Buyer's Guide

Deciding To Buy



Knowledge. Confidence. Engel & Völkers Snell Real Estate.

Understanding the importance of fully understanding the process of purchasing real estate in in Los Cabos is what has driven Engel & Völkers Snell Real Estate to successfully guide Mexican-real estate purchasers for more than 15 years. Today, Engel & Völkers Snell Real Estate is the recognized real estate leader in Los Cabos. In fact, we pioneered the use of Title policies and Third Party Escrow in Mexico in an effort to make your investment as safe as possible.

Each real estate transaction is guided by a full-time, bi-lingual closing officer who ensures the integrity of all of our closings – from start to finish. We understand the local regulations regarding ownership of real estate in Mexico by foreign investors and we put this knowledge to work for you – making sure your investment is protected and secure.

Below you will find some helpful information regarding purchasing in Mexico and also building your dream home in Mexico. If at any point you have any questions, please contact us at 866.650.5845 or email here.

BUYING IN MEXICO

Q. Can non-Mexicans own real estate in Mexico?

A. Yes! Ownership of real estate in Mexico is via a Mexican land trust called a fideicomiso (fee-day-coe-me-so). The trust has a term of 50 years and can be renewed in perpetuity to allow for long-term control of the asset or to will the land from generation to generation. For this purpose, we offer secure U.S. financing and Title Insurance on properties purchased in Mexico.

Q. What is the history of the Mexican property trust/fideicomiso?

A. With the advent of the North American Free Trade Agreement (NAFTA), the Mexican government recognized that it was crucial to make foreign investment in Mexico safer and easier for non-Mexicans. Because the Mexican Constitution prohibits non-Mexicans from purchasing or owning real estate within 60 miles of the U.S. international border, or within 30 miles of the Mexican coast, an innovative and secure method of holding title was created. This method allows non-Mexicans ownership through a Mexican property trust called a Fideicomiso. This is a trust agreement, much like an estate trust in the U.S., which gives the Purchaser all of the rights of ownership.

In order to gain the rights of ownership, the Department of Foreign Affairs in Mexico City issues a permit to the Mexican bank of the Purchaser’s choice, allowing the bank to act as Purchaser of the property. Essentially, the bank acts as the “Trustee” for the trust and the Purchaser is the “Beneficiary” of the trust. The trust is not an asset of the bank; the banks simply act as the Trustee to hold the trust.

Q. What is the function of the trustee bank?

A. Much like living wills or estate trusts in the U.S., the Mexican bank, or Trustee, takes instruction only from the Beneficiary of the trust (the Purchaser). The Beneficiary has the right to use, occupy, lease and possess the property, including the right to build on it or otherwise improve it. The Beneficiary may also sell the property by instructing the Trustee to transfer the rights to another qualified Purchaser, or bequeath the property to an Inheritor. The initial term of the trust is 50 years, however the trust can be renewed for additional periods of 50 years indefinitely, providing for long-term control of the asset.

Q. What rights do I hold as a purchaser of Mexican real estate?

A. The Purchaser holds the same rights as a property owner in the U.S. or Canada, including the right to enjoy, sell, rent, improve the property, etc. This is not to be confused with a land lease. The property purchased is placed in a trust with the Purchaser named as the Beneficiary of the trust — the Purchaser is not a lessee. If the property purchased is already held in a trust, the Purchaser has the option of assuming that trust, or having the property vested in a new trust.

Q. How long does it take to establish a trust?

A. At Engel & Völkers Snell Real Estate, we partner with Federal and State notaries for all of our closings in order to secure your trust. A “Notario Publico” in Mexico is much different than a Public Notary in the U.S. In Mexico, Notaries are specialized attorneys who act on behalf of the state and federal government in relation to any transaction; they are comparable to a U.S. Clerk of Courts.

On average, Engel & Völkers Snell Real Estate can obtain your trust within 60-90 days. In some cases title has been transferred in as little as two to three weeks. We oversee the entire process and make certain you understand each and every step involved. For your benefit, we can even provide you with a sample trust in English for your review.

Many real estate purchases in Mexico have only a simple buy/ sell agreement between the Purchaser and the Seller as evidence of ownership. This is not a safe method of ownership and is not recommended by Engel & Völkers Snell Real Estate or our Third Party Escrow provider.

Q.When do I pay for my property?

A. The Purchaser should only release funds when the Purchaser holds clear title. By utilizing our Third Party Escrow service, your money is held in an individually numbered escrow account until your trust is complete and the property rights have been transferred to you, the Purchaser.

Q. Is Title Insurance a necessity?

A. Whether you purchase real estate in the U.S. or Mexico, Engel & Völkers Snell Real Estate recommends Title Insurance for every property your purchase. We insure our cars, homes and our health — it is just as important to insure one of your largest investments: your property.

Title Insurance is available for properties in Mexico purchased by U.S. and Mexican citizens.

Fact: Just because you have a trust does not ensure you have free and clear title. Title insurance is a necessity.

Fact: In a Engel & Völkers Snell Real Estate property search, the property’s title is searched all the way back to the Mexican Revolution. Most trust-securing title searches only go back to one or two owners of record.

Q. How do I ensure ownership of the land that I am going to purchase?

A. In the trust document the Purchaser must name the Beneficiary or foreign Owner of the property. The purchaser can be an individual, multiple partners, a foreign corporation, an estate trust, a living will, or another entity. The Trustee of the trust (the Mexican bank) will take direction from whomever you name as the Beneficiary. Note: You can name a U.S. corporation as the Beneficiary of the trust. This is perfectly legal.

Remember:

•If you sell the shares in the U.S. corporation, you have created a real estate transaction in Mexico and all Mexican capital gains taxes apply.*

•You can own a property in a Mexican corporation and take title fee simple only if the property is for development or investment purposes.

•You cannot own property through Mexican corporation to bypass the trust process.

•It is against the law for a foreigner to own property in a Mexican corporation for residential purposes.

MANIFESTING YOUR CONSTRUCTION

Protect your investment. Record the cost of your new construction. Receipts alone won’t cut it.

The following is an overview regarding the manifestation regulations currently in place for individuals. Please note that the information is intended for individuals, not corporations. Over time these regulations may change, therefore it is important to make sure that the process outlined here is still in effect by contacting a certified accountant or Mexican Notary.

Q. What is manifesting?

A. Manifesting is simply recording the amount of money spent on a home’s construction or remodel, in order to add it to the Owners’ cost basis. Adding to your cost basis is the key to reducing your capital gains tax. Proper documentation and manifesting your construction are vital to building your new home.

Q. Why do I need to manifest my construction?

A. When you sell your home, the manifested cost plus the cost of your lot stated in your trust (title), will be used to determine the basis for capital gains tax. If you have not manifested your construction, Mexican tax law will not recognize your construction costs and you will not be able to use them as a deductible expense. All of your receipts, cancelled checks and bank statements will not help unless you have completed your manifestation. Before you begin construction, decide how to structure your financial arrangements with your contractor. The two main choices are Cost Plus and a Fixed Bid.

Q. What is a cost plus contract?

A. With a Cost Plus contract, the Owner pays the contractor for the cost of materials, plus a fee of 12 to 20 percent. Using this method, it is necessary to keep excellent records in order to prove all expenses. Each time you pay the contractor, he must provide you with a legal Mexican invoice called a “factura.” Each factura must be in the name of the Beneficiary named in the trust and will include an 11 percent sales tax called IVA. Without facturas, nothing you spend is deductible as an expense in Mexico. Also, with Cost Plus, you (not the contractor) are responsible for paying the Social Security tax for each person working on your home.

Q. What is a fixed bid contract?

A. With a Fixed Bid contract, the contractor quotes you a flat fee to build your home. A fixed bid includes all labor, materials, Social Security, etc. It is all-inclusive. When using the Fixed Bid process, the burden of record keeping is on the contractor, and you do not have to pay the 11 percent IVA sales tax each time you make a payment. It is, however, still necessary to receive a factura (Mexican invoice) from the contractor for each payment. The factura should reflect the amount of the payment due sans the 11 percent IVA sales tax. Mexican tax law states there is no IVA for the construction of a personal residence provided the contractor is providing an all-inclusive bid. Again, the Fixed Bid process is much less labor-intensive for you and puts the majority of the record keeping burden on the contractor.

Q. How do I pull a building permit?

A. The building permit is the first step to manifesting your property correctly. You will need the permit both to start construction and finish construction. The permit is pulled from the “Departamento de Obras Publicas,” the government Public Works office. Normally, the contractor will pull this permit. Be advised that there are two things you need to watch for:

1. Make sure the building permit is pulled in the same name as the Beneficiary named in your trust.

2. Make sure the building permit represents the approximate amount of the construction the contractor has quoted.

The fee for the building permit is based on the estimated value of your construction. In an effort to reduce this fee, some contractors will report a lower construction amount when pulling the permit. This is a huge mistake. You want your construction costs recorded accurately so that your cost basis will be accurate for capital gains.

Hint: When using Fixed Bid, make certain the contractor is in agreement to provide you with a factura with no 11 percent sales tax added for each payment. Remember to have this in writing in your construction contract.

Hint: Never report a lower construction value to save some money on the permit fee — it will cost you much more in the long run.

Q. What is a letter of termination of works and why is it necessary? LETTER OF TERMINATION OF WORKS

A. When construction is finished and you are ready to manifest your construction, you will need to take your building permit to the “Departamento de Obras Publicas” (Public Works) with a letter stating the total amount you spent on your construction and confirmation that construction is finished. You or your contractor can write the letter. With this letter, you will request an official statement of completion called an “aviso de terminación de obra,” which is a “Letter of Termination of Works.” This letter will state the amount you spent on your construction, which should be in accordance with the amount stated on the building permit.

The Letter of Termination of Works is the document that actually establishes your construction cost basis for the tax office.

SOCIAL SECURITY

Social Security is a very serious issue in Mexico. Your home can actually be liened or sold to force payment if taxes are not paid. Beware, this can happen even years after you finish your construction. If the amount of Social Security taxes paid corresponds to the amount of your construction, you will receive a letter from Social Security called “Carta de Razonabilidad de Pago,” which means “Letter of Reasonability of Payment.” This letter is very important, as it is your protection to prevent any future claims for non-payment of Social Security taxes. Before you can receive your Letter of Termination of Works, you will be required to have this letter from Social Security.

MANIFESTING YOUR CONSTRUCTION, FOR GOOD.

Once you have your Letter of Termination of Works and your letter from Social Security, you simply take them to the tax office (Oficina de Catastro). There, the value will be recorded and added to the cost reflected on your trust document. Once completed, you have successfully manifested your construction and established an accurate tax basis for your property.

Fact: If you do not have a trust, you should not begin construction. Without the trust document you cannot pull a building permit in your name and you run the risk of not being allowed to deduct your land cost or construction cost when you sell.

Fact: Annual property taxes are relatively low in Mexico, but capital gains taxes are not. Registering an inaccurately low number will cost you much more in the long run. Engel & Völkers Snell Real Estate will work with you to make certain that all your documents are in order and that your actual costs are recorded properly. Just as there are no shortcuts or legal ways around taxes in the U.S. or Canada, there are no shortcuts around taxes in Mexico. Your home is a costly investment and following proper legal steps will ensure a safe and enjoyable experience in Mexico. If someone says, “This is Mexico, and that’s the way we do it here,” then beware. Seek another agent or broker.

• Always get your trust.

• Always record the real value of your purchase.

• Always purchase U.S. Title Insurance.

• Always manifest your construction.

If you are considering a real estate purchase in Baja, make certain everything is done correctly. Allow Engel & Völkers Snell Real Estate to put our knowledge and experience to work for you. We are an independent brokerage, assuring our only interest is representing you in a safe, solid and secure real estate transaction.

For more information regarding buying in Mexico, contact us today.

Prepairing To Buy



Before you start shopping for your property, it is a good idea to make some preparations.

Build Your Green File.

A green file contains all your important financial documents. You will need it to secure financing for your property. The typical green file should contain:

  • Financial statements
  • Bank accounts
  • Investments
  • Credit cards
  • Auto loans
  • Recent pay stubs
  • Tax returns for two years
  • Copies of leases for investment properties
  • 401K statements, life insurance, stocks, bonds, and mutual account information.

Check Your Credit Rating.

Your credit score will have a huge impact on what type of property you can buy, and at what price. It is first recommended to check your credit rating with an experienced lending institution so that we can determine what you can afford. The lender will research your credit ratings from the three credit reporting agencies Equifax, Experian and Trans Union. We will be happy to recommend experienced, knowledgeable lenders in the residential, construction, and commercial and investment real estate fields.

Be Careful With Your Finances.

Now is not a good time to make sudden career changes or large purchases. You want to approach your property purchase from a position of financial stability.

Choosing A Real Estate Agent



Buying a property requires making many important financial decisions, understanding complex issues and completing a lot of paperwork. It helps to have an expert in your corner when undertaking such a large purchase. We can guide you through this process, and also provide you with access to property listings before they hit the general market.

Here are some factors to consider when choosing your real estate professional:

  • Look for a full-time agent – one who has experience completing transactions similar to yours.
  • Interview a few agents: Are they familiar with the area in which you are interested?
  • Ask how much time the agent will have for you, and if they are available at night and on weekends.
  • Ask about their credentials and education: A good agent will continually strive to improve and gain knowledge of the latest real estate trends and hold the highest designations in their respective fields of expertise.
  • Does the agent return your calls promptly? Time is money when attempting to buy a property.
  • Ask for a list of properties they have sold or a list of references.
  • Choose an agent who listens attentively to your needs and concerns. Pick an agent, with whom you feel comfortable.

Time To Go Shopping



Once those preparations are out of the way, it is time to find the right property for you.

Take a Drive.

Get to know the neighborhoods, complexes, or subdivisions, which interest you. Drive around and get a feel for what it would be like to own a property in the area. Start getting a sense of the properties available in those areas.

Narrow Your Search.

Select a few properties that interest you the most and have your real estate agent make appointments to visit them. Ask your real estate agent about the potential long term resale value of the properties you are considering.

Time to Buy.

Once you have picked out the property you want to purchase, your real estate agent can help you make an offer that the seller will accept. A good agent will investigate the potential costs and expenses associated with the new property. An agent can also help you draft your offer in a way that gives you the advantage over another offer.

Escrow Inspections & Appraisals



The Process, Step-by-Step

The Initial Agreement and Deposit.


An effective agreement is a legal arrangement between a potential purchaser and the property’s seller.

Some important tips to keep in mind to streamline the process:

  • Keep written records of everything. For the sake of clarity, it will be extremely useful to transcribe all verbal agreements including counter-offers and addendums and to convert them into written agreements to be signed by both parties. We will assist you in drafting all the paperwork for your purchase and make sure that you have copies of everything.
  • Stick to the schedule. Now that you have chosen your offer, you and the seller will be given a timeline to mark every stage in the process of closing the real estate contract. Meeting the requirements on time ensures a smoother flow of negotiations so that each party involved is not in breach of their agreements. During the process we will keep you constantly updated, so you will always be prepared for the next step.

The Closing Agent.

Either a title company or an attorney will be selected as a closing agent. The closing agent will hold the deposit in escrow and will research the complete recorded history of the property to ensure that the title is free and clear of encumbrances by the date of closing and that all new encumbrances are properly added to the title. Some properties are subject to restrictions which limit various activities such as building or parking restrictions. There may be recorded easements and encroachments, which limit the rights to use your property.

How to Hold Title.

You may wish to consult an attorney or tax advisor on the best way to hold title. Different methods of holding title have different legal, estate and tax implications, especially when selling or upon death of the title holder.

Inspections.

Once your offer is accepted by the seller, you will need to have a licensed property inspector inspect the property within the time frame that was agreed upon in the effective contract to purchase. You may elect to have different inspectors inspect the property, if you wish to obtain professional opinions from inspectors who specialize in a specific area (eg. roof, HVAC, structure). If you are purchasing a commercial property, then you will need to have an environmental audit done on the site for the lending institution. We can recommend several different inspectors.

Depending on the outcome of these inspections, one of two things may happen:

1. Either each milestone is successfully closed and the contingencies will be removed, bringing you one step closer to the close, or

2. The buyer, after reviewing the property and the papers, requests a renegotiation of the terms of contract (usually the price).

Appraisal and Lending.

It is imperative that you keep in close communication with your lender, who will let you know when additional documents are needed to approve your loan application and fund your loan. If the agreement is conditional upon financing, then the property will be appraised by a licensed appraiser to determine the value for the lending institution, via a third party. This is done so that the lending institution can confirm their investment in your property is accurate. Appraisers are specialists in determining the value of properties, based on a combination of square footage measurements, building costs, recent sales of comparable properties, operating income, etc. When you are within two weeks of closing, double check with your lender to be sure the loan will go through smoothly and on time.

Association Approval.

If the property that you are purchasing is conditional upon an association approval, request the rules, regulations, and other important documents from the seller as soon as you have an effective agreement to purchase. Make sure that the application documents and processing fees are submitted to the appropriate person at the association by the required time. Fill out all of the information completely and legibly so there is no delay in processing the application. If you are required to meet with the association for your approval, make an appointment as soon as possible for the interview. Most associations require a certificate of approval before move-in. Your closing agent will request that the original copy of this approval letter be brought to the closing, so that it can be recorded with the deed in the county public records.

Property Insurance.

If you are obtaining a loan, you will be required by your lender to purchase a certain amount of insurance on the property. The value will depend on the lending institution and the purchase price of the property. You may be able to save hundreds of dollars a year on homeowners insurance by shopping around for insurance. You can also save money with these tips.

    • Consider a higher deductible. Increasing your deductible by just a few hundred dollars can make a big difference in your premium.
    • Ask your insurance agent about discounts. You may be able get a lower premium if your home has safety features such as dead-bolt locks, smoke detectors, an alarm system, storm shutters or fire-retardant roofing materials. Persons over 55 years of age or long-term customers may also be offered discounts.
    • Insure your house NOT the land under it. After a disaster, the land is still there. If you do not subtract the value of the land when deciding how much homeowner’s insurance to buy, you will pay more than you should.

We will be happy to recommend experienced knowledgeable insurance agents for every property type.

Moving In



Closing Day

If you have come this far, then this means that it is almost time for a congratulations, but not yet. Do not forget to tie up these loose ends:

Final Walk-Through Inspection.

More of a formality than anything else, the final inspection takes place a day before, or the day of the closing. You will visit the property to verify that all is in working order, everything is the same as when you last viewed the property, that there are no extra items left behind, and that everything included in your purchase is still at the property.

Home Services and Utilities.

We will provide a list of useful numbers for the activation of home services and utilities after the closing occurs.

Be Prepared.

We are ready to assist you should an unforeseen glitch pop up, even at this last stage. Something at the property breaks down, or some other minor detail – no need to worry. We have encountered these problems before so we know how to handle them efficiently and in a stress-free manor.

Closing.

The closing agent will furnish all parties involved with a settlement statement, which summarizes and details the financial transactions enacted in the process. You and the seller(s) will sign this statement, as well as the closing agent, certifying its accuracy. If you are obtaining financing, you will have to sign all pertinent documentation required by the lending institution. If you are unable to attend the scheduled closing, arrangements can be made depending on the circumstances and the notice that we receive. If you are bringing funds to the transaction, you can elect to either have the funds wired electronically into the closing agent’s escrow account, or bring a certified bank check to the closing in the amount specified on the settlement statement. The seller should arrange to have all property keys and any other important information for you at the closing so that you may receive these items at this time.

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Emily has her finger on the pulse of Baja California Sur and works tirelessly to match her clients’ needs and lifestyle with the perfect home in Los Cabos. Contact her today to start your home searching journey!

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