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Friday, October 3, 2008

MEXICAN REAL ESTATE: What to know before buying in Mexico

by Tom Kerr
The cross-border real estate game is evolving quickly and dramatically. Brave or foolhardy souls who bought Mexican land in days gone by routinely assumed nerve-wracking and often catastrophic risks. But these days it may be more financially risky to procrastinate about buying property south of the border, because prices are still attractively priced but may soon be out of reach.

Foreign investment into Mexico now averages about $20 billion a year, and much of that capital infusion goes directly into real estate. Price appreciation is robust in locations throughout the country. Seven million North Americans travel to Mexico each year and the State Department estimates that about 400,000 live there permanently – nearly double the amount that did so just 10 years ago. In fact, many Americans who used to reside in San Diego, for instance, now commute to work from permanent homes in Mexico. They enjoy California earning power and the relative strength of the dollar, but simultaneously take advantage of Mexico’s more desirable locations, customized architecture, and bargain home prices.

In May of this year representatives from the National Association of Realtors (NAR) met with Mexican Embassy officials in Washington, D.C. to discuss the housing market and its relationship to buyers in the USA. Antonio Ortiz-Mena, Head of Economic Affairs for the Embassy, explained that housing prices in Mexico are continuing to gain in appreciation, but have not gotten ahead of inflation as they tend to do in typical “boom and bust” cycles. That economic pattern indicates that Mexico now offers stability not seen in other countries, while representing excellent sustainable returns on investment.

What may be more profound and significant is that, according to notes from the meeting posted on the official NAR Web site, Mexico “may also consider recognizing the US Real Estate license in Mexico.” Meanwhile the Embassy is working with both AARP and Medicare to discuss how to facilitate the transition to Mexico for American retirees. The Embassy plans, for example, to launch a test project in nearly a dozen cities to find out more about how to make moving to Mexico more seamless for citizens of the USA.

Fueling these kinds of initiatives is the historically unprecedented fact that Baby Boomers are migrating into Mexico in astonishing numbers in search of an affordable and more charming alternative to increasingly expensive life in the USA. For many who are anxious about their prospects for retirement – thanks to years of lackluster stock market returns, plummeting home equity, and skyrocketing health care costs – Mexico may be the only option that makes decent financial sense. But our southern neighbor is in many ways the superior choice. Mexico offers a rare combination of pristine natural resources, beautiful but conveniently located destinations, colorful and interesting cultural assets, excellent schools, talented architects and builders, a cheap cost of living, and next door neighbor proximity to friends, relatives, or second homes back in the USA.

Baby Boomers (those persons born after 1945) make up almost 30 percent of the American population. There are 78 million in the USA and the first of them turned 60 in 2006, representing the largest-ever segment of American society to hit retirement age. The purchasing power of this powerful demographic is peaking at a time when Wall Street and the real estate market are both in complete turmoil and lack the stability to promise reliable investment quality. But American confidence in the Mexican economy and the nation’s political stability is stronger than ever, and this new breed of young-at-heart seniors is not interested in retiring into a life of convalescence.

A National Association of Realtors study found that the 50-plus age group travels further distances than any other age group and spends more time vacationing now than they did a decade ago, when they were ten years younger. They are more active, wealthier, and more interested in and experiences in different cultures than their aging predecessors were. A recent AARP study found that they are, to put it bluntly, more adventurous.

They are not, however, reckless. The same AARP research also found that Boomers are prudent and careful when it comes to risk-taking, and that extends to their investment outlook and management of assets and finances. Lucky for them, changes in Mexican law have made it significantly safer and easier for foreigners to own property, and major U.S. companies have begun offering mortgages and title insurance in partnership with Mexico’s real estate industry. Such practices provide needed reassurance, security, and comfort to Americans considering purchases in a foreign country, because they can transact business with trusted institutions according to familiar terms, methods, and conditions.

Those planning to buy in Mexico should keep in mind that contracts are drafted in Spanish and – at least for now – real estate agents in Mexico are not required to be licensed. But many reputable brokerage companies –including such prestigious ones as Sotheby’s – have branches in Mexico and can guide clients and offer help with selecting competent and skilled local professionals including lawyers, building inspectors, and contractors.

The most important restriction to foreign ownership of real estate is contained in the Mexican constitution. It states that foreigners cannot own property within 60 miles of the border or 30 miles from a coastline. That used to be a compelling reason to avoid Mexico, but recently the rules have changed to encourage investment. Now there are two legitimate and easy ways to circumvent the problem, and those are 1) the use of a Bank Trust and 2) corporate ownership.

• The Bank Trust or Fideicomiso

Several major Mexican banks can create the Trust (Fideicomiso) in exchange for set-up and annual maintenance fees. Rather than give direct ownership to the foreign buyer, it establishes a bank-managed trust account to hold the legal title to the property on behalf of the foreigner. Trusts can be established for 50 years into the future and renewed at any time. The costs to set up the trust vary, but average $500-$800 plus about the same amount in annual maintenance fees. The property buyer is granted all rights of enjoyment of the property including the ability to remodel, mortgage, sell, or leave the property to heirs. Bank trusts are established by a Mexican attorney, the forms are standardized, and the procedure – which usually happens at closing – is routine, thanks to the large number of foreign property owners.

• The Mexican Corporation

Ownership of property through a Mexican corporation is another excellent option. As long as at least two people – for example, a husband and wife – are in the corporation, it can be wholly owned by foreigners. Once incorporated, the corporation can own property outright, completely eliminating the need for a Fideicomiso trust. Corporations can also legally rent and lease property, which is advantageous for those who want to divide their time between the USA and Mexico or who want to buy now but not live in the property until a future retirement date. Establishing the corporation is a relatively simple process that takes about six weeks and costs around $2,000.

Traditionally, real estate purchases in Mexico meant paying a lump sum in cash at closing. Fortunately, regulations have been updated and now cross-border mortgages are available through major financial institutions that have representatives in Mexico. Title insurance is used to protect owners if the title turns out to be invalid or if there are legal claims on the property, and works the same way it does in the states. Large, well-known U.S. title insurance companies can arrange insurance as well as escrow services to protect the buyer’s down payment until the transaction is completed.

Generally the seller will pay the real estate brokerage fees and the buyer is responsible for other total closing costs such as escrow fees and title insurance. The total cost is roughly comparable to those typically paid in the USA. Real estate transactions in Mexico are usually closed in about 60 days for a cash transaction or 90 days for a mortgage-financed purchase.

Before buying property anywhere – even in one’s own hometown – it is important to gain a familiarity of the location to understand particular nuances that cannot be realized by simply walking through a home or driving around a neighborhood. Experience the area first hand, by visiting or vacationing there. Get to know the neighborhood and talk to people, including both natives and transplants. Putting some time and effort into due diligence – or investing in the cost of having someone trustworthy and knowledgeable do it for a professional fee – is always recommended before buying real estate.

The best thing about doing this kind of research in Mexico is that the project can be dovetailed into a wonderful excuse for a vacation in one of the world’s prime holiday destinations. Plan the excursion ahead of time because it may also be possible to offset some or all of the trip expenses as investment planning or a real estate business deduction.

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About the writer: Tom Kerr is a freelance travel and finance writer based in the USA.