Obstacles to foreign ownership of real estate in Mexico

Financing and Foreign Ownership of Real Estate in Mexico

Due to the similarities of real estate transactions in general, many Americans assume that the basic real estate terms and principles of the United States also hold true in Mexico (Peyton, 2003). Because much of the American real estate terminology is adopted for real estate transactions in Mexico, a lot of the paperwork appears to be similar.

However, many aspects of Mexican real estate are completely different. Therefore, a foreigner who wishes to purchase real estate in Mexico may face many obstacles to acquiring simple ownership.

Real estate experts recommend investing a significant amount of time before investing in residential real estate In Mexico. It is important to understand the terrain, its problems and advantages, as well as the area, the people and the corresponding real estate values.

Different Laws in Mexico

According to Rose (1998), even people who are highly experienced in buying and selling real estate in the United States may not be prepared for the Mexican experience, as the laws and regulations in Mexico are very different from those in the U.S.

For example, under the terms of the Mexican Constitution (Rose, 1998), only Mexicans have the right to own land or receive mineral or water rights. Foreigners have the right to own real property, as long as they do not call upon the protection of their government.

Basically, this means is that all disputes concerning land ownership will be tried in Mexican courts, treating foreign landowners the same as Mexican nationals. Foreigners cannot take the case to the legal system of their own countries. According to Rose (1998), "this is done to prevent the historic recurrence, prevalent in Latin America in the past 200 years, of a capital-exporting country meddling in the sovereign affairs of another nation to protect a private party's economic interests."

In addition, foreigners are explicitly prohibited from directly owning real estate within what is known as the "Forbidden Zones" of 100 kilometers of the Mexican border and 50 kilometers of its coasts (Rose, 1998).

However, recent laws have made it possible for foreigners, foreign firms, and Mexican firms with foreign participation to acquire interests in coastal or "forbidden" real estate through a bank trust (Neptune Realtors, 2003). Still, for foreigners who want to buy property in these restricted areas, foreign ownership can be obtained under a bank trust, which is also called a fideicomiso.

The Mexican Government created the fideicomisos as a solution to the problems involved in developing the restricted zone and to attract foreign capital (Peyton, 2003). These trusts allow foreigners, as beneficiaries of the trusts, to enjoy unrestricted use of land located in the restricted zone legally.

Although direct ownership of real estate by foreigners in these areas is not permitted, foreigners can purchase the right to hold, occupy, use, improve, develop, rent and sell real estate by purchasing a beneficial interest in a fideicomiso. This bank trust is similar to trusts set up in the United States, yet a Mexican bank must be designated as the trustee, holding title to the property as the owner of record.

These bank trusts are typically created for a 50-year period, although they may be extended. The bank acts as a trustee, holding legal title to the property. The buyer holds beneficial use.

Foreigners may also use fideicomisos to purchase land in non-restricted areas for a variety of reasons. For example, these bank trusts allow multiple or successor owners. In addition, they are easy and inexpensive to set up.

Based on the current tariff, the bank charges the investor an initial fee of approximately $500 to draw up the agreement and establish the trust, in addition to a percentage based on the value of the property (Neptune Realtors, 2003). The bank may also charge an annual fee for its services as a trustee, which is based on the value of the property.

Title of the property is transferred to a trust with a Mexican bank acting as the trustee. The trust agreement is created when a permit is obtained from the Mexican Ministry of Foreign Affairs. The investor is designated as beneficiary in the trust and the beneficiary rights are recorded in the public record.

Another important factor to consider when buying real estate in Mexico is zoning. In many residential areas, zoning restrictions are not apparent yet certain areas may have building codes for historical preservation (Rose, 1998).

For example, in areas that enforce a historical building preservation code, private land ownership may be prohibited in forested areas, natural protected areas, reserves, biospheres and other environmentally protected areas (Rose, 1998).

In addition, many historical preservation laws have limited large land-holdings in agricultural areas, placing restrictions on the amount of farmland that can be owned by a single party.

Basically, Mexican real estate transactions are carried out in a different manner than U.S. real estate transactions (Peyton, 2003). The buyer is required to retain professionals to assist in the transaction.

In addition, Mexico has yet to regulate real estate transactions. Therefore, real estate agents and brokers are not legally licensed in Mexico, as they are in the U.S. Therefore, foreign investors must proceed carefully when buying property in Mexico.

Obtaining Title and Title Insurance

Mexican deeds are public instruments, which can be researched at the local Public Registry of Property (National Law Center for Inter-American Free Trade, 1997). There is a Public Registry of Property in most cities and towns throughout Mexico. These government offices are where documents are registered so that third parties can research the ownership of land titles and liens on such titles.

A deed must be finalized and signed by a Mexican notary. The deed lists the parties involved in the transaction, including the notary, seller, buyer, and the trustee bank, as well as identifies the property.

When the deed is finalized and signed by the notary, by the seller, by the bank as trustee and by the buyer, the purchase price is made and the transaction is closed. The title changes hands.

Title insurance is now available to foreigners through title insurance companies in the U.S. (National Law Center for Inter-American Free Trade, 1997). Many American companies offer title insurance for Mexican real estate transactions.

In the U.S. virtually all real estate purchasers and lenders are protected by title insurance. As more and more foreign lenders fund loans on sales in Mexico, more title insurance policies are being issued on Mexican real estate transactions. To the extent of the title insurance policy's terms, the buyer is protected from unforeseen problems with the title to the property.

Capital Markets and Home Mortgage Market in Mexico

According to recent statistics, Mexico requires approximately 700,000 new houses per year to keep up with population growth (Inter-American Development Bank, 2000). Yet Mexico has the lowest ratio of bank loans to gross domestic product. It's just 18%, compared to 72% in the U.S. (Smith, 2002)

More than half of the country's families meet their housing needs through the informal sector, due to the fact that mortgage loans are generally available only for the purchase of new homes at extremely high prices.

Informal sector homes are typically low quality and built on environmentally fragile land. Since the majority of these homes lack legal title, their owners tend to invest little, and municipal utilities often fail to provide them with basic public services.

Mexico's formal housing market consists mainly of large developments undertaken by construction companies with loans from mortgage institutions (Inter-American Development Bank, 2000). These homes are usually expensive.

The 1994 financial crisis was extremely damaging to Mexico's already unstable mortgage market (Inter-American Development Bank, 20000. Without a government guarantee, mortgage firms refuse to lend to families that earn less than$1,000 a month. As a result, only the wealthiest 10% of Mexican families can get mortgages for their properties.

In the U.S. A secondary mortgage market has provided financing for real estate development ventures which otherwise would be unaffordable, yet Mexico's "primary" mortgage markets are still greatly undeveloped.

Rather than assuming pricey mortgages, most of the Mexican population actually saves to buy a piece of land, then saves for each type and amount of construction material needed, thus gradually building their home in what is called the "pay and build as you can plan (National Association of Realtors, 2002)."

Changes Made for Foreign Investment

Over the past decade, the Mexican government has placed foreign investment in real estate development high on its list of priorities (Peyton, 1994). In the past, Mexico has placed rigid restrictions on foreign ownership of real estate.

However, in recent years, the government has shifted to a position of encouraging foreign investment throughout Mexico. The government now has a new "open-door" policy for foreign investment, which it has backed up by making important changes in the foreign investment laws. Due to these recent changes, in Mexico, as in the United States, federal, state, and local laws administer the transfer of real estate rights (Creekmore, 2001).

As a result, foreign investors seeking to buy real estate, including housing developments, condominiums, and timeshare projects, now have greater legal freedom and ownership rights under Mexico's new foreign investment law. In addition, Mexico's new administration has been exploring the possibility of securitizing mortgages.

Unlike in the past, Mexican law now protects trust beneficiaries from any problems the bank may have. A trust cannot be seized to satisfy judgments against the bank.

In 1994 Mexican law established that Trust Deeds are to be for 50-year terms with and are renewable indefinitely in 50-year increments. Mexican notaries are appointed by the government to control all recordings and documentation of real estate corporate and private records regarding transfers of ownership.

Because of these recent changes, fidiecomismos now provide solid protection for foreign investment capital, in an attempt to reshape the Mexican tourist industry into an attractive place for investing capital.

Still, despite new foreign investment laws, there are still many aspects of the law dealing with real estate acquired by foreigners that may seem overly restrictive, particularly when compared to similar situations in the U.S. When investing in Mexico, foreign investors must exercise great caution, as they would with any other investment.