We believe that "Rocky Point" Puerto Penasco, Sonora Mexico is a superior investment alternative to real estate in the U.S. and elsewhere in Mexico. Studies show that Rocky Point to be in the third year of a 25 year upward real estate cycle. Even though Rocky Point is still small and relatively underdeveloped, it is attracting investments at a higher rate than any other resort area in Mexico, surpassing even Cancun and Los Cabos. Long term real estate appreciation will be driven by a limited supply of beachfront property paired up against the virtually unlimited income and population growth of the southern U.S.
Do you go to Mexico, enjoy the beautiful sandy beaches, and experience an intense desire to have your own property there? If so, you have a lot in common with many other Americans and Canadians. Buying property in Mexico can be a good investment, financially as well as emotionally, since Americans and Canadians enjoy approximately six times as much buying power in Mexico as in their home countries. Recent changes in Mexico's economy suggest that this may even be a conservative estimate.
But many Norteamericanos, as the Mexicans call us, are afraid to buy property in Mexico. Often their fears are based on stories they've heard third hand, or confusions between past history and present practice. Here are some of the myths we hear most often, followed by an explanation of the true facts.
Foreigners can't own real estate in Mexico?
Not true. In most of Mexico, Americans, or any other foreigners, can own land outright with what is called a fee simple title, the same as we have in the United States. Only in the restricted zone -- 50km (31.05 miles) from the ocean and 100km (62.1 miles) from the borders -- is it true that foreigners can't hold a fee simple title. "Rocky Point" Puerto Penasco is in that area, so these limitations apply.
Perhaps the main reason for establishing the restricted zone is that the Mexicans lost so much territory to the United States in the 19th century -- about one third of their country: Texas in 1845, and in 1848 through the treaty of Guadalupe Hidalgo the territory that became California, Nevada, Utah, most of Arizona, and parts of New Mexico, Colorado, and Wyoming. The treaty was signed shortly after American forces had captured Mexico City. The United States paid only $15,000,000 for all of this land. And in 1854 through the Gadsden Purchase the United States acquired the rest of what is now Arizona and New Mexico. It's not surprising that Mexico was a little nervous about allowing foreigners, especially Americans, to acquire any more land.
But old wounds heal, and now the United States and Mexico are working hand in hand. NAFTA has promoted good business relationships, but even before NAFTA, Mexico wanted to make it possible for foreigners to invest in their country, so in 1971 they developed the bank trust (fideicomiso) as a way for Americans to buy residential property in the restricted area.
Americans can't own real estate unless they have a Mexican partner?
Not true. It used to be that for a partnership or Mexican Corporation, foreigners had to have Mexican partners who owned at least 51% interest. This is no longer the case. Under the new Foreign Investment Law of 1993, a Mexican Corporation can be owned 100% by foreigners, and the corporation can buy and own any property with a fee simple title, as long as its use is non-residential.
A Bank Trust is a Lease Agreement?
Not true. Under a Bank Trust the beneficiary (buyer) has all the rights of ownership: the right to buy, sell, lease, use, bequeath, improve, transfer, and encumber. On the other hand, a Lease Agreement would grant only the right to use. If a lessee made improvements, such as building a house on the property, that house would belong to the landlord. Nor could the lessee sell the property or borrow money on it.
In "Rocky Point" Puerto Penasco, Sonora Mexico there have been in the past many long-term Lease Agreements for land. Before 1971 the Bank Trust was not available, and leasing was the only option for Americans. Apparently some of them were confused about the difference between a long-term Lease Agreement and Bank Trust ownership; thus they built homes and made improvements on the land that they were leasing. Under Mexican law, a Lease Agreement must be renewed at least every 10 years. After the Bank Trust was initiated, some Lease Agreements expired and the landlords declined to renew, which was their legal right. The tenants then lost the houses they had built. This frightened other Americans, who thought that their compatriots had had their ownership rights taken away, when in fact they had never possessed such rights. In many cases, however, the former lessees were able to regularize their situations by purchasing the property under a Bank Trust.
The Mexican government can take away foreigners' property at any time?
Not true. The Bank Trust is established by the government and gives foreigners the same rights of ownership as Mexican citizens. The only difference is that they never receive the actual fee simple title. It is held in trust for them by a bank. When first established, the term of a Bank Trust was for 30 years only and was made renewable for another 30 years. In 1993 the term was extended to 50 years, and renewable for another 50 years.
Not long ago the United States media featured a group of Americans in Baja California who complained that they were being "evicted" from their property. And that they had "purchased" homes in an upscale development in 1986, even though they had been warned that the developer’s title to the land was in dispute and that litigation was pending. The courts eventually decided in favor of the Mexican landowners, and the Americans were dispossessed.
A similar thing happened some time ago in Cholla Bay, a community near "Rocky Point" Puerto Penasco, Sonora Mexico. Residents who had held Lease Agreements for many years and built improvements on "their" property were "evicted" when the owners decided not to renew the Lease Agreements. Although the Americans were outraged, the property owners were entirely within their rights. In the United States it was reported that "the Mexican government" had taken away their land. In fact, it was simply the law being enforced.
The Phoenix and Tucson papers from time to time have published negative stories dealing with the alleged injustices to a few Americans in Cholla Bay. Most of these stories have been ill-informed and one-sided. In any country, including the United States, title discrepancies exist, lawsuits get filed, and in some rare cases, buyers lose their property. Some Americans, we have noticed, have an irrational fear that the Mexican government can take away property at any time for any reason. This is absolutely not true. On the other hand, other Americans are incredibly gullible and will pay money to almost anyone if they believe they are getting a bargain. Rather than fearing the Mexican government, foreign buyers would do better to be wary of unscrupulous developers like the ones mentioned above.
Investment opportunities in real estate abound and are as well one of the safest for real estate investments. Foreigners can own coastline land with Bank Trusts held by Mexican banks. These Bank Trusts are set up with 50-year renewable beneficiary rights without limitations. Land and homeowners can enjoy the rights of ownership equally protected by the Mexican government.
This bank trust allows foreigners complete control over real estate in the restricted zones. Under the Fidiecomismo, the Mexican bank, through the Bank Trust, holds the title to the property in any restricted zone. The owner who is the beneficiary of the Bank Trust administers the Bank Trust and therefore controls the property. The owner is free to transfer ownership, rent or improve the property at their will. Foreign owners may also enjoy capital gains on sold property and can also instruct the Bank Trust to pass the property on to their heirs.
Mexican law also protects beneficiaries of the Bank Trust from any problems that the bank may have. A Bank Trust can never be seized to satisfy judgments against the bank. Mexican law, in 1994, established that Bank Trust deeds are to be 50-year terms and are renewable indefinitely in 50-year increments.
Mexican notaries, Notaria Publica, are government appointed attorneys specifically trained to handle the legalities of property transfers. Notaries are the only ones legally able to transfer title. They also make sure the title is clear from the local to the national level, make sure no liens exist and collect any taxes due on the property. Notaries perform title searches similar to American title companies guaranteeing your property is unencumbered.
Rental properties and other businesses can be owned by foreigners by forming a Mexican Corporation. In this case, the Mexican Company, which would hold the title, owns the property and a Bank Trust is not needed. The only benefit being a few hundred dollars for annual trust fees.
Closings are performed by the Notaries and most properties require only 30-60 days to complete the closing process, although it may take considerably longer to receive the Bank Trust or actual title. You can purchase Title Insurance but this generally is not needed with the Notary system.
If you plan to rent your property, understand you will need a passport to obtain your FM3 to conduct business in Mexico, even if you are using a reservation management company. Our Service Concierge, is able to assist you with those documents as well as bill paying and an assortment of other services. Tax bills, as well as utility bills are not sent to you in the mail therefore, using a bill paying service is an added convenience.
New Mechanisms for Buying Mexican Real Estate:
The country of Mexico is attempting to accommodate foreign investors in the real estate industry. In concert with United States title companies, banks, and appraisers, it is simplifying the process of determining property values, which will make it easier for buyers to purchase property and for lenders to make loans.
It can be extremely difficult to qualify for vacation home financing, as well as very expensive. Real estate loans offered in Mexico through United States banks are typically considered "unsecured" loans, as today there is no viable means to put a mortgage on the property. Qualifying for this type of loan is difficult, time consuming and usually expensive. On the flip side, currently, if a buyer is successful in obtaining a loan for property in Mexico, they will be rewarded with a Form 1099 Mortgage Interest Statement for use as a deduction on their United States Federal Income Tax.
Seller Financing is a another means of obtaining a vacation home. Sellers often own properties free and clear, and appreciate the benefits of a long term payout with a higher interest rate than they may obtain on a traditional investment. Obtaining a credit report adds to the seller's peace of mind. Often, an uninvolved third party collects, records and distributes the funds, and holds the necessary title documents.
Home Equity Loan
A Home Equity Loan, on the buyer's primary dwelling is often the easiest and most affordable way to obtain the necessary funds to purchase a vacation home. In addition, a Form 1099 is usually provided.
Finally, Fractional Ownership, for instance with another family, is another option. A carefully worded contract with explicit shared-use and property-disposal clauses is an absolute necessity.
These are just a few examples of fairly typical financing arrangements. Creative financing arrangments are best left to a finance professional, and as always, it is best to consult an accountant and attorney to verify the appropriateness of the transaction.
It is now possible to get United States title insurance on some Mexican properties. While this costs more and takes longer, it is worth it to American buyers to ensure peace of mind.
Title searches in Mexico are usually done through a Mexican law firm. The attorneys verify the owner and search for liens, encumbrances, and anything else that could affect the title. Since Mexico’s registries are not automated, this can be a lengthy process, taking approximately eight to ten weeks, as opposed to one to five days in the United States. After the search is completed, the Mexican law firm prepares its legal opinion of status of title, which will include owner of record, easements, liens, restrictions, and anything else pertinent to the property ownership. The closing of the transaction is done in the office of the notario, and funds disbursed through escrow.
Computerized Property Valuation
Access to public records is taken for granted in the United States, but comparable sales are not readily available to the public in Mexico. The Mexican MLS is working diligently to make mandatory disclosure of sales prices and terms available to the agents. This will make it possible for real estate agents to do comparative market analysis and determine fairer and more consistent pricing.
Past History and Future Trends
Financing has been available, but many Americans have financed their vacation homes by taking out home equity loans on their property in the United States, thus enabling them to pay cash in Mexico. Recently several American lending companies have made it possible for buyers of Mexican properties to finance their purchases. One key is the Title Guaranty Deed, which has a foreclosure provision similar to the American Deed of Trust. Lenders can now foreclose within 90 days and get their security back. Another key is title insurance, and this concept too is becoming more widely known in Mexico. Since it protects buyers and sellers alike, it is sure to be used increasingly in the future.
Appraisal is also coming to be an accepted practice. Without the computer data base American realtors are used to, it is more difficult to fix a fair price on properties, but appraisers are building up their own databases, and the states of Arizona and Sonora are cooperating to facilitate computer access to property registries in both countries.
All of these developments are making it easier for more Americans to buy property in Puerto Penasco, but they must never forget that they are obligated to follow the laws of their host country, Mexico. Knowing what to expect and what pitfalls to avoid should make it more comfortable for them. Knowing American practices should make it clearer to Mexicans what to expect from Americans and why they act the peculiar way they do.
Our focus is on organization and protection of the interests of our clients at all times. We adhere to the strictest of ethical guidelines and always place the interests of our clients above all. We seek to attract and retain the highest quality sales associates in the market area in order to provide high quality client services. Please let us know how we can help you and your investment partners here in "Rocky Point" Puerto Penasco, Sonora Mexico.