The Baja California Travel & Living Webzine

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.

More Below...
 

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
 

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.

 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!

Articles.Dream.2004/Copyright, 2004,
Consultores Phoenix, S.C. Reproduction prohibited without permission

ABOUT THE AUTHOR:
Linda Neil is the founder of the settlement company™. It is the first company in Mexico dedicated to counseling buyers and sellers and to supervising the closings and registrations of real estate for non-Mexicans. The company provides title investigations, due diligence and legal services for buyers and sellers, as required, for properties and corporations holding real estate located anywhere in Mexico.

For further information and references, please contact.

The Settlement Company:
in Mexico: 01-800-627-5130
International: 1-877-214-4950 or 011-52-612-123-5056
FAX: (011-52) 612-123-5056

the settlement company®

Click here to email Linda Neil