How to Buy Real Estate in Vallarta
Published Nov 1, 2005 - (Updated Aug 20, 2012)
The following information offers a simple and concise summary about owning real estate in Mexico.
It is supplied courtesy of Century 21 Bay & Beach in Nuevo Vallarta, and has been slightly revised by our editorial staff to focus primarily on purchasing real estate in the Vallarta area and to bring it up to date.
It is a common misconception that foreigners cannot own real estate in Mexico, but the reality is that they can. Outside the Restricted Zone, defined below, a foreigner or foreign corporation can acquire any type of real estate, holding the property as a direct owner complying with Mexican law.
However, there is the Restricted Zone. The Mexican Constitution regulates ownership of the land and establishes that “… in a zone of 100 kilometers along the border or 50 kilometers along the coast, a foreigner cannot acquire the direct ownership of the land”. These areas are known as the “Restricted or Prohibited Zones”.
Nevertheless, the latest Mexican Foreign Investment Law, enacted December 28, 1993, provides a solution in the form of a Fideicomiso. Within the Restricted Zone, a foreigner or foreign corporation can obtain all the rights of ownership with a bank trust, known as a Fideicomiso.
Any foreigner or Mexican National can establish a Fideicomiso (the equivalent of an American beneficial trust) through a Mexican bank to purchase real estate anywhere in Mexico, including the Restricted Zone. For practical reasons, even in unrestricted zones, many foreigners, and Mexican Nationals for that matter, prefer to hold their property under a Fideicomiso.
To do so, the buyer requests a Mexican bank of his choice to act as a trustee on his behalf. The bank, as a matter of normal course, obtains the permit from the Ministry of Foreign Affairs to acquire the chosen property in trust.
The Fideicomiso can be established for a maximum term of 50 years and can be automatically renewed for another 50-year period. During these periods you have the right to transfer the title to any other party, including a member of your family.
The bank becomes the legal owner of the property for the exclusive use of the buyer/beneficiary, who has all the benefits of a direct owner, including the possibility of leasing or transferring his rights to the property to a third party or pre-appointed heir.
The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary. Fideicomisos are not held by the trustee as an asset of the bank.
Another alternative is to purchase non-residential property through a Mexican corporation, which under certain conditions can be 100% foreign-owned, with a provision in its by-laws that the foreigners accept being subject to Mexican laws and agree not to invoke the laws of their own country. Also, they agree that the real estate acquired be registered with the Foreign Affairs Ministry and be used for non-residential activities. In other words, under these conditions foreigners can directly acquire properties destined for tourist, commercial and industrial use.
The Real Estate Industry
The real estate industry in Mexico is similar in many ways to that of the United States, which is probably the most advanced in the world. It is developing quickly, taking advantage of today’s technology; however, it seems to be paralleling the system as it exists in the U.S.A.
The only national professional real estate organization in Mexico is the “Associación Mexicana de Profesionales Inmobiliarios” (Mexican Association of Real Estate Professionals) or “A.M.P.I.” with 24 chapters in 38 cities. This organization is somewhat similar to the National Association of Realtors (NAR) in the United States.
At this time, there are no government license laws regulating real estate brokerage and sales in Mexico. Anybody can, in effect, offer properties for sale. Therefore, caution should be taken to select an established and reputable real estate company. A potential buyer may want to check with the local Chamber of Commerce associations or a prominent law firm.
Historically, due to lack of capital markets and high Mexican interest rates, most transactions were made in cash. In 1993 and 1994, the Mexican economy picked up to such an extent that annual inflation went down to one digit and interest rates were more or less accessible.
Banks introduced attractive mortgage programs and, consequently, sales proliferated throughout Mexico. Due to the devaluation in December 1994, the situation has reverted and the few banks that offer mortgages do so at such high variable interest rates that very few buyers are in a position to take advantage of them.
However, this is changing. Recently Scotiabank Inverlat introduced long-term mortgages at rates between 15-17%. These mortgages, however, are only available to foreigners with FM-2 immigration status.
Multiple Listing Service
A couple of electronic multiple listing services (MLS) are now operating in Mexico.
Producciones Viva, the company that publishes the Real Estate Guide, has been offering MLS service to Vallarta since 1989, available in a print catalog and online at mlsvallarta.com.)
Escrow, Title Insurance and Home Insurance
It is the Public Notary who, in effect, acts as a “Holding Agent” for the involved parties, so there are few escrow companies in Mexico.
At the present time there is no general use of title insurance in Mexico, although some American companies are providing coverage in some resort areas of the country. On the other hand, insurance companies do provide full home coverage throughout Mexico.
The most commonly used title insurance company in Vallarta is Stewart Title.
Most real estate transactions are “opened” after a written purchase offer is accepted by the seller and when a purchase-sale agreement (promissory contract) is signed by both parties. In most cases, a deposit is required by the broker to transmit the offer to the seller. (If the transaction is being conducted directly with the seller, it is highly recommended that a real estate broker or lawyer be consulted before signing any papers or handing over any money.)
In some areas it is common practice to deliver to the seller, as an advance payment, the equivalent of 10-30% (including the initial deposit) of the total price upon signing the purchase-sale agreement, which should contain a penalty clause applicable in case there is a breach of contract by any of the parties.
Normally, when signing the escritura or official deed, which needs to be certified by a Public Notary, the balance is paid and the property is delivered. This should not take more than 45 days. It is recommended that an escrow account be used for all real estate transactions.
The Public Notary
A Public Notary is a government-appointed lawyer who processes and certifies all real estate transactions, including the drawing and review of all real estate closing documents, thus ensuring their proper transfer.
Furthermore, all powers of attorney, the formation of corporations, wills, official witnessing, etc. are handled and duly registered through the office of the Public Notary, who also is responsible to the government for the collection of all taxes involved.
In connection with real estate transactions, the Public Notary, upon request, receives the following official documents, which, by law, are required for any transfer:
- A non-lien certificate from the public property registry, based on a complete title search;
- A statement from the treasury or municipality regarding property assessments, water bills and other pertinent taxes that might be due;
- An appraisal of the property for tax purposes.
It is common practice that the buyer pays the transfer of acquisition tax and all other closing costs, including the Notary’s fees and expenses, while the seller pays his capital gains tax and the broker’s commission.
Since January 1, 1996, the federal law regarding the real estate transfer tax, which was 2% for all the Republic of Mexico, was modified to allow each of the Mexican states to determine its own tax. The range now may be from 1-4% of the tax appraisal value, which is generally less than the sales value.
The rest of the closing costs, which exclude the transfer cost mentioned above, vary from 3-5% or more of the appraised tax value, depending on the particular state. These percentages are applied to the highest value of the following:
- The amount for which the property is sold,
- The value of the official tax appraisal,
- The value designated by the property assessment authorities.
Cost of the Fideicomiso
Based on the present tariff, the bank charges the person desiring the Fideicomiso an initial fee (approx. $500.00 USD) for drawing up the agreement and establishing the trust, plus a percentage based on the value of the property. In addition, the bank charges an annual fee (depending on the value of the property) to cover its services as a trustee.
Real Estate Broker’s Commission
Most real estate companies in Mexico charge a 6-8% commission based on the actual sale price of the property. However, in resort areas broker rates are usually higher because of increased broker expenses.
Capital Gains Tax
In Mexico, the concept of capital gains tax does not apply in the same way it is determined in the United States. Here, the gain from the sale of property is treated as normal income at a tax rate of up to 35%. To determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:
- The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes;
- Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above;
- Commissions paid to real estate brokers by the seller;
- The closing costs, including all expenses, taxes and fees paid by the seller.
The Notary will retain the calculated gain after deductions, forwarding it to the Mexican tax authorities. The seller will then deduct this amount against his annual tax return, which becomes an adjustable tax credit in the U.S.A.
On the other hand, there is no capital gains tax in Mexico if there is conclusive proof the seller has used the property as his primary residence.