There is a myth in America that foreigners can’t own property in Mexico. In reality, Mexico only restricts foreign ownership in certain zones, such as near the beach and border, and there are two structures that make it possible for foreigners to own property even within those restricted zones.
Foreigners purchasing non-residential property can form a Mexican corporation. “Mexican corporations can be 100 percent foreign owned,” James Glover of Baja Real Estate and Consulting and publisher of bajainsider.com said. “A Mexican corporation is a Mexican in the eyes of the law. So your rights are no different than a Mexican at that point.”
Foreigners purchasing residential property must use a Mexican bank trust called a fideicomiso, a structure established in 1973. In a fideicomiso, the bank holds the title, while the investor or property owner receives beneficial rights.
“I had to really try to get comfortable when I first heard this that I didn’t actually have title to the property,” Alan Axelrod, Baja investor and managing member of Axelrod Capital Management, LLC, said. “But I’ve concluded that you really have all the burdens and benefits of ownership. You can sell it, you can gift it, you can will it….You can renew it anytime and then it runs for 50 more years, and it has a minimal cost.”
“The net effect of this provision is that the foreign person is permitted to do anything with his/her property that a Mexican citizen can do,” Linda Neil, an accredited buyer representative and real estate consultant based in La Paz, said.
The key difference is that a fideicomiso structure allows for a nonjudicial foreclosure process, which means the property can be sold quickly if the beneficiary doesn’t make payments, Russ Schreier, CEO of Finance North America, said. This would make it easier for fideicomiso beneficiaries to lose their properties than fee simple owners.
However, “the Mexican government is fully aware that it would destroy their property values if they just started indiscriminately taking property away from people,” so there is little fear of that happening, Glover said.
Other than a six-month stint of GMAC mortgages in about the year 2000, Mexico’s mortgage market developed just two years ago and is “still in its infant stages,” Schreier said.
GE and GMAC are the main lenders, though Scotia Bank is now entering the market, Schreier said.
Lenders will only finance primary residences or second homes, not investment properties, so they will not take projected rental income into account, Schreier said. Construction financing is available only in certain developments, he said.
An 80 percent loan to value with 20 percent down and a debt-to-income ratio of 45 to 55 for a full income documentation loan is typical, and the credit process is identical to that for loans in the U.S., he said.
Interest rates could be as low as 8 percent on an intermediate ARM up to 8.75 on a 30-year fixed full income documentation loan, while stated income loans will be slightly higher, Schreier said. As long as U.S. and Canadian rates stay relatively stable, Mexican rates will likely go down as more competition enters the market, he said.
As mortgage insurance becomes available, Finance North America hopes to be able to go up to 90 or 95 percent LTV by the end of the year, he said.
Real estate investing takes significant due diligence on the specific submarket and has “a relationship-based type of business nuance,” Axelrod said.
“One of the problems down here is the MLS does not hold all the properties. There’s a great deal of pocket listings,” Glover said. Many Mexicans don’t work with real estate agents, so “you have to drive around a lot.”
Stewart Title, First American and Fidelity offer Mexican title insurance. “Knowing that you get U.S. title insurance from a U.S. company that’s enforceable in the U.S. courts gives people tremendous comfort,” Jim Grogan, president and CEO of Loreto Bay Company, said.
After purchase, the title must be registered with the local and federal government, and foreign investments must be registered with Mexico’s Secretary of Economy, Glover said.
Many Mexican sellers are used to getting earnest money paid in cash and don’t understand the nature of escrow or why it is necessary, but that is changing as more American investors enter the market, Axelrod said.
Schreier recommended putting all deposits through escrow. “You just want to be careful when you’re purchasing in Mexico that you don’t do something that you wouldn’t feel comfortable doing in the United States,” he said.
In the past, some buyers tried to avoid property taxes by saying they bought property for less than they actually did, but they then encountered the 29 percent capital gains tax when they sold, Glover said. “That’s a huge mistake because property taxes are…almost nothing, compared to anything in the United States.”
The transaction process can be somewhat slow because Mexican notaries are becoming bogged down with many transactions, Glover said.
Due diligence on title of raw land is essential because certain land parcels have been held under communal ownerships, called ejidos, and are now being marketed to private investors, Glover said. Sometimes that land does have clear title, and sometimes it does not, he said.
Buyers should consider only the purchase of private property, according to real estate acquisition guidelines published by The Settlement Company, an escrow and title company of which Neil is the founder. “Ejidal property is often offered at a far lower price, but it cannot legally be sold or promised to be sold until it becomes private property.”
The process of turning ejido land into deeded land is so complicated that Axelrod said he looked instead “for fee titled land that has a clean chain of title, and I think that’s where the opportunities are.”
Axelrod said he has invested in vacant land that is prime for future development by a hotel or subdivision developer.
Buying raw land with the intention of dividing it up can be a dangerous strategy with many potential mistakes, but it can be lucrative, Glover said. Some investors purchase land believing that power and water will be available, only to discover that’s not really the case, he said.
Unlike U.S. law, Mexican law recognizes squatters’ rights. Landowners “really have to fence [their property] and put private property signs all over it because you don’t want to allow squatters to get any rights on your property,” Axelrod said. A survey to establish proper fence lines is also important, because the ejido will sometimes put up improper fence lines hoping to acquire the land by adverse possession, he said.
When seeking raw land, investors should be aware that unscrupulous brokers often post signs on property even when they don’t represent the seller, Axelrod said. “Don’t just call the phone number on the sign,” he said. “You’ve got to ask around who really owns it and who really represents the piece of land.”
“There’s a little bit of wild west going on down there,” he said.