Many investment experts, including CNBC’s "Mad Money" host, Jim Cramer, have been advising people to buy real estate in Mexico as an excellent form of diversification and make an investment with potential for double-digit return. However, because of some differences in legalities of property ownership, and business culture, there are some common mistakes which buyers make, and you as an investor will want to avoid. The following are the areas where those mistakes are made, and tips on how to avoid them.
1. Pre-construction Payments – not carefully considering the payment schedule. Errors include:
- Payment schedule based on fixed calendar dates
- Paying the complete value before legal possession is taken
- Some buyers have ended up paying the complete value of the property, taking physical possession, but are still waiting for documentation to be completed for the legal possession.
Be sure to have a payment schedule arranged that is based on progress of the construction, not on fixed calendar dates; also, hold back the final portion of the payment until legal possession has been delivered. Make sure the corresponding contract spells out these items. This will protect you from the risk of complications in the delivery, or completion of project, which of course leads to time, effort and even funds spent in legal action.
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2. Legal Status of Property, Rights or Payments
Checking the legal status of a property is important, in several aspects. Avoid the following problems:
- Ejido property – Although prices are very low, this property is not privately owned. Individuals can own the rights to ejido property, but do not own the property itself. The owner of the rights can go through a complicated process of transferring the rights to create a titled, private property, making that individual the complete, legal owner as with any private property. The risks come from the many extra steps that need to be carried out by the individual who holds the rights. An individual who hold the rights to ejido property can sell his rights legally (only the rights and not the property itself), and by doing so passes on these risks and these extra time consuming steps. All is legal, but sometimes new buyers do not understand of the extra risks and steps needed to legally register the property in their name.
- Different owner – Are you making a deal with someone who is not the legal owner of the property? Have a legal expert review the documentation of a property. Ensure that the person you are dealing with is the legal owner, or that person’s legal representative with all correct documentation.
As one broker states, some buyers think they can "leave their brains at the border," doing things they would never consider back home. Making any part of the transaction without legal documentation or "under the table" is unwise.
- Pay very close attention to all documentation.
- The final contract must be notarized and filed in the public registry.
Consider the risk of your deposits. "Earnest money," a smaller amount, can be deposited into:
- escrow account
- buyer’s agent account
- seller’s agent account
- seller’s account
The risk increases on each of the examples; the escrow account is the safest, and the deposit into the seller’s account is most risky. Your buyer’s agent may advise you to deposit into a "seller’s account" when the seller is a reputable developer, a larger, established corporation.
For the first deposit, again, escrow is the safest. Agents should hardly ever be involved on holding the first deposit because the cash quantity are significantly greater at 20% – 50% of total property value.
Eventually, the full payment will need to be transferred into the account of the seller. You as the buyer will need to ensure that contract outlines clearly when the money needs to be paid to the seller. specifying the bank account which should list the seller as the owner of the bank account. This ensures that you made the payment, and that the seller received the payment, and you have evidence of this payment. In some cases the money is received by third party bank account. In these cases there needs to be a special clause in the promissory contract, or the final purchase sales contract that states the precise wiring instructions listing out the bank, account number, and account name.
Leaving anything in doubt as to the legal status of the property puts the funds you’ve invested at risk of loss.
3. Capital Gains Tax
In some cases, capital gains tax may have to be considered as an expense. The main points to be considered are:
- If the operation value is below the market value or appraised value by more than 10%, a capital gains tax will be levied onto the buyer
- This tax is paid by the buyer
Investors may need to consider this expense as a part of their closing costs, and consult with a professional to calculate this expense.
4. Property Location
Most investors know that in real estate, location is key, and the fact that less market information is available in the Mexico real estate market can actually lead to some better investment opportunities. Buying in growing areas can show excellent return if you have done your homework, and you know what kind of investment and development is taking place in the area, what the tourist numbers are like, what the expat numbers are, and how fast these are changing. Some points to consider are:
- Do not assume beachfront, or the highest demand property is the best option
- Do not assume the cheapest will rise in price (if you have good indications that it will, go for it!)
- Take your time for your decision
- Find all information possible, from various sources
- Do not let yourself be pressured, or told you will loose a "once in a lifetime opportunity"
5. Working with Qualified, Experienced Professionals
While most investors should also know this well, this goes back to the fact that some buyers are inclined to forget important points that they would never ignore back home. If you are investing a large sum in Mexico real estate, it only makes sense that you hire a professional, qualified consultant, just as if you were investing in the stock market back home. Since it is a market and business culture you may not be familiar with, it is even that much more important to be aware of these points:
- Laws protecting clients are not as well developed in Mexico
- It is up to you to do your homework and check qualifications and references for any professional
- Hire qualified, reliable professionals for all aspects of your transaction; a buyer’s agent, lawyer and notary public are central to the transaction.
Finding the right support for your purchase will help a great deal to avoid errors in the previous 4 points. It will not guarantee that you will have a risk free investment, or that you will have double digit returns, but the probability will increase drastically. Take your time to find the most qualified and experienced agent.
