acquisition taxes and to
"give faith" to the validity of signatures. The persons signing before
him must prove they are who they say they are. Because the
responsibility and potential liability for the actions of the Mexican
Notary Public are considerably higher than those of Notaries Public in
the U.S. and Canada, the notary’s fees will also be substantially
higher than those charged on the
other
side of the border. These fees are based upon a rate schedule reviewed
and approved annually by the College of Notaries Public and are tied
to the amount declared in the property transfer.
I.V.A. - The Impuesto Sobre Valor Agregado (I.V.A.) is a value added
tax which is charged on all services. It is 10% of the value of
services provided on the Baja Peninsula and 15% for services provided
on mainland Mexico. Many trustee banks are headquartered on mainland
Mexico, thus the I.V.A. charged on their
services will be 15%. IVA taxes must be paid on services provided by the Notary, the appraiser and any other professionals whose services you use
BANK ADMINISTRATION FEES: If title to your property is in a bank
trust there will be annual fees for the administration of same. Over
the past few years there has been a substantial decrease in annual
fees and it makes sense to shop around for the most favorable rate for
the property being purchased if a new trust is contemplated. If an
assignment, new rates may possibly also be negotiated. Traditionally,
trustee banks have not sent annual statements. It is important to
request a statement from your trustee bank at least ninety days prior
to the anniversary of the trust and pay on time to avoid penalties, or
to contract with a company providing this payment service.
TITLE SEARCH AND INSURANCE: A title search is always a worthwhile
investment. An investigation will generally indicate the registered
owner, the chain of title, and will indicate liens, if any, against
the property at the time of the investigation.
Title insurance, issued when the new deed is registered, guarantees
the marketability of the property and is a requirement by most
institutional lenders. There are currently three US title insurers
offering policies on Mexican properties. In the event there is a
problem with title, the insurer is obligated to defend the owner’s
rights in the property and/or indemnify the owner against financial
loss. Investment in a title policy puts the financial risk on the
insurer, not the buyer who may not be able to defend the property as
well as a major insurance company.
PROPERTY TAXES: are a municipal tax and income benefits the
municipality. Typical rates for residential dwellings is 6.5 (pesos)
per 1,000 and 13 per 1,000 for properties destined as rental units.
Vacant lots are rated at 26 per 1,000 with an increase of 2.6 per
annum for each year there is no construction declared on the lot.
Maximum amount is 52 per 1,000. Valuations for property tax purposes
are generally made every two to three years or at the time of sale of
a property. Property taxes must be brought current prior to transfer
of the title.
ACQUISITION TAX: The acquisition tax, or transfer tax, is generally
paid by the buyer. It is currently 2% of the declared value of the
property in most parts of the country.
CAPITAL GAINS TAXES: A foreigner who sells property in Mexico is
liable under special rules, much like the United States, for the
payment of the I.S.I.R. (Impuesto Sobre la Renta) which is the Mexican
equivalent of the Capital Gains tax. Liability is either 20% of the
declared value of the transaction or 33% of the net value, taking into
consideration the length of time held, the improvements made,
commissions paid and other allowable expenses. The formula is
complicated and the tax should be figured both ways and confirmed by
the Notary Public who will be having the documents recorded and making
the tax payments. This is a seller tax and title cannot transfer to
the buyer under this tax has been paid.
SETTLEMENT FEES: Attorneys and Notaries Public often oversee parts of
the previously described required steps to a transfer. The buyer,
however, usually has to do certain of his own legwork and can
certainly do so if he has a good command of the Spanish language.
Unless the buyer has a lot of time to spend on the activity, it may
make sense to hire a company whose sole purpose is to supervise and
coordinate the permits, tax payments and other myriad of details so
necessary to obtain full legal right to the property being purchased.
Fees for these services will vary with the value of the property and
the complexity of the situation. It is important to always request a
written estimate of all the expenses prior to beginning the transfer!
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