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Real Estate 101 – Puerto Vallarta, Mexico

For non-nationals including American and Canadian ex-patriots, purchasing and owning real estate in Puerto Vallarta, Mexico has never been safer or a more viable proposition than it is today – but with any real estate transaction anywhere, due diligence is important. Find out more below.

A Guide to Purchase a Property in Mexico

Specific guidelines exist for foreigners to purchase real estate in Mexico. There is a process – which at times may seem redundant – and there are no short-cuts. All purchases for non-national citizens are completed through a trust deed established with a Mexican Bank. The Mexican bank acts as a trustee on behalf of the foreign purchaser and the purchaser holds all rights of ownership. The same applies for a foreign or Mexican corporation, however the tax ramifications are much more stringent.

How Do Foreigners own Property in Mexico?

Article 27 of the Mexican Constitution states that foreigners cannot own property outright within 100 kilometers (62 miles) of the international borders and 50 kilometers (31 miles) of the coast. This law was put in place for fear of foreign invasions that might threaten the country’s sovereignty. Non-Mexicans may directly own rural or urban land in the interior of Mexico subject to certain limitations on specific agricultural tracts. As time has passed, and as the Mexican government has come to realize the benefits of opening these attractive areas up to foreign investment, they have modified this constitutional restriction. Since 1973 foreigners (non-Mexicans) have been able to purchase coastal and border properties by way of a Mexican Bank Trust, known as a “Fideicomiso”.

What is the trust, and how does it work?

Essentially, it is the same as a trust in most other places in the world – the trust is the vehicle that holds the property, the beneficiary is the person that controls the rights to the trust and the trustee is the entity that manages and oversees the trust. In this case, only Mexican banks can act as trustees (and they vary in terms of service and efficiency). So, you the buyer (or whomever you elect) become the beneficiary and the property itself becomes the subject of the trust.

Thus, the bank trustee holds the legal title to the property, with beneficiary of the trust – you, the buyer – enjoying all rights and privileges of ownership, including exclusive use and enjoyment.

The beneficiary enjoys the right to occupy or rent the property, and may transfer the property to any legally qualified person he may designate. Beneficiaries are also allowed to modify their property in accordance with local zoning regulations.

These trusts have an initial term of 50 years. They are renewable at any time or at the end of the 50-year period for a filing fee (approx. $1,000 US) for additional 50-year periods, in perpetuity. The property may also be sold to a person legally authorized to own property or to another foreigner via an assignment of the trust or a new trust, at any time. This process is designed to protect the rights of foreigners, and ensure the transactions are legal.

What is a Trust Institution?

In Mexico, a Trust Institution is a banking institution that is authorized to open 'fiduciary' accounts and conduct trust operations as a Trustee. The Trust – not the trustee - holds legal title to the real estate property during the term of the trust. The Trustee is also empowered with rights and responsibilities necessary to achieve the objectives of the contractual agreement creating the Trust, for the benefit of the trust beneficiary.

How are these trusts created?

To establish a real estate trust (fideicomiso), any one of the banks in Mexico will charge an annual fee for maintaining the trust, averaging $450 to $550 per year. The Mexican government specifically set up the trust system to provide non-nationals the security of deeded property ownership without having to change their 1917 Constitution. Mexican real estate law allows foreigners to acquire residential real estate located in the coastal and border areas of Mexico through a Trust ("Fideicomiso"). A Trust grants the same rights and obligations as if you owned the property outright. Alternatively, foreigners may also acquire title to non-residential real estate located in the coastal and border areas of Mexico through a Mexican corporation. When they do so, they will also be obliged to pay 16% VAT on the improved value of the property (ie. not the land value) at the time of purchase.

Are Mexican banks the only institutions that can hold trusts on behalf of foreign investors? Yes, however you have the right to choose which bank you would like to hold your Trust. The Trust is not an asset of the bank. Trusts also allow foreign investors to participate in other sectors of the Mexican economy.

Are there differences in other aspects of property ownership in Mexico?

Financing is relatively new in Mexico and not designed for non-nationals. If financing is something one wants or needs, get pre-approved ahead of time, just as you would in the U.S. or Canada. US or non-Mexican banks will not lend on the security of Mexican real estate as they are not chartered to do so.

Closing costs to the buyer tend to be higher in Mexico than they are in most places in the U.S. or Canada, averaging 4 to 6 percent of the purchase price (If property is less than $100K, this percentage increases to an 8-10% range, due to some fixed costs, such as trust fees). Once a Purchase Agreement has been negotiated, closing usually takes between 30 to 60 days depending on contingencies and financing requirements.

Escrows are used almost universally in all transactions in Puerto Vallarta. There are several reputable private escrow companies specializing in this function. Their fee is typically between $600 to $700 US per transaction. This cost is typically paid for by the buyer; however, it can be split between the buyer and the seller.

The Notary of record is the Official Agent that collects all taxes and exclusively records all deeds to be registered in the Public Registry of Property office.

What characteristics would a trust agreement have?

In the Trust deed, the present owner of the real estate would appear as the trustor (fideicomitente) and would thereby convey title of the real property to the Trust that will hold title to the property during the life of the Trust (50 years) for the benefit of the Beneficiary. You can renew the Trust perpetually. The buyer (you) would appear as the Beneficiary (fideicomisario), the person having the absolute use and avail of the property.

What are the requirements of the property trust?

  1. A copy of the real estate title or deed indicating the exact surface area, metes and boundaries, a free of lien certificate, receipts for federal, local or municipal Taxes (these documents are provided for by the Seller).
  2. Your complete name, nationality, occupation, address and phone number. Copy of your passport, immigration form (if appropriate), phone or other bill serviced by mail to your address.
  3. The name, nationality, address and phone number of the substitute beneficiary(ies) in case of death of the Beneficiary during the life of the Trust (Optional).
  4. The agreed purchase price.

What is the process?

Upon receiving the information and documents described above, the Trustee will proceed to apply to the Foreign Affairs Ministry (Secretaría de Relaciones Exteriores) for the permit authorizing the execution of the Trust deed. Once the permit is issued by the Foreign Affairs Ministry, then the Trustee will be able to execute and formalize the Trust deed before a Mexican Notary Public. Notary Public Offices in Mexico have a greater legal status and competence than those in the United States. The Notary Public is an Attorney at Law who is authorized by the State Government to, among other faculties, grant final formality to the title transfer process in the protocol book. The resulting document taken from this protocol book (the Trust deed) is registered at the corresponding Public Property Registry, and it will provide evidence of title. In the event that you cannot be present at the execution of the Trust deed before the Notary Public, a duly empowered representative may execute the Trust deed on your behalf. Powers of Attorney for representatives must be granted in compliance with Mexican formalities including its formalization before a Mexican Notary Public.

What specific rights and obligations does the beneficiary assume upon the celebration of the trust deed?

As the Trust Beneficiary, you will have the use and possession of the property; that is, you may live on the real estate, undertake any alterations and improvements subject to any applicable limitations and/or requirements stipulated by the local laws and regulations, such as zoning and construction regulations among others. You also have the capacity to instruct the Trustee on mortgaging the real estate, leasing it, selling, transferring your beneficial interests to another person or corporation, or performing any of the acts that by law derive from the ownership. If you sell the property to another foreigner, you may assign your beneficial interest in the Trust to the new purchaser or instruct the Trustee to convey the property to a newly formed Trust for the benefit of the new purchaser. This assignment of rights must be formalized through a Mexican Public Notary, prior to the payment of the federal and local taxes and fees that arise from the transfer of Beneficiary rights. You will also have the obligation to pay the duties on the real estate, i.e.: real estate and water service taxes, power supply fees, the condominium maintenance fees, if applicable, as well as the Trustee's annual administration fee.

What happens if the beneficiary of the trust dies during the legal period of the trust?

The Beneficiary will be required to appoint substitute beneficiary(ies) at the moment of formation of the Trust (Closing) or in a latter event. The substitute or secondary beneficiary will receive all the rights and obligations that arise from the Trust if the beneficiary dies during the life of the Trust. With this designation of substitute beneficiaries, your heirs will not need to follow any probate proceeding before the Mexican courts, which could take time and Attorney's Fees. They would only have to give notice to the bank of the deceased and show the death certificate and their identifications, and then the Bank will accept and register them as the new owners (beneficiaries) of the Trust Property. Some fees and taxes will apply.

How long does a trust remain in effect and can it be renewed?

The trust is renewable at the end of its 50-year term and for additional periods of 50 years each. The law provides that if an application is filed no more than 360 or less than 181 days before the end of the original Trust, The Secretary of Foreign Relations must issue a new Trust permit, effective for an additional term of 50 years. The Trust can be renewed in perpetuity.

Can I sell or transfer my interest in a trust?

A Trust interest may be sold or transferred much like any other interest in real property. Upon the sale of an interest in real estate held under a Trust, the Secretary of Foreign Relations is required by law to issue a new Trust permit to the buyer. If property held under a Trust is sold to a Mexican National, the Trust can be terminated and the Mexican National may then own the property in fee simple.

What about the availability of insurance on the transaction (title insurance), as well as the property itself?

Title Insurance is available. Other types of insurance, including property, liability, damage and earthquake, are all readily available, at low costs. Please ask your Coldwell Banker La Costa agent for further information regarding this matter.

What about taxes? What can I expect to pay in Mexico?

For the buyer, the subject of real estate taxes generally comes as good news: especially in the Puerto Vallarta area where real estate taxes tend to be very low. Known as the “Predial”, the annual property tax is calculated as a percentage of the assessed value determined at the time of sale, paid bi-monthly or yearly (in advance). Property taxes have been historically low in Mexico, because they have never been considered to be a significant source of governmental revenue (plus, if you pay for the whole year in advance, before February 15th, you get a 10% discount).

What other expenses should I consider on the purchase of property in Mexico?

If you are not planning on living full-time in Mexico, property maintenance will need to be considered for the time you are away. For condominium owners common area maintenance and security is handled by the Condominium Owners Association, paid for through monthly fees. Homeowners may want to consider a property management company to manage the payment of utilities, inspect the property, check on renters should the property be rented, and respond to any issues surrounding the property.

How can I be assured of dealing with a qualified Real Estate Professional in Mexico?

One of the major differences in buying properties south of the border stems from the fact that Real Estate agents in Mexico are not subject to any national certification or educational requirements. As such, the best advice you can act on is to always deal with an established Real Estate Agency, whose references you have checked personally with several former clients.

In addition, the agency should be a member in good standing with the Mexican Association of Real Estate Professionals (AMPI). The AMPI Chapter in Puerto Vallarta is particularly active and has been in existence for about 30 years. It operates the FLEXMLS system among other things and has a very stringent admission process as well as a very effective Honors and Justice Committee. Coldwell Banker La Costa Realty is one of the original founding members of the local AMPI Chapter and has always maintained an active role over the years.