In Puerto Vallarta, there are a lot of brokerages that are owned by Americans and Canadians. If you’re a foreigner from the States or Canada, you’ll probably see some similarities in our purchase sale agreements. One of the big differences is that Article 27 of the 1917 Mexican Constitution prohibits foreigners from owning properties in the Restricted Zone, which is property along the coastline.
The Restricted Zone is 62 miles from the U.S. and Central American border and 31 miles from the coastline both on the Pacific and the Atlantic side. In these regions, the title has to be held in a real estate trust, which they established in 1973. The Mexican government figured that they were missing out on some foreign investment opportunities, so they established a real estate trust with a Mexican bank. The trust has a renewable term of 50 years where the buyers would be the primary beneficiaries of the trust.
There are also substitute beneficiaries. If you have kids, other family members, or friends you want to add as a substitute, they will be able to inherit the property. As of right now, there is no inheritance tax in Mexico. To put this into perspective, for the real estate trust where you and your spouse will be the primary beneficiaries, should one of you pass away, the survivor becomes 100 percent the sole beneficiary. Then, when that person passes, the substitutes become the primary beneficiaries. There’s a fee for the notary to do the transaction with the bank, but there’s no probate to go through. Usually within 60-90 days, depending on your trust bank, your substitutes become the primaries which means that they basically own the property.
Buying a Home with a Trust in Mexico
A trust in Mexico is like a trust in the U.S. In the U.S., you have a living trust where you can put all your properties and personal effects. A trust in Mexico works similarly. What is nice about the trust in Mexico is that nobody can claim to be your child or next of kin which would lead to a probate and then a lawsuit. With this trust, whoever is listed as a substitute will get the property. You can also designate different percentage of ownership to these substitutes, and the percentages can be changed later. People can be removed or added as well. It’s very flexible. When the time comes, the substitutes just have to provide a notarized and apostille death certificate. Then, the notary in Mexico will start working with the trust bank to recognize them as the new sub-primary beneficiaries of the property.
Buy Property in Mexico With Cash
The majority of transactions are cash. About 85-90% of our clients purchase with cash. Loans are available in Mexico, but the interest rates are higher than what we’re accustomed to in the States. There are also closing costs on the loan itself which will be a peso loan. As of right now, there aren’t any U.S. dollar loans through the Mexican financial institutions for the purchasing of the property. There is only the peso loan on the exchange rate at the time of the closing. Thus, most of our foreign buyers here either have the cash or tap into a line of credit back at home. Some people take out an equity line on their house in the U.S., move the money to Mexico, and purchase the property.
Home Closing Costs in Mexico
The conversion of the dollar to pesos is very cost efficient. The exchange rate of the dollar to pesos is 19:1 right now. For example, for a $300,000 purchase, there will be a closing cost of 3.5-4.5%. Two of the items in the closing costs will be returned in the form of a credit against capital gains when you sell in the future. The first item is the transfer tax which is around 2-2.8% of the fiscal value and the second item is the notary fees. Most of the itemized closing costs are set fees and a few are a percentage of the transaction. So, the transfer tax, or patrimony tax, is around 2-2.8% of the fiscal value. This is deductible when you sell in the future. You can get the money back in the form of credit as well as a notary fee. For example, if the legal fees of the notary is 30,000 pesos, which is around $1,600 right now, you’ll get that in the form of credit. In the long run, your buyer’s closing costs goes down when you sell your property in the future. So if you’re spending 3.5-4.5% buyer closing costs right now, it is going to be less because some of those itemized costs will be credited towards capital gains in the future. Note that you need to get the legal invoice from the notary which could take anywhere from two to five months for your deed to be registered after closing.
After Closing A Property in Mexico
When we close, you will get a quick copy of your deed. The actual original deed will be sent to the public registry for it to be registered. This takes a few months, but once it comes out of registry, the registered deed will be sent to the notary. The notary is supposed to notify you or your closing attorney, but they get busy and sometimes forget. So, it’s good to put a reminder on your calendar to contact your closing attorney in about three or four months. Ask if they can you check if your deed has been registered. They will check with your notary. If it is registered, you can pick it up or you can designate somebody else to pick it up on your behalf. After that, you don’t need it again until you sell. So, you can give the deed to the notary until that time comes.
Tips for Buying Property in Mexico
There are scams everywhere for everything. What I recommend is to find an Asociación Mexicana de Profesionales Immobiliaros (AMPI). It is the association of realtors in Mexico. I would suggest working with them because they have to abide by certain a code of ethics and rules, and they go through training throughout the year. As of right now, you don’t have to be licensed in Mexico. So, be really cautious who you’re working with. Make sure they’re an AMPI agent and maybe interview some of their past clients. Some people ask questions on social media or on blogs. Additionally, something to watch out for is a request to send money directly to the realtor. That should be a red flag. For a lot of the developments preconstruction, the money is going to the developer because it’s a cash transaction. If you’re going to purchase reconstruction or resale, get an attorney and have them review the documents to make sure it’s a legitimate corporation. The developer will get the money or will have access to the money. It is like they’re getting a loan, as all the construction money comes from sales. These are some things to be aware of so that you can make a wise decision moving forward. You should not just trust anybody and wire money over.
Hiring a Real Estate Attorney in Mexico
It’s advisable to hire an attorney. There are a lot of great law firms and attorneys, and they’re all fully bilingual so you won’t have to worry about communication. These law firms and attorneys work with a lot of the big notaries in town. It is important to clarify that a notary in Mexico is not like a notary back in the States where just anybody can be a notary. In Mexico, a notary is appointed by the governor of that state. They must be at a law firm, be at least 35 years of age, and have worked for the notary office for a minimum of three years. They have an authority like that of a federal judge. Whenever you are transferring titles, it’s always done at the notary office. Whether it’s real estate, business, or civil attorneys are the ones that do the title, search, and generating of the local, state, and federal document that are required for transactions. When you get something notarized in Mexico, it’s not a simple stamp. There is an obligation to use original documents as records of everything. Getting something notarized is the biggest piece of a real estate transaction. What we do in Puerto Vallarta is that we have closing attorneys that work outside of the notary office or independent third-party law firms that work with the notary. They gather information and the necessary documentation. The closing attorneys basically help the notary. When they’re ready to close, you go to the closing, and you sign.
Co-ops and Condos in Mexico
There aren’t any co-ops in Mexico right now. We have timeshare/fractional ownership, but in my office, there is mostly full ownership, condos, or houses. We also sell land and business opportunities and commercial.
Property Taxes in Mexico
Property taxes in Mexico are a non-issue. They are around $100-125 for every 100 thousand fiscal values. For example, my property tax for my condo, which is around 2,700 square feet, is $135 for the year. For a half a million-dollar property, there is around $500-550 property tax a year. If you pay for the whole year’s property tax by the end of February, there is a 15 percent discount. For condominium buildings, there are monthly HOA dues and utility bills like electricity, internet, water, and gas. Some bills might include water, gas, and HOA. It might be separately metered, but water and gas are only about $15-20 a month. Electricity is the same as in the U.S., so you should conserve and turn things off when are not using it.
Renting Condos in Puerto Vallarta
The majority of our clients investing in Vallarta don’t live here full time. About 65-70% of them rent out their unit while others just lock it up – they don’t want somebody else sleeping in their bed or they don’t need to generate that rental income to pay for their caring costs. Other people may need that income to subsidize the caring costs of the HOA, all the utilities, a maid, and other additional expenses. Renting out your condo depends on where you’re at financially.
Purchase Sale Agreement
The purchase sale agreement is standard. Just like in the U.S., once the offer is agreed upon by both parties with 10 percent into escrow, 90 percent of the balance gets wired into escrow about four days to a week prior to closing. There is typically also the buyer’s closing cost. You send a deposit directly to the notary or the closing attorney so they can start the closing process and then, you send the balance of the closing cost. Typically, you wire it into escrow along with the 90 percent balance,
Timeline of Purchase Sale Agreement
It takes 45-60 days to close if the seller is a foreigner that has a real estate trust, the buyer is a foreigner who will need a real estate trust meaning they are purchasing a property in the Restricted Zone in Mexico, and if paperwork and deposit is submitted on time. Some trust banks are faster than others, and some aren’t. Furthermore, if the seller has a mortgage on the property, that adds to the timeline. If the seller is a Mexican national and the buyers are foreign, you can sometimes close sooner around 30-45 days because you’re not dealing with the seller. The seller doesn’t have a trust bank since they own the title directly. There are also contingencies in the purchase sale agreement, such as a home inspection. If it’s a condominium association, you could read the financials, rules and regulations, the condo regime, and the bylaws. There’s also the option for a photographing inventory, which I strongly suggest doing. You might not remember what the artwork looked like or what kind of chairs it had. They could swap things out. Also, things can break, or something may be suddenly missing. Thus, I suggest doing a photographic inventory. The listing agent should do that. The seller signs off on it. Then the buyer signs off on an itemized photographic inventory so there’s no doubt about what’s staying in the unit.
Home Inspectors in Mexico
Usually, the buyer’s agent has a list of home inspectors they’ve worked with. They’ll check with one of them to see if they’re available and what they charge for a home inspection, depending on the size (square feet) of the unit. It could cost between $200-700. For a 10-bedroom Villa, it’s going to cost more compared to a two bedroom, 1100-square-foot condo. Unlike in the U.S., if the owner has an employee, like a maid, that they’re paying directly, they need to liquidate that employee at the labor board because the employee is tied to the property. For example, if you hired a maid for three years and she comes once a week, you would hire an accountant or attorney to go to the labor board and do the calculations based on how many years they’ve worked for you, their current salary is, and then accountant or attorney will do the liquidation. So, you will have to pay off all the benefits they’ve accumulated like a severance package. However, it must be done by the labor board. The maid will also go to the labor board. Your accountant or your property manager’s attorney will meet them there, they will give the money to the labor board employee who will count it and give it to the maid. Then, she signs a letter that gets stamped and processed. When we close at the closing, the buyer will receive that labor letter that states that the maid has been paid. If that employee comes knocking on the door one day and says, “You still owe me money,” you can say, “Well, I don’t owe you money. I didn’t hire you.” On the other hand, if the employees hired a property management company, then we don’t have that problem. The property management company will sign a letter saying that the maid works for them, not for the owner and that they pay the maid.
Timothy Real Estate Buyer’s Guide
People can email me, and I can send it to them. My email is Taniel[at]timothyrealestategroup.com. This guide covers the basics of our company. We are frequently asked questions about the purchasing process like what to look forward to in a purchase sale agreement, the closing costs for buyers, and closing costs for sellers. We specify what the buyer is paying and their closing costs and what the seller is paying. We want to make sure you have a better understanding of what you’re getting yourself into. This guide is very helpful, and it’s free. My website is tanielchemsian.com. Please feel free to visit my website and email me with any questions.