When an American, Canadian or other foreign citizen
attempts to buy property in Mexico, he or she is confronted with
a huge task. How to insure that property rights transfer when
money is given to the seller. In a real estate transaction in
the United States to protect the money and title transfer, most
people use escrow.
Escrow means "any transaction wherein one person, for
the purpose of effecting the sale, transfers, encumbers or
leases real or personal property to another person, delivers any
written instrument, money, title to real or personal property,
to a third person to be held until some specified event occurs.
Upon that events occurrence, the item to be delivered by the
third party is delivered to the beneficiary, grantee or
obligee." California Code of Finance Section 17003. In the
eastern half of the United States this transaction is handled by
attorneys and on the West Coast, escrow is either handled by an
escrow company, title insurance company or an attorney. These
companies are licensed and regulated by the state. The main
problem here is the property transaction is in Mexico.
The word "escrow" in Spanish is not easily
translated. One term that is often used is arras. Arras can be
roughly translated as follows: the deposit of a sum of money or
property that one contracting party makes with the other
contracting party upon the execution of a contract for a
specific purpose. Normally, arras is used to assure performance
and fulfillment of the terms and conditions of an existing
contract. As one can see, the major difference between "escrow"
and arras is that escrow always involves an independent third
party, while arras does not.
One other Spanish term that is used in place of
escrow is dep#sito. Dep#sito means exactly what it sounds like.
It is a deposit where one persons gives another person something
to hold and then that item is returned. There are all types of
dep#sitos, but none of them carry the protection and guarantees
that an escrow agreement does. There is also no involvement of
an independent third party.
The participation of third parties in escrow services
in Mexico presents some very serious problems. First of all,
when an individual or company offers escrow one has to assume
the service being offered is for the public at large. This
company is holding money in the company account until certain
conditions are met. At the time those conditions are met, the
funds are released. But Mexican law strictly prohibits any
individual or company from receiving funds from the public to
comply with an unsettled obligation, i.e. a real estate
transaction. The penalty for violating this law is 2 to 10 years
in jail and a fine of 5 to 500 times the minimum wage in effect
in Mexico City.
Also, these "escrow" or 'closing" companies in Mexico
are not licensed or regulated by the Mexican state like their
U.S. counterparts. Since escrow as Americans know it, does not
exist under Mexican law, many foreigners have been misled into
thinking that the people they were hiring were as qualified as
the escrow companies in the United States.
One additional point concerning the Mexican real
estate industry is that real estate brokers in Mexico sometimes
act as "escrow agents". These brokers are not licensed or bonded
to sell real estate in Mexico like their counterparts in the
U.S. Even if they have a license in the U.S., that license does
not cross the border and become valid in Mexico. Also, if the
brokers are not Mexican citizens, they could be conducting
business illegally. The reason being that to conduct business in
Mexico one needs either an FM-3 visa for a non-resident business
and pleasure or an FM-2 visa which is for permanent residency.
These concerns may be alleviated in Mexico with leaders like
Century 21 Mexico and ReMax, but at this time, no license is
required to sell real estate in Mexico. Therefore, the legal
clause "caveat emptor" or "buyer beware" is a fact of life when
doing a real estate transaction in Mexico.
In addition to these concerns, there are fundamental
components of a Mexican real estate transaction that a foreigner
buying property in Mexico must be concerned about. For example
in the U.S., the escrow officer takes care of the title report,
conveyance of deeds of trust, the documents to clear all
existing liens on the property , prorates the taxes, makes sure
all documents are executed properly, records all necessary
documents and disburses documents, funds and a closing
statement. Also, included in those duties is usually the
obligation to pay real estate broker fees after the transaction
is official and complete. Many times in Mexico, the funds are
placed into an account, (not a trust account), where the broker
is already paid and the real estate transaction is nowhere near
complete. The title is not clear and free, the trust documents
for the property have not been checked, the notary has not been
consulted nor has he looked over the trust documents and the
bank has not been notified as trustee of the fideicomiso (trust)
which holds title to the property.
After all this explanation, foreign investors are
still left with the problem of how to insure title to the
property actually passes and their money stays safe until the
transaction is completed. One way is to get the bank involved
and have it handle the finances. The bank would probably set up
a trust account and hold the money until the transaction was
complete. The bank would charge a set up fee and charge a
percentage of the money held as their commission
Another way is to place the money with an American
attorney in his or her trust account set up specifically for
this particular transaction. The attorney has a license to
practice law and has a fiduciary duty (the highest possible
duty/obligation by law) to protect and safe keep property
received from clients or third persons. Rule 1.15 of the ABA
Model Rules for Professional Responsibility. For example, an
American attorney that serves as an escrow agent is governed by
the applicable law of fiduciaries even though the lawyer
provides no legal services in the transaction.
You are probably saying " O.K. that is great, my
attorney in the States can handle my funds, but he can not read
Spanish nor can he practice law in Mexico." The answer is to
find a good Mexican attorney who has substantial real estate
experience who has the ability to communicate to your attorney
in the United States and explain that the transaction is
complete and recorded. Upon clearance from the Mexican attorney,
your American attorney can sign off on the transaction and
release the funds.
By doing the real estate transaction in this manner,
the funds do not leave the United States, the broker was paid
after the transaction was completed and peace of mind was
obtained until the title passed to the piece of Mexican
property. So when you think about buying property in Mexico
remember escrow as it exists in the United States, does not
exist in Mexico.
Christopher M. Leo, is a licensed California attorney
and of counsel at the firm of Peyton, Muriel and Associates with
offices in Mexico and the United States. Mr. Leo has a masters
in International and Comparative Law from Georgetown. He
specializes in the areas of international trade law,
international tax planning and is an expert on NAFTA issues. He
is also the assistant editor of the Mexico Business Law Alert, a
monthly newsletter on business in Mexico
<Title>What kinds of real estate exist in Mexico?
By Dennis John Peyton
(The following is an excerpt from Mr. Peyton's new
Book "How to buy real estate in Mexico" available from Law
Mexico Publishing at:1-800-LAW MEXICO)
<Subhead>KINDS OF PROPERTY
Real estate in Mexico is divided into many different
categories. The most basic division is private and public
property. With the 1992 changes to the Mexican Constitution a
third category, ejido property, has emerged as a new alternative
for foreign investors. It is important to determine what
category of property you are dealing with before you make the
final decision to buy. The following sections will explain the
different kinds property which you may encounter in Mexico.
<Subhead>Private property
Private property is the most common category of
property involved in real estate transactions in Mexico. In a
nut shell, private property consists of all property registered
as such in the public registry of property. The public registry
of property (el registro p$blico de la propiedad) is where all
real estate transactions should be recorded. The registry is
open to the public and people working there are obligated to
allow any interested party to read the entries filed. They must
also provide certified copies of the entries or statements which
are recorded there, as well as certificates showing that there
are not entries with respect to a specific property.
The seller of the property should provide you with a
copy of his title documents (escrituras p$blicas) which are the
recorded documents which evidence a real estate transaction in
the public record. As in the United States, recording gives
constructive notice of a documents existence, and therefore is
binding before all third parties of good faith. Typically the
title documents will have the stamp on the last page. This shows
that the transaction by which the seller acquired title to the
property he is selling has been recorded with the public
registry of property and gives you all the necessary filing
information. If this stamp is missing from the last page of the
title documents it is very likely that the seller has some
problem with his title to the property. In such cases, the
transaction should be postponed or canceled until the would be
owner can prove ownership.
If the seller is unable to produce documents which
prove the property has been registered in the public registry it
can either mean that the property is not private property or
that he or she does not have title to the property. As we will
see later on in this chapter, if the property is public property
it cannot be sold, and certainly not by an individual. On the
other hand, if the seller cannot produce recorded title
documents then he or she is not the owner of record and extreme
caution should be used if you choose to proceed with the
transaction.
Private property is treated the same both within and
outside of the restricted zone. The only difference is the
limitation regarding ownership by foreigners. Otherwise, the
same principals and classifications apply to private property
throughout Mexico.
For the purposes of this book I have divided private
property into four types: unimproved property; improved
property/single family homes; condominiums; and time shares. I
have purposely left out development properties because they are
the subject of another book, and because most people are likely
to buy of the four types of properties listed.
<Subhead>Unimproved property
For our purposes unimproved property will refer to
real property which has received no development, construction,
or site preparation. This type of property is commonly known as
raw land because it does not have any added improvements such as
landscaping, drainage, streets, utilities, or structures.
The law refers to real estate in many different ways.
The following terms are important when trying to determine the
classification of property in Mexico:
<Bullet 1>"Fincas": This term is used to refer to all real
estate, independent of its location. This would include all
lands as well as any construction on the land.
<Bullet 1>"Finca R$stica": Is all real estate located outside of
the limits (per"metro) of cities; in other words, rural property.
<Bullet 1>"Finca Urbana": Refers to real estate located inside
the limits (per"metro) of cities, or urban property.
<Bullet 1>"Terreno": This word usually translate as "land" in
its most generic use.
Unimproved property can be a problem for buyers in
the restricted zone. This due mainly to the difficulties
involved in getting a trust permit form the Ministry of Foreign
Affairs. More often than not, because the property is not
improved, it will not be held in trust. In years past the
Ministry would issue trust permits for almost any property
regardless of its location and improvements. More recently they
have indicated that it is better if the property is part of a
larger development.
The tendency seems to be that the Mexican government
is more inclined to grant trust permits for unimproved property
in larger developments rather than for isolated lots in areas
with little or no other development. The intent is to encourage
a more uniform and planned development of Mexico. For this
reason, when you are looking at unimproved property, it is
important that you determine whether you will have problems
obtaining a trust permit from the Ministry of Foreign Affairs.
To do this you should contact the trust department of
any Mexican bank in the area where the property is located.
Usually they can give you an idea of the degree of difficulty
you should expect. Be sure to get this information personally.
Very often the owners and especially real estate agents will not
tell you that you may have problems with the trust permit. We
will take a closer look at ways of protecting yourself against
these situations and others in the chapter on Promissory
Agreements.
Another important consideration to take when buying
unimproved property is to determine if the property is held
under co-ownership (copropiedad). In many areas property has
been passed down through the family for years but the proper
formalities were never carried out. This is often because either
the transactions were never recorded or at the time the
transaction was being executed the parties didn't want to pay
the taxes and expenses involved in formalizing the transactions.
This is important because it is not always apparent
to the foreign investor that the property is not owned solely by
the seller, and there are no legal safeguards to protect the
unknowing investor from buying only an undivided interest in the
property. This is not to say that you would be left without any
legal recourse to remedy the situation, but it is always better
to avoid litigation, especially when you are in a foreign
country.
Always ask if the owner holds title to the property
individually. If the property is held under co-ownership the
title documents will indicate that sellers has an undivided
interest in the property. In Spanish the most common term to
indicate this is "proindiviso".
When the title to property is held under co-ownership
the certificate of no encumbrances issued by the public
registry will indicate this. This certificate is merely a
statement by the public registry of property with regarding to
the status of any registered property. The certificate of no
encumbrances is required by the Public Notary to record any real
estate transaction.
If the seller has only an undivided interest in the
property you intend to buy, he must first get the consent of the
other co-owners to subdivide his parcel out the property in
order to sell it. If this is not done, the sale would not be
valid, and you would be forced to take action against the seller
to recover any money you may have paid. You would not be able
to sue for the title to the property because, strictly speaking,
the seller did not have the right to sell the property, and,
therefore, you could not show that you ever legally had title to
the property.
Another important consideration is to determine if
the property is "ejido" property. We will take a closer look at
this type property latter on in this chapter. For now, the most
important thing to remember is that if the property you want to
buy is not recorded with the public registry of property, then
don't buy it! It's that simple. This is because neither
"ejido" property nor public property can be registered in the
public registry of property.
A native of Wisconsin, Mr. Peyton graduated from
the University of Wisconsin and one of only a handful of
Americans licensed to practice law in Mexico. He is a member of
the international law firm of Peyton, Muriel and Associates with
offices in San Diego, Tijuana, Los Cabos, Cuidad Juarez,
Guadalajara and Mexico City.
For Immediate release... Contact Marcela Caballero: (800) 529-6394
MEXICAN REAL ESTATE MARKET BOOMS!
Mexico is quickly becoming the fastest growing resort destination for many Americans. In fact, whole communities have been built by Americans in places like Los Cabos and Rosarito in Baja California. Mexico has been blessed with miles and miles of virgin beaches and tropical paradise making it a an ideal place to escape the cold winters of the north. This has sparked a a real estate boom in Mexico by Americans taking advantage of real estate prices unheard of in the United States. People are buying beach front and ocean view properties at a fraction of the price of what they would cost in in the United States.
Unfortunately there has been very little information in English dealing with real estate transactions Mexico. This has caused confusion and frustration among American buyers who have been forced to invest blindly without the benefit of even the most basic information. Buying real estate is no easy task in the United States where everything is in English. In Mexico the law are different and most documents are in Spanish. Finally there is a book which deals with Mexican real estate transactions in plain English: HOW TO BUY REAL ESTATE IN MEXICO.
This book is a quick and easy reference to buying real estate in Mexico. It includes valuable information which will save the reader time and money. It gives a step-by-step explanation for selecting and buying property, whether it be a lot, a condominium or a beach front home. The book also includes an invaluable reference section on Mexican real estate law and a English translation of Mexico's new Foreign Investment Law.
How To Buy Real Estate In Mexico was written by Dennis John Peyton one of only a handful of Americans licensed to practice law in Mexico. A native of Wisconsin, Peyton received his BA from the University of Wisconsin; and his law degree from La Universidad Tecnologica de Mexico, in Mexico City. He is the author of numerous articles on Mexican real estate and has been a speaker at various conferences, and on radio and television programs. Mr. Peyton has lived and worked in Mexico for over a decade and is currently writing a series of books on investing in Mexico.
If you are thinking of buying real estate in Mexico for retirement, a vacation home, or simply for investment purposes this book is a must to read. It sells for $19.95 and is available from Law Mexico Publishing at 1-800-Law Mexico, or 539 Telegraph Canyon Road Suite 787, Chula Vista, CA 91910-6497
Do you really have title to your property?
by Dennis John Peyton
(The following is an excerpt from Mr. Peyton's new
Book "How to buy real estate in Mexico" available from Law
Mexico Publishing at:1-800-LAW MEXICO)
Over the years I have had several clients who have
come to me with documents which they thought entitled them to
property in Mexico, only to find out that the documents were
invalid. Many people believe that if the title documents are
notarized before a public notary in Mexico then they have
nothing to worry about. Unfortunately this is not true.
One of the most common problems I have seen in Baja
California, especially in Baja California Sur, involves the
assignment of real estate trust rights without the consent of
the trustee/bank. This type of agreement is used when the
property you are buying is already held in trust. It is an
assignment of rights because what you are actually purchasing
are the beneficial rights the seller has in the real estate
trust which holds title to the property. What usually happens is
the seller, who has property in a real estate trust
"fideicomiso", sells his or her rights to the buyer without
first getting consent form the bank. The buyer and the seller
merely go before a public notary and execute the assignment of
trust rights but neglect to inform the bank.
In order for the assignment to be legal it must be
carried out before a public notary or a public broker and abide
by the terms and conditions of the trust agreement. The
bank/trusstee will also need to notify the Ministry of Foreign
Affairs so that assignment may be authorized. Almost without
exception, the real estate trust agreement will require that the
trust beneficiary get prior consent before he or she can assign
the trust rights to the buyer. Moreover, the bank will also
normally charge a fee to carry out the assignment and notify the
Mexican authorities.
The fact that assignment has been executed before a
public notary in Mexico does not necessarily mean that the
transaction if valid. If the transaction was carried out
correctly the notary should make sure that all the provisions of
the trust agreement were met, and the assignment of trust rights
does not violate any of the provision of the trust agreement.
Since the bank is actually owns the property, and is party to
the trust agreement, it is imperative that the notary makes sure
that there are not any outstanding obligations with the bank
before executing the assignment.
Unfortunately, there have been numerous cases where
notaries carried out trust assignments without even consulting
the bank/trustee. This usually results in the bank refusing to
recognize the buyer as the beneficiary of the trust. This is
because the bank is required to notify the Mexican government
when the trust's beneficiary is changed, and must pay a fine if
this is not done within the allotted time. I have personally
seen at least three such cases and in every one the buyer didn't
realize what had happened until years after the transaction was
carried out. This can create serious problems, especially when
the seller cannot be located.
Therefore, the first thing you need to do when
purchasing a property which is held in trust is ask the seller
for a copy of his or her trust agreement. Since you are buying
the rights contained in this agreement you should review it to
see if it meets the general standards for trust agreements. If
there are changes to be made this is the time to request them.
Be sure that the bank/trustee fees are reasonable.
In some cases the fees were set years ago and are very
reasonable. On the other hand, trusts established in the late
1980's sometimes got a little heavy handed with the fees because
of the government bank monopoly which existed throughout that
decade. Check around to get an idea of what the current fees are
and ask to have yours adjusted accordingly.
Both the beneficiary and the substitute beneficiary
will need to be changed. Don't forget the substitute beneficiary
because if it is left blank you will have to pay more to have it
done later.
The parties to the assignment of rights contract will
either be the seller/beneficiary and the buyer or the
bank/trustee and the buyer. Under no circumstances should you as
the buyer accept an assignment of trust rights without the
written consent of the bank/trustee.
Over the years there have been many assignment
contracts executed without the knowledge or consent of the
bank/trustee, even some that have been recorded and filed with
the Public Registry. But remember, you as the buyer will have to
deal with the bank in the future. Once the seller has been paid
he or she may not be able to be found. Therefore it is in your
interests to make sure that the bank/trustee is fully aware of
assignment of trust rights.
There are all kinds of arguments regarding the need
to inform the bank regarding the assignment of trust rights.
Some believe it is not necessary due to the fact that the
assignment concerns personal property rights, rather than real
property rights, and therefore the transaction may be executed
in a private agreement. Do not be persuaded by these arguments.
Your main concern should be to comply with the conditions set
forth in the trust permit and the trust agreement. More
importantly, you certainly do not want to fight with the
bank/trustee to have your rights recognized, or find out after
the transaction that the seller still owed bank trust fees!
To avoid all of these situations it is advisable to
make sure the assignment of rights agreement includes the
consent of the bank/trustee and authorization from the Ministry
of Foreign Affairs. By doing so you can rest assured that you
will be registered as the new beneficiary of the trust and that
all trust fees are current.
If the seller has chosen to the have the
bank/trustee represent him or her in the assignment, the bank's
trust representative will execute the contract with you before a
public notary or a public broker. On the other hand, if the
seller is going to execute the assignment agreement, consent
from the bank/trustee should be granted through a letter of
instruction sent to the notary or the public broker.
The contents of the assignment should be fairly
similar to the trust agreement. After all, all of the rights you
are buying are contained in that agreement, and the assignment
only recognizes the transfer. Once the assignment agreement has
been recorded before a notary and registered, contact your
bank/trustee to confirm that they have opened your file and that
your name has replaced the seller's name.
A native of Wisconsin, Mr. Peyton graduated from
the University of Wisconsin and one of only a handful of
Americans licensed to practice law in Mexico. He is a member of
the international law firm of Peyton, Muriel and Associates with
offices in San Diego, Tijuana, Los Cabos, Cuidad Juarez,
