So...you want to purchase your dream home in Manzanillo...

Manzanillo has become an exciting and desirable place to live for those who are retiring, for those who are working from home on a computer link with their company, for those who are looking for a vacation home or an outstanding investment...above all, for those who dream of a better quality of life!

Home...the word represents security and comfort for the majority. All too often the word, when used in conjunction with a purchase of property in Mexico creates stress, worry, and at times has been associated with financial loss. This needn't be the case. Procedures in searching titles and transferring property are similar to those of the United States and Canada. The buyer of a house, condominium or lot in Manzanillo must ask the same questions, and should receive the same answers similar to those received when buying a property elsewhere.

Make sure you LOVE Manzanillo!

In considering the purchase of something so important as a home, it is necessary to have the right persons representing the buyer and his interests. The person you select should be familiar with the area, with basic real estate principles...and should impress you with his or her honesty and drive to find what YOU are looking for. Once you have found the person you feel comfortable with, stick with him or her, and let him do his job. The sales person who knows you aren't shopping around will generally work harder to find exactly what you are looking for. Remember, it is your money and your commitment. Do not be pressurized by someone who is charming, but who does not listen carefully enough to understand YOUR special needs.

Once you have chosen Manzanillo, an agent with whom you feel comfortable, AND a possible property, check out the neighborhood and ask questions. What will it look like in 10 years? Are highways and other development projects planned for the future? Where are schools, churches, shopping facilities? Are there homeowner fees for maintenance of common areas? If so, how much are they and when are they paid? Are all the utilities in and paid for? What does the developer have left to do? What building restrictions are there? Are their covenants and restrictions registered for the usage of the land?

In many areas of Mexico, there is no enforcement of a master plan or building code. This can effect the changing face of the neighborhood you select.

For example, you can buy a house and it has a beautiful view of the ocean. 180 degrees. The lot next to you is vacant and for sale. If it is sold, how many stories will the house be, and will it obstruct your view? Are there covenants to protect the vista from your back patio? What would you do if your one-story home, which has an incredible view of Santiago Bay, is obstructed by a 3-story monstrosity next door?

CLOSING COSTS

Closing costs will range from  1-1/2% to 30% of the total cost of your property. The higher the price of your property, the lower the percentage of total costs for closing. But, there are many varying factors. You will require the expertise of a lawyer, notary, and others. The fees will sometimes vary because you are a gringo (foreigner), and can sometimes be taken advantage of.  Always ask for the fees that will be charged up front! If your leave anything to chance, you'll be in for an unpleasant surprise.

Certain expenses for permits are fixed, regardless of the value of your property. Costs of transfer include title search, transfer taxes, bank fees, government permits and notary fees. Your seller may assist in some of these; especially those related to title search and insurance. Be sure to get a written estimate so that you will not be shocked at the date of the transfer of title! While a real estate agent may know the procedure, his or her specialty is to identify the correct property for you and to negotiate advantageous terms for the purchase. The technicalities of the transfer, negotiations for permits, registrations and so forth are generally more objectively and thoroughly handled by a neutral third party who does not have a financial interest in the transaction.

TITLE

Does your seller have a registered title to the property? Many foreign buyers, in order to avoid closing costs, or through ignorance, have paid for their property, taken possession of it, and have never  obtained a registered title! Ask for a copy of your seller's title documents and reserve the right to examine them prior to the release of any part of your payment. If they are in Spanish, have them translated, and if in doubt, consult with a neutral third party about their probably validity. Sometimes the seller has never acquired title to the property he is selling, but this can be remedied. The buyer should be aware of this conditions, however, and be certain that the person who accepts his offer is truly the holder of the title. Additionally, he should make arrangements for the additional costs, if any, involved in this double transfer, assuming it is possible.

UNDERSTAND THE MEXICAN BANK TRUST: FIDEICOMISO

Payment of the purchase price is not enough. In order to have a valid ownership interest in the property which you are buying, it is necessary to have a valid ownership interest in the property. The title must be recorded. This puts the rest of the world on notice that the property is yours. If you are a foreign person purchasing property in many parts of Mexico, the property will not transfer to your name, but to a Mexican bank as trustee for your interests. The Mexican constitution prohibits direct ownership of real property by foreigners in the "prohibited zone," a strip of land 30 miles wide along its sea coasts and 60 miles wide along its borders with the United States and Guatemala/Belize, as well as the entire Baja peninsula. This is the reason for the bank trust, the "fideicomiso," which has been established under the guidelines of the Mexican government so that foreigners may be protected in the property acquisitions.

There is a way where you can actually hold title to a property in your own name. The process begins by setting up a foreign-owned Mexican corporation and naming yourself as president and administrator. The property is then purchased under the Mexican corporation's name, and you, as president/administrator, have total control over the property. A Mexican corporation must register with Hacienda (the Mexican I.R.S.), and pay taxes, based on the use of the property. For example, if you have purchased a condo for an investment, and rent it out, you must pay taxes on your rental income.

Cost for having a notary set up a Mexican corporation can cost between $600-2,000 U.S., so shop around, and make sure you get a reliable notary who knows his business. (A "notario" in Mexico actually has more status and education than a lawyer. A Mexican notary is a attorney who has practiced his profession for at least 5 years, and has been appointed by the governor of the state in which he is practicing. His duties and obligations include: drafting of the deed, calculation of the seller's capital gains taxes and buyer's acquisition taxes, and to "give faith" to the validity of the signatures. The persons signing before him must prove they are who they say they are. Because the responsibility and potential liability for the actions of the Mexican Notary Public are considered higher than those of notaries public in the United States and Canada, the notary's fees will also be substantially higher than those charged on the other side of the border. These fees are based upon a rate schedule reviewed and approved annually by the College of Notaries Public, and are tied to the amount declared in the property transfer. However, some notaries have been known to charge exorbitant fees just because they are dealing with an uninformed foreign buyer.

According to lawyer and notary Juan Jose Serratoz, of Colima, there is a new law that allows a foreigner to legally hold title in his own name. It allows, on a case-by-case basis, for an individual to make application to Colima's Secretary of Interior Relations, requesting that the title of the property be placed in his name. Under this new law, they are given 15 days to respond with a "yes" or "no." If you know Mexico, nothing is ever accomplished by the government in such a short period of time, so if you hear no word, it means that you automatically get your requested title change.

Whether you are purchasing in a zone requiring a bank trust, or in an area where title can be taken directly into your name, it is necessary that this transfer take place and your interest registered as soon as possible after the successful conclusion of the negotiations to purchase your dream property. Until this transfer takes place you are vulnerable: the seller may die; the heirs may be unwilling to recognize your rights in the property; you may become involved in a lengthy and expensive probate proceeding. Meanwhile, your interest may not be recognized by the authorities should you wish to obtain a building permit; by the bank should you wish to borrow money and use the property as collateral or as part of your assets; by the courts should a third party also claim an interest in the land; or most importantly, should you decide to sell it.

The prudent buyer of real estate in the United States or Canada would not consider leaving his title "in limbo" in either of those two countries. One should not do so in Mexico, either.

The foreigner purchasing real estate in Mexico is buying personal, not real property if the acquisition is personal property.

How does personal vs. real affect the foreigner who acquires property under a Mexican bank trust? The effect is negligible. Instead of using the words: "transfer of title" one should more properly say "transfer of trust rights," or "assignment of trust rights." In practical terms the beneficiary has full control of the property. He may direct the trustee bank to: 1) lease the property; 2) sell the property; or 3)  mortgage the property. The foreign owner enjoys full rights of usage and may do anything to sell the property permitted under Mexican law. He enjoys the same rights of dominion as any Mexican citizen who has direct title to the property. He may construct a building, tear it down or modify it in compliance only with the local zoning and planning ordinances, or if applicable, the homeowner's condominium association.

A permit to acquire the rights in the property must be obtained from the Secretary of Foreign Relations and the terms of the permit form a part of the deed. Currently, the term for a trust is 50 years. Multiple renewals are permitted under the law. By requesting extensions each fifty years a property may be controlled by a family or business entity for generations.

PURCHASING A CONDOMINIUM

For those who are considering the purchase of a condominium or lot: Just as in other countries, the unit, or tract of land, must be legally described and an individual property must be registered in both the property tax office and in the public registry of property. Often a developer will spend time and energy on promoting the sale of the properties prior to completing the establishment of a condominium association. Fortunately, in Manzanillo, all condominium developments are established, and there is no problem. But beware, when buying in other areas. Until this is completed, legal title to an individual unit or lot cannot be granted since there is nothing to describe! Be sure to investigate the status of the condominium regime prior to completing the offer to purchase. Association fees vary. Ask to see a copy of the fees paid, and make sure they are current.

INSIST ON RECEIVING A REGISTERED TITLE

The purchase/sale document signed by buyer and seller is generally legally valid between the parties to the transaction It most likely contains the description of the property, the price to be paid to the seller, and any other special terms and conditions. It may be drawn up by the parties, their agent(s), or by a third party. It should be considered an interim contract, however. Until the final deed is drafted by, and signed before a Mexican Notary Public and duly registered, the transfer WILL NOT provide valid notice to third parties. This final deed must be recorded in the public registry office of the municipality in which the property is located. Mexico's land registry system functions in much the same manner as those in the U.S. and Canada.

Unless the deed for the rights of the beneficiary has been recorded, there may not be a remedy for the purchaser who neglected to obtain a registered deed...his interest, his investment, may be lost.

When a foreigner is acquiring residential property for which a bank trust is required, the purchaser should receive a deed which has been signed by the bank trustee before a Mexican notary. This will name the beneficiaries and substitute beneficiaries of the trust in accordance with the purchaser's instructions. 

A full description of the property must be included, seller's capital gains taxes paid, and buyer's acquisition tax paid. These receipts should be included in the deed document which may consist of 8-10 pages or more. The final page of the document should bear the stamp of the public registry, together with the book and page numbers, and the date on  which it was recorded. If this stamp is not on the document, the transaction has not been completed, the buyer is not fully protected.

FINANCING

If the seller will be financing your purchase, request that title be transferred to you and a pledge guarantee contract executed  guaranteeing payment. Traditionally, sellers have preferred to hold title to the rights in their name and transfer title to the buyer only upon receipt of payment in full from the buyer. Meanwhile, however, the seller may die, may disappear, may go bankrupt...a risky situation for the buyer. The prudent buyer will insist upon a transfer of title and registration of a mortgage or pledge in which he gives his rights in the property as security for payment of the remaining purchase price. In the event of default by the buyer, the seller must conduct a proceeding similar to a judicial foreclosure in the United States and Canada. It is troublesome, as is any foreclosure in any country in the world, but not notably more problematical. The registered title and recorded pledge or mortgage protection in having his loan recorded and will have an established legal proceeding to follow in the event of default by the buyer.

CLOSING COSTS

How to avoid unpleasant surprises... Mexican law says that taxes must be paid on the higher of the following: purchase price OR appraised value. Since many appraisals are lower than the actual selling price, your taxes will be considerably lower if the appraisal value is declared. Payment on this basis has taken place for many years in many parts of the country. It is, however, illegal. Should you choose to pay your costs based on this basis, please be aware that: 1) it is a violation of the law, and 2) your tax base will be low for declaration of value in the property when you sell it. Furthermore, if you are financing your property through an institutional lender, full value must be declared.

Here are some of the steps involved in obtaining a registered title. The costs for same will vary with the property and a written estimate should always be obtained prior to initiating the process. 

OFFICIAL APPRAISAL: The appraisal must be made by an appraiser who is usually an architect and who is recognized as a Perito Valuador, or official appraiser, by the property tax authorities in the municipality where the property is located. This is required prior to completing any transfer of title. If an institutional lender is involved, a commercial appraisal may also be required.

FOREIGN RELATIONS PERMITS:   If the property you are purchasing is already in a trust (fideicomiso) you may either: request assignment of the rights to you, or may request a new trust for 50 years. In either case, a permit from the Secretary of Foreign Relations is required and the new deed must be registered in the National Foreign Investment Registry. The difference in cost for the permit to establish a new trust and for a permit to assign rights is minimal. The factors to be considered are: 1) remaining term of existing trust--when will it need to be renewed?; and 2) what are the annual bank fees under the existing trust? Different banks charge different fees.

If the permit has a remaining term of less than 35 or 40 years and/or the annual bank administration fees are more than $500 U.S. dollars, it probably makes sense to obtain the permit for a new 50-year trust with a bank offering more attractive fees.

I.V.A.: The Impuesto Sobre Valor Agregado (I.V.A.) is a federal value added tax which is charged on all services. It is currently 15% of the value of services provided on mainland Mexico. This tax must be paid on services provided by the notary, the appraiser and any other professionals you use.

BANK ADMINISTRATION FEES: If title to the property is in a bank trust there will be annual fees for the administration of the trust. Over the past few years there has been a substantial decrease in annual fees (Competition thrives in Mexico!), and it makes sense to shop around for the most favorable rate. Traditionally, trustee banks have not sent annual statements. It is important to request a statement from your trustee bank at least 90 days prior to the anniversary of your trust, and you must pay on time to avoid penalties. If you don't take it upon yourself to follow through on this yearly, you could be in for a big surprise from the trustee bank when you go to sell your home in the future.

TITLE SEARCH AND INSURANCE: A title search is always a worthwhile investment. An investigation will generally indicate the registered owner, the chain of title, and will indicate liens, if any, against the property at the time of the investigation.

Title insurance, issued when the new deed is registered, guarantees the marketability of the property and is a requirement by most institutional lenders. 

PROPERTY TAXES: Unlike exorbitant property taxes in the U.S. and Canada, Mexican property taxes are negligible. For example, on a home valued at $150,000 U.S. dollars, your taxes run about $40/year.

ACQUISITION TAX:  The acquisition tax or transfer tax, is generally paid by the buyer. It is currently 2% of the declared value of the property.

CAPITAL GAINS TAXES: A foreigner who sells property in Mexico is liable under special rules, much like the United States, for the payment of the I.S.I.R. (Impuesto Sobre la Renta) which is the Mexican equivalent of capital gains tax, about 35% of the net value, taking into consideration the length of time held, the improvements made, commissions paid, and other allowable expenses. The formula is complicated, and a notary will do the computations.

The information in this article came from two sources:

The Settlement Company, providing escrow services and consultations for buyers of real property in Mexico. The Settlement Company is an independent third party, with more than 75 years of experience in property titles and transfers. E-mail Linda Neil: info@settlement-co.com or call (from U.S. or Canada) 011-52-114-20016 or FAX 011-52-114-22016. From Mexico, call 01-114-22006; FAX 01-114-22016.

David Nichols, American and long-time resident of Manzanillo, has owned and managed many properties over the years.  Nichols was also manager of Club Santiago, and holds title to several properties in his own name, proving it can be done! Although officially retired, Dave can be found rewiring his current residence with 220V electricity, or taking a snooze in his hammock, that's stretched out between two mango trees in his backyard.