Step 3: Due Diligence and Obtaining Proper Documentation

Doing your homework includes: Ascertaining the status and transferability of the property, acquiring title insurance, making a physical inspection of the property, acquiring a statement of no liens, and acquiring an appraisal.

Status and Transferability

Determining the ownership status and transferability of a property is mandatory. For a property to be transferable there must be:

Possession of a title in the owner’s name
Transferability: a right to sell the property
No liens or encumbrances

Possession of Title in the Owner’s Name
A person must have rightful ownership with possession of title in his name. It is advisable to obtain consent of the spouse by having the new deed signed by both the holder of title and his/her spouse

Right to Sell/Transferability
Merely having possession of title and rightful ownership does not mean there is a right to sell the property.

Ejido land/Co-propiedad
An owner of ejido land, land within the restricted zone, has proper title; however, he is prohibited from transferring the property to a non-ejidatario. Likewise, the same applies for land that is a joint ownership of private property within a family, a co-propiedad. In both cases, if proper channels are not taken, you may be surprised when the rightful owner comes to reclaim his property and evicts you without any compensation for your loss.

Regimen de Condominio.
Federal law requires condominium developments to have a recorded regimen de condominio. A condominium unit can not be legally transferred without this required regimen.

Fraccionamientos
Subdivisions, fraccionamientos, must be approved by both the local and state authorities in order for the land and/or the house to be legally transferred.

The Fideicomiso

The Constitution of Mexico provides that a foreigner may not own property within 50 kilometers (31miles) of the coast or 100 kilometers (62 miles) of the national border. As a result, most of the Baja Peninsula is within the restricted zone. Currently, approximately forty-eight percent of Mexico’s land is in ejido ownership.

Before ejido land can be sold to outsiders, it must be fully privatized, which entails a lengthy application process which requires a minimum of seventy percent of the members of the ejido to agree on privatization, for undisputed titles to be established, and for parcels of land to be defined.

The first sale must include the right of first refusal, called The Derecho al tanto. It involves notification to the ejido president who then gives public notice of the intended sale. The following is the order a Mexico property offer must first be offered to: Family of the seller, anyone who has worked the property for one year or more, neighbors, and other members of the ejido. The sale may only proceed if no one among these four groups comes forward to purchase the property or raise an objection within thirty days.

To legally own land within the restricted zones, a bank trust (fideicomiso) must be formed. The foreign buyer becomes the sole and controlling beneficiary with the bank being the owner of record for the property. As beneficiary, you enjoy all the rights of ownership which include the right to rent the property, pledge the property as collateral, tear it down to construct a new dwelling, or to bequeath it to heirs.

A trust lasts for 50 years. Before expiration, the trust can be renewed for an additional fifty years.

If the trust is terminated, ownership transfers to the party named by the trust beneficiary as long as he has the legal capacity. If the fiduciary has not received instructions regarding its transfer, the property may be sold with the proceeds (after expenses) of the sale going to the beneficiary.

There are many benefits in creating a trust:

A trust may be modified to allow for new beneficiaries using a fairly simple procedure
The interests of a trust may be passed to heirs without the need of a probate proceeding in Mexico
A beneficiary may instruct the trustee to lease or rent the property for up to ten years with the rental income going to the beneficiary.
Although not a guarantee of title, a bank will do its own title search before issuing a trust

If you find Mexico property and is later sold to another foreign buyer, a Contrato de Cesión de Derechos Fideicomisarios may be used. The new deed must be registered in the National Foreign Investment Registry and a permit from the Secretary of Foreign Relations must be obtained. The new buyer may either request a new trust for a fifty-year term or request an assignment of the rights. It is probably more profitable to obtain a new fifty-year trust with a bank offering more favorable fees if the trust has annual fees of more than $500 and/or the term remaining is less than thirty-five to forty years.

A fideicomiso can not be avoided by forming a Mexican corporation as the owner of the restricted property and having the foreign buyer be the sole stockholder.

Title Insurance

Title insurance protects the buyer from financial losses resulting from title defects and prior liens, excluding physical defects. It assures clear title and transferability. It protects the buyer from previously undiscovered circumstances that may arise to threaten a buyer’s ownership of the property. Companies offering title insurance include: Stewart Title Guaranty de Mexico S.A. de C.V., First Mexico Group, and Fidelity National

A title policy guarantees the following:

Proper title to the estate or interests
Marketability of title
No defects, encumbrances, or liens
Right of access to and from property

A title policy does not guarantee the following:

Rights of eminent domain recorded after that date of the policy
Real Estate Laws, regulations, or ordinances restricting the use of property
Assessments or taxes not shown as existing liens
Liens, encumbrances, defects, or adverse claims which have been suffered, created, or agreed to by the claimant, created after the date of the policy, or known by the claimant but not a matter of public record.
Water rights (Mexico only)
Mineral rights (Mexico only)
Facts, interests, rights, easements, claims, liens, encumbrances, discrepancies or conflicts in boundary lines, shortage in area, encroachment or other fact which could be ascertained by physical inspection of the property or by making and inquiry of those in possession of the property, or which a correct survey would disclose
Confiscation, expropriation or taking of land by agrarian reform, revolution, insurrection, or political action (Mexico only)

Physical Inspection of the Property

Surprisingly, there are no disclosure requirements for real estate in Mexico. Besides doing your own physical inspection, you may also want to hire an architect or engineer to determine its condition. Obtaining a soil survey is also recommended.

Statement of No Liens

Certificado de libertad de gravamen
A buyer should obtain from the seller a statement of no liens, unpaid taxes, or other encumbrances on the property better know as a certificado de libertad de gravamen. A gravamen should include:

A legal description of the property
The owner of record
Boundaries
Surface area

Certificado de no aduedo
You should also obtain a certificado de no aduedo, a certificate of no debt, provided by the local tax office

Escritura publica
The escritura publica, the public deed, should also be obtained

Affadavit Regarding Debts Related to the Property
A buyer should obtain an affidavit from the seller stating that all other debts relating to the property have been satisfied. This includes:

Verification that all homeowners’ association fees are up to date
Verification that all household staff have been properly dismissed and compensated for in accordance with Mexico’s labor laws.

Social Security Clearance for New Construction (terminacion de obra)
For single family homes that are less than five years old a conclusion of work document (terminacion de obra) should be obtained from the seller. Secondly, a declaration that all worker insurance was paid during the construction should be obtained from the Social Security Institute (IMSS).

Appraisal (Avalúo)

To establish a value for tax purposes, an official appraisal (avalúo) of the property is required. The Notario orders the appraisal. The escritura should include both the official appraisal amount as well as the full purchase price paid for the property.

Secretary of Foreign Relations Permit and Registration

All foreign buyers who purchase real estate in Mexico must be registered with the Secretary of Foreign Relations.

Restricted Zone: You must obtain a bank trust permit. The new deed must be registered in the National Foreign Investment Registry.
Non-Restricted Zone: You must obtain a regular permit and register the new deed.
Vacant Lot: These permits should include a general development plan detailing the construction time frame and the amount of money to be invested.

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