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MEXICO BUYER’S CHECKLIST
Obtain the advice and services of a U.S or Mexican attorney, a registered Mexican real estate agent, a title insurance company and/or an appraiser.
Understand and follow the Mexican law concerning real estate purchases.
Obtain a property disclosure statement from the seller, as available.
Obtain a copy of existing public deed (escritura pública) complete with recording information and a current copy of the lien certificate (certificado de libertad de gravámen).
Request a copy of any existing commitment for title insurance on the subject property. Obtain a current commitment for title insurance on your specific property.
When dealing with residential developments advertised in the United States, obtain a public report from that state. For example, in Arizona, obtain an Arizona Public Report.
Obtain a copy of applicable Mexican state/municipal development authorizations.
Obtain a copy of any Covenants, Conditions, or Restrictions for the property and any homeowners’ association bylaws, budget, and financial statements.
Analyze all risks associated with purchasing property where any infrastructure, building or other improvements have not been fully completed.
Analyze all risks associated with seller financing.
Estimate closing costs associated with your purchase.
Complete due diligence, including investigations of title and value, prior to committing to purchase, or make purchase contract contingent on those investigations.
Enter into a written purchase contract (in Spanish and English) that defines the details and contingencies of the agreement with the seller.
Place all deposits in a neutral, third party escrow account, pursuant to a fully executed escrow agreement.
Obtain title through a Mexican Notary Public, and title insurance, at the time of full payment.
Ensure proper recording of the title transfer with all applicable municipal and federal registries at time of title transfer.
Typical Broker Activity: Most real estate transactions are “opened” after a written purchase offer is accepted by the seller and when a purchase-sale agreement (promissory contract) is signed by both parties. In most cases, a deposit is required by the broker in order to transmit the offer to the seller. If the transaction is being conducted directly with the seller, it is highly recommended that a real estate broker or a lawyer be consulted before signing any papers or handing over any money. In some areas it is common practice to deliver to the seller, as an advance payment, the equivalent of 20 percent to 50 percent (including the initial deposit) of the total price upon signing the purchase-sale agreement that should contain a penalty clause applicable in case there is a breach of contract by any of the parties. Normally, when signing the “escritura” or official deed, which needs to be certified by a “Notario Publico” or notary public, the balance is paid and the property is delivered. This should not take more than 45 days. In certain resort areas the custom of using escrows is being implemented. According to the Mexican association, AMPI, brokerage activity typically involves showing the property, loan origination activities, advertising property, preparation of legal contracts, negotiating the sale, income analysis where appropriate, selling title insurance and ancillary activities. A major difference from the United States process is the significant role of the “notario” (notary) who plays a major role in the transaction.
Notary: The notary public is a government-appointed lawyer who processes and certifies all real estate transactions, including the drawing and review of all real estate closing documents, thus insuring their proper transfer. All powers of attorney, the formation of corporations, wills, official witnessing, etc., are handled and duly registered through the offices of the notary public, who is also responsible to the government for the collection of all taxes involved. In connection to real estate transactions, the notary public, upon request, receives the following official documents, which by law are required for any transfer:
A non-lien certificate from the Public Property Registry based on a complete title search.
A statement from the Treasury or Municipality regarding property assessments, water bills, and other pertinent taxes that might be due.
An appraisal of the property for tax purposes.
Closing Costs: It is common practice that the buyer pays the transfer or acquisition tax as well as all other closing costs including the notary fees and expenses, and the seller pays his capital gains tax and the broker’s commission. Since January 1, 1996, the federal law regarding the real estate transfer tax, which was 2 percent for the entire Republic of Mexico, was modified in order to allow each of the Mexican states to determine its own tax. The range may be from1 percent to 4 percent of the tax appraisal value, generally less than the sales value. The rest of the closing costs, which exclude the transfer cost mentioned above, may vary from 3 percent to 5 percent of the appraised tax value or more, depending on the particular state. These percentages are applied to the highest value of the following: the amount for which the property is sold; the value of the official tax appraisal; or the value designated by the property assessment authorities.
Cost of the Real Estate Trusts: Based on the present tariff, the bank charges the person desiring to set up a real estate trust, or “fideicomiso,” an initial fee of approximately $600 for drawing up the original trust agreement and establishing a trust, plus a percentage according to the value of the property. In addition, the bank charges an annual fee, depending on the value of the property, to cover its services as a trustee.
Escrow, Title Insurance and Home Insurance: It is the Notary Public who, in effect, acts as a “Holding Agent” for the involved parties and, for this reason, there are few escrow companies in Mexico. At present there is no general use of title insurance in Mexico, although some American companies are providing coverage in some resort areas of the country. On the other hand, insurance companies do provide full home coverage throughout Mexico.
Real Estate Broker’s Commission: Most real estate companies in Mexico charge a commission of from 5 percent to 7 percent based on the actual sales price of the property. However, different area broker rates reflecting higher broker expenses may be found, such as in resort areas.
Capital Gains Taxes: In Mexico the concept of capital gains tax does not apply in the sense in which it is understood in the United States. The gain from the sale of property is considered as normal income at a tax rate of up to 35 percent. In order to determine the gain, the following costs and expenses are deducted from the amount for which the property is officially sold:
Original land cost and depreciated construction cost, based on the number of years the property was held and adjusted for inflation according to the official consumer price indexes;
Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as described for inflation;
Commissions paid to real estate brokers by the seller;
Closing costs, including all expenses, taxes and fees paid by the seller.
The notary retains the calculated gain after making appropriate deductions and forwards it to the Mexican tax authorities. The seller then deducts this amount from his annual tax return, which becomes an adjustable tax credit in the case of persons filing U.S. tax returns. On the other hand, there is no capital gains tax in Mexico if there is conclusive proof the seller has had the property as his primary residence for the previous two years.
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