Ownership by Foreigners


Ownership by Foreigners

 

All of the Baja, and the rest of the coastlines, was off limits to foreign ownership under terms of the 1916 Constitution, until Mexico’s leadership in the 1970’s saw the need for secure foreign investment and created a way for foreigners to invest in Baja real estate.

They did so by adopting use of a trust called a “fideicomiso”, a mechanism perfected in Monaco. The model is exactly like a US living trust, with your banker hired to act as trustee. A new trust has a 50 year term, can be renewed by law, and the property can be transferred, willed, built on, mortgaged and otherwise dealt with without significant limitation. Several American title insurance companies insure these ownerships.

The problem is solved. You may have questions, so don’t hesitate to ask us. John Haggerty, our broker, has a background in US real estate law and has passed a stringent test for the equivalent of a Mexican college degree in real estate, and all of us are seasoned and experienced in the real estate business in Baja Sur.

 

Escrow

When Americans and Canadians started buying under the new rules that allowed actual ownership after 1975, escrow was – literally – a foreign concept. Mexican law still makes no provision for escrows, in which a neutral party holds funds for the buyer and seller in a transaction. Yet sophisticated buyers and sellers needed the security of escrow for their mutual protection. The title companies operating in our state stepped forward to offer such escrow services, and in almost every case our transactions involve either AMX Title, Fidelity or First American acting as the neutral party.   We work with AMX Title, and the Notary in Loreto successfully.  All such escrows are “split,” with the funds kept and controlled in a US bank, and the deed and other transaction documents prepared and executed, as required, before a Mexican notary. The common practice is that the parties execute the title transfer documents at the notary’s office, and at the same time sign a disbursal order which is then sent by e-mail to escrow specifying the addressees and amounts for funds transfer.

 

Closing Process

Overview of The Closing Process

Closing a purchase in Mexico is more complex, expensive to the buyer, and lengthy, than is typical in the United States.   The purpose of the exercise is to get good clean ownership from the seller to the buyer.   The roles of the various participants are different here, though, and some of the steps have no counterpart in an American closing.

Once buyer and seller have agreed to the sale by signing a purchase and sale agreement (often with some revisions and addenda), the real work begins.   The escrow agreement is signed by both the buyer and the seller, and the escrow is funded by the buyer with 10% of the purchase price, + the escrow fee of 500.00 USD.  A closing office, or an independent attorney, will coordinate all the steps required to transfer the property into the names of the buyers.  We typically work with Liliana Carranza.  Liliana provides the buyers with an estimate of closing costs, and then 50% of the total is wired to her account in order for her to get started on the process.  The balance of 50% is wired to her at the time of closing.  

Buyers must apply for a permit for a new trust, or to transfer an existing one.  That is obtained from the Foreign Affairs department, and the Mexican bank that will be the trustee makes the application.  Among the first things a buyer has to do is thus fill out a form identifying himself and anyone else who is going to be a first-level beneficiary, plus successor beneficiaries, in much the same way he would for a lawyer drafting an American trust.   Once this document and fees (see the next article, on closing costs) are given to the bank, it sends the application.

At the same time as the trust permit is applied for, the closer will order an official appraisal called an avaluo, and also order certificates that the property is in the name of seller and is free from liens, and also that the annual real estate taxes are paid.   The closer will also gather proofs of identities of all parties involved (passport copies, usually) and of their residence (usually in the form of a current utility bill from buyer’s home).  The closer furnishes all this documentation to the notario.

In this same period, the closer will obtain a US-style title report, which will be required to obtain title insurance if it is desired (see the separate article on title insurance).  This report traces seller’s title back to a point at which it is certain that the title is good (often to a deed signed by the President of Mexico conveying national land).

When all these items are in place, the notario can begin drafting the “deed” (see the separate article on notarios and their key role, and on the trust itself, called a fideicomiso).  For foreigners this instrument is both a transfer of title from the seller to the new trustee and the document that establishes the trust, and with it the new trust relationship between the trustee bank and the buyer/new owner.  If there is a lender involved, which is more and more often the case, a special form of the same trust will be used providing security for the lender (much like an American deed of trust or mortgage), thus involving a fourth party to the paper.   This document will often be 25 to as much as 50 legal size pages in length, especially if there is a lender, each paragraph and statement in it must be correct, and is cross-checked by the notaria against source documents, and the process therefore typically takes weeks to complete.

The draft deed must then be reviewed and approved by each of the participants:  new trustee bank, seller’s trustee bank, buyer, seller, and lender if there is one.  Each may have corrections.   When all corrections are made and agreed to by everyone, a date can be set for the parties to sign.

At the closing itself, the closer or a translator will explain the content of the instrument to the buyer, if necessary, making sure that each name is spelled right, the relationships are correctly described, the alternate beneficiaries are properly identified, etc.   After last-minute corrections are made, the trust is signed by all parties, and buyer and seller sign an escrow disbursal order giving the amounts to be wired by the escrow to seller, to the real estate brokerages, and to anyone else who is to be paid from seller’s proceeds.

Any of these steps can take weeks.   Sometimes errors or discrepancies are discovered during the process — and sometimes at the last minute, requiring a postponement.    Please be patient.   But please also stay in touch with your closer and work with him or her, and you will get to that magical day when everyone signs.

A word about powers of attorney:   because of the inherent uncertainty and possibility of delays, either buyer or seller may choose to give a power of attorney to someone — often a member of the closer’s staff, or most typically the closing officer herself.   If a power is to be used, that fact must be disclosed to the notaria in advance, and the details of the power, identification of the person given the power, etc., furnished, since the power itself will be recited in the final document.  Also, if the power is to be executed in the US, it will be signed before a notary, and then the notarization “apostilled,” (a process of certification of the notarization by the individual state’s Secretary of State that is provided for in an international convention that both Mexico and the US are signatories of).   For Canadians, whose country is not a signer of the convention, the document must be signed at a Mexican consulate.

 

Closing Costs

If you’ve been involved in a transaction in Mexico, you’ve probably been shocked at the closing costs.   If you haven’t, then you probably will be.   This is a brief explanation of what they are, and why they are what they are.

The total cost will run from a minimum of about 3% of the purchase price for a very expensive property, to as much as 10% for the least expensive one.    Some of the costs are fixed, and others are related to the price being paid.

The biggest item, in most cases, will be the acquisition tax (“ISABI”), which is a flat 2% of the price stated in pesos as of the date of closing, charged to the buyer.  Since most purchase agreements are specified in dollars, the exact amount cannot be known until closing, when the current exchange rate between pesos and dollars is known, and applied to the dollar figure, and then the result multiplied by .02.

Other variable amounts, typically charged as a percentage of sales price in pesos, include:   Notary fees, appraiser’s fee, and various registration fees at the tax office (called Catastro), and public registry.

Fixed fees include:   Foreign Affairs Ministry permit and registration, preventive notice, certificates of no liens and of property taxes paid, trustee bank’s acceptance fee and first year’s fee, closing coordinator’s fee, US bank escrow fee for purchase money control, and a preliminary title report.

The closing coordinator will prepare and furnish the buyer an estimate of closing costs as soon as the bargain is reached.    Buyer will then be asked to deposit 50% of these costs immediately, in the special trust account the closer maintains for handling closing costs.   The advance payment of 50% and the direct furnishing of funds for the closer to disburse is necessary because, in contrast to US practice, substantial sums must be paid out in advance of closing, in order to start the process and move it toward that closing.

The second half of the costs are then typically due a few days before the scheduled signing.  The final total of costs is not typically known until some weeks after the signing when the fideicomiso is finally presented to the public registry.   All the costs are of course accounted for in detail in the buyer’s final closing costs statement, and an appropriate refund made.


Notaries

The Mexican system of recording land transfers was inherited from Spain along with the main body of Mexican law and jurisprudence. It centers on the notary (notaria or notario), who is an attorney who has studied and apprenticed extensively and eventually obtained one of a limited number of appointments to act in this capacity. A notary’s role here is far different from that of one in the United States, and more closely resembles that of a federal judge or magistrate with prescribed powers and record-keeping duties. There are at the present time between 25 and 30 notaries in Baja California Sur. The notary has many roles in a land transaction, including:

a) assembling (or, more often, having others assemble and bring to him) all of the documents required for a valid transfer;

b) assuring himself or herself of the legal identity and authority of each person who will be executing the document;

c) drafting the actual document of transfer (the fideicomiso trust, for most foreigners);

d) supervising the parties’ and other participants’ signatures,

e) permanently retaining the original of the signed document and all the supporting documentation assembled;

f) issuing a certified copy or copies and seeing that one is properly recorded at the tax and public registry offices,

g) calculating – and collecting at or before the time of transfer – all of the taxes and official fees involved, and

h) making all the required tax and other fee payments to the various local, state and national authorities.

It is a big job, so the notary’s fee is a large part of the total closing costs, as contrasted to the relatively minor role and fee of a notary in the United States.


 

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