Frequently Asked Questions.

Q:Is financing available?

Q:Is there a diversity in properties available in the Bay of Banderas?

Q:Trust System

Q:How does the process of buying a place in Mexico differ from buying a home in the U.S.?
- Dave J. - Seattle, WA

A: While the offer process itself is relatively similar, the escrow and title processes are somewhat different. The offer process is effectively the same with the exception that most agencies use a dual-column bilingual format so that the contract is in Spanish and in English, with the Spanish side prevailing under Mexican law. A counter-offer process follows and is very similar to that of the U.S., with the exception of back-up offers and multiple offers.

Once an offer has been agreed to by all parties, an earnest money deposit is placed in escrow with a reputable title company, such as First American Title or Stewart Title. These companies will hold the escrow funds (which are 10% of the purchase price for the earnest money deposit and the subsequent 90% funds for the balance of the purchase) until the closing and will disburse these funds according to a mutually agreed upon letter of disbursement signed by both the buyer and the seller.

Along the coastline and near the border of Mexico, foreigners can hold title through a fideicomiso (often called a "bank trust") vs. Mexicans who can purchase this property outright (or "fee simple"). The property is held in a trust through a Mexican bank, wherein the bank is the trustee, you are the beneficiary and you designate substitute beneficiaries upon your demise. The fideicomisos are active for 50 years and are renewable after that. (Do not be confused, this is NOT a "lease".) In fact, the original fideicomisos were effective for 30 years and many are currently in the process of being renewed to 50-year fideicomisos at this time. The process of renewal is relatively simple and inexpensive. Furthermore, in the event of death, the heirs do not need to go through probate as the property is in trust and they are already designated as the substitute beneficiaries. There is a process that is necessary with accompanying fees, but it is fairly simple.

In the event you have a loan secured by your Mexican property, the lender will require that they either have a mortgage ("hipoteca") against your property or, more commonly, establish a "fideicomiso en garantia" (referred to as a "guaranty trust). The lender will be placed in first position as the first beneficiary and you, as the borrower, will be on title as the secondary beneficiary. You still have the substitute beneficiary according to your designation.

It is important to note that anybody can be your substitute beneficiary, they do not have to be blood relatives. In addition, you can even have a charity as your substitute beneficiary, but the documentation will be extensive. If you wish to do this, you will need to plan ahead and provide this information to the Notario as soon as possible so that the fideicomiso bank will have sufficient time to review and approve the documentation.

The entire process can be as short as 30 days and most commonly is between 45 and 60 days. If the escrow includes any holidays, please make sure you plan accordingly, as governmental offices, including Notarios, may be closed, thus causing delays.

All of this is coordinated through your Realtor and the Notario Publico. While it sounds somewhat complicated, a good Realtor will make the process virtually effortless for you, only requesting certain documentation that will be necessary to complete the process. Pursue the adventure and enjoy the process of buying your new home in Mexico!

Q:What questions should I ask when selecting a Realtor in Mexico?
- Patty M, Los Angeles, CA

A: Selecting a Realtor is as important as selecting a doctor, attorney, or other professional advisor or confidant in your life. Purchasing a home is the single most important financial decision you’ll make in your life, so it stands to reason that selecting the professional that is going to guide you through that process is the most important aspect of making the right real estate decisions and getting the proper guidance. When selling a home, the Realtor selection process is perhaps even more critical.

Let’s look at the purchasing side first. Since purchasing a home is a lengthy process overall, from reviewing the market, to previewing the properties, to deliberating and negotiating once you’ve found the right property, to the entire escrow and closing process, a relationship is being formed with you and your Realtor. It is important that you are working with somebody that you trust and feel comfortable with as you’ll be very closely connected with them for months at a time. Often times, the bond that is created with a Realtor will continue on for years after as a friendship can easily be formed during this entire process.

The Realtor with whom you’re working must also understand you and what you’re looking for in a home. A good Realtor will listen to all your needs and wants in your prospective new home and will create a picture in their mind. From that picture they’ll rely on their research materials, such as the MLS, and their connections in the industry, to properly describe your desired home to others and search through all the listings available, weeding out those that don’t fit the primary criteria and alerting you to those which are most likely to suit your needs.

In the home search process, your Realtor should be able to respond to your questions, and/or get you the information from reliable sources that you need to make an informed decision. A seasoned Realtor knows that it’s not about making a sale - it’s about providing you with all the tools to make the proper decision for you. Only then will the sale come. Therefore, a good Realtor will not resort to pressure tactics. However, it is important to keep in mind that while you may be pressured in a particular situation because "another offer is coming" or "somebody else is interested in this property", it may simply be the Realtor keeping you informed, and not intentionally applying pressure.

From a selling side, experience, expertise, and professionalism would be the most critical elements to consider. While these are valuable in a buying situation, they are essential in a sales side. How many years has the agent been in business or in the area? How are they determining the value of your property - verifiable comps or "from the air"? What type of presence and reputation does he/she or, perhaps more importantly, their brokerage have in the community? Since the MLS is a primary means of marketing a property, are they a member of the MLS and the local real estate board (in Mexico, it’s called AMPI)? Have they sold your type of property before or, in some cases, your price range? What will they do for you in the realm of marketing? Will they be present at showings or are they just going to hand out keys? These are only some of the questions to ask and to have responded to with your satisfaction in order to determine who the best Realtor would be to work with in regard to selling your property. Of course, sometimes it just comes down to a gut level feeling and that’s OK too.

Q:I keep hearing conflicting rumors about changes in the Mexican Capital Gains Tax. Can you help clear up the confusion?
- Steven H. Phoenix, AZ

A: I have been getting many questions about this and since it requires a detailed answer, look for the continuation of my answer next week. The law regarding capital gains taxes has indeed changed, has always and will continue to change. Mexico is no different than any other country who levies taxes in that it will continue to modify its tax codes to meet its needs. That said; let’s look at what has changed, what has not, and what may continue to be the outlook for change for this aspect of real estate. The terms used herein are not the necessarily the legal terms under the law but are used for our discussion herein.

The modifications that have been made have effectively created three levels of capital gains taxes where there used to only be two. These levels are: total exemption; partial exemption; and no exemption. All areas have been modified, and the partial exemption is the newest category. Let’s look at each.

No Exemption: Simply put, if you don’t qualify for exemption of either type, you must either pay 25% of the gross sales price or 28% of the net gain (that’s 1% less than last year). Deductions that can be applied to get to your net gain include brokerage fees, capital improvements verified with facturas or an independent appraisal, and even an inflationary allowance.

Total Exemption: Total exemption means no tax due at all on an unlimited amount of gain if you resided in the property for five years or more and have the following documentation: FM-3 or 2, working status (with an RFC number, and maybe even with a copy of your tax returns for either FM status), escritura and receipts (such as telephone or electricity). Keep in mind that the exemption, whether partial or total, is intended for residents, thus these requirements are intended to be able to prove residency status to the Notario, and in turn, to Hacienda.

Partial Exemption: The same documentation as above is required, with the exception that it is only needed for a period of 6 months or more. However, only a portion of the value is exempt from taxes. The calculation is relatively complex and is based on an instrument called an UDI. UDIs were a financial instrument created at the time of the devaluation to bring economic balance and structure given the rapid decline of the peso. At this time, the UDI has a valuation of approximately 3 UDIs to the peso (this changes daily). The new tax law reflects that there is a partial exemption of up to 1.5 million UDIs, although this is not as simple as it seems. There is a fairly complex calculation that is involved and will need to be addressed fully in another article. Let it be said that for a full and accurate calculation of your capital gains tax obligation, whether partial or not, you must seek the counsel of a Notario Publico.

It is important to note that the Notarios do not make the law; however, they are empowered by Hacienda to enforce it and collect the taxes on behalf of individuals. The requirements for individual Notarios can vary, although they are attempting to standardize their documentation requirements for exemption to alleviate the need for shopping and consequently getting a different answer depending on the Notario with whom you speak. Also remember that the selection of the Notario is the choice of the buyer - after all, they are paying the bill. AT ANY TIME the tax law can change, so please ask your AMPI Realtor or Notario what the current law holds for you in relation to your capital gains tax obligations. (Look for part 2 next week.)

Q:I keep hearing conflicting rumors about changes in the Mexican Capital Gains Tax. Can you help clear up the confusion? - Part 2
- Steven H. Phoenix, AZ

A: This is the second in the series regarding capital gains taxes. In Part I of this series, we mentioned that there are now three levels of capital gains taxes instead of the previous two: total exemption; partial exemption; and no exemption. Here we address the most complicated aspect of these changes today - the partial exemption.

The partial exemption is based on an instrument called an "UDI". The law states that you can "exempt" up to 1.5 million UDIs (which rate changes daily). As of this writing, the rate of the UDI was at 3.825206 to the peso, or approximately $5.7M million pesos, or $520,000 USD. However, the exemption is based on a percentage calculation. Below, I’m going to show you two different sales. Both have the same sales price for today, but different purchase prices: one at $5,000,000 pesos (or approximately $455,000 USD) and another at $7,000,000 pesos (or approximately $635,000 USD). The calculations are for foreigners, as for Mexicans they can be different based on the Mexican’s tax base rate. The calculations assume an 8% brokerage fee.

$5,000,000 Peso Original Purchase Price:
Current Sales Price	$9,000,000	March 2007
UDI Deduction	($5,737,809)	(1.5M UDIs x 3.825206)
Amount Exceeding Deduction	$3,262,191	(36.25% of sales price)
Adjusted Purchase Price	($1,812,500)	(36.25% x $5,000,000)
Adjusted Real Estate Commission	($261,000)	(36.25% x $720,000)
Total Gain	$1,188,691
Capital Gains Tax Due	$332,833	(28% x $1,188,691)
$7,000,000 Peso Original Purchase Price:
Current Sales Price	$9,000,000	March 2007
UDI Deduction	($5,737,809)	(1.5M UDIs x 3.825206)
Amount Exceeding Deduction	$3,262,191	(36.25% of sales price)
Adjusted Purchase Price	($2,537,500)	(36.25% x $7,000,000)
Adjusted Real Estate Commission	($ 261,000)	(36.25% x $720,000)
Total Gain	$ 463,691
Capital Gains Tax Due	$129,833	(28% x $463,691)

(All prices listed above are in Pesos) Note that the Adjusted Purchase Price does NOT include any fiscal adjustment that would also be applied since the purchase of the property, which would effectively reduce the taxes to be paid. As to the real estate commission, IVA is not factored in for this calculation.

Now, let’s think about this for a second. In the first scenario, your REAL profit is approximately $3.3 million pesos ($9M, minus $5M, minus brokerage fees). That means that your REAL tax rate is just over 10%! ($332,833 divided by $3,280,000) - remember, that’s all pesos. If EVERYBODY had a 10% flat tax, I think we’d all be pretty happy about it. In the second scenario, it’s the same - just over 10%. While there are still criteria to meet for this, you don’t have to meet the most difficult criteria item, which is to reside in the home for 5 years; only 6 or more months. All things considered, this is not such a bad deal.

As you can see, despite the fact that some think that the 1.5M UDIs is an "exemption" to that amount and then you pay taxes on all the value that exceeds that, this is not the case. So despite the fact that you may have purchased a property exceeding the UDI exemption, the current law does have benefits for you too.

These figures are based on the law as of today and can change at any time. In addition, you MUST confirm all calculations in your particular situation with the Notario Publico in your transaction as each case is different and there may be idiosyncrasies of your deal that may affect your particular situation. As you can see from these examples, owning property in Mexico is still a very good investment.

Q:What are the things we need to look out for when thinking about ejido land?
- April Dice, La Cruz, MX

A: EJIDO. The word strikes fear and uncertainty into the minds of most foreigners. And well it should. Ejido properties (Mexican co-op farm land) are off limits to the foreign community, despite the fact that many have "purchased the rights to use" these properties through what is called a "prestanombre" (literally translated, lent name). However, for those who have dared to take the chance of not having legal title and borrowing the name of a trusted Mexican friend to hold their title, it appears that their risky behavior is about to pay off.

At a meeting held a few months ago in the little town of Mismaloya, the Ejido of Boca de Tomatlan, which controls the ejido beachfront, riverfront and hillside communities virtually from Mismaloya to La Troza, it was announced that the Ejido is in the process of being "regularized". So what is regularization and what does it really mean, and more importantly, what is the process in which to get your property regularized?

Regularization essentially means that you are taking an ejido property and making it into a fully titled property, allowing anybody, including foreigners, to ultimately be able to own this property. This is an enormous benefit as much of this property, like the beachfront land of the Boca Ejido, has incredible resale and development opportunities that are legally available to foreign buyers/owners only through the fideicomiso process (and not under the Ejido structure). Therefore, once a property is regularized, it can be titled and transferred as any other regularized property that you would find throughout Vallarta and the Bay.

The process, while sounding relatively unassuming, can be daunting, primarily due to the timeframes that can be endured. If you currently "own" or, through a prestanombre "have possession of", a parcel in this Ejido, you will need to provide the following documentation to begin the process:

1. Constancia Ejidal (this is the letter that was issued from the Ejido recognizing you or your prestanombre as the "owner" of the property).
2. Identification (if you are Mexican, this would be an Electoral Card and/or a birth certificate; if you are not Mexican, this would be your legal status in Mexico (i.e., FM-2, FM-3, etc.)

The procedure will be as follows:

• All properties in the Ejido will undergo full surveys. Each property will be measured to verify property lines and boundaries. It is important to note that if a discrepancy is found at the time of the survey, any issues and/or disputes must be resolved prior to the issuance of the title. For example, if a neighbor built a fence or a portion of his/her home on "your" property, this issue will need to be resolved prior to the title being issued. The reality is that the other party is now in "possession" of that property, so if you did not dispute it before, the likelihood is that they will now get title to that portion of the land. Of course, you will only be responsible for paying for the remaining property that will be titled to you, unless you are able to resolve the dispute with your neighbor. The ejido has little if any power to resolve these disputes. If you cannot resolve the differences, your property cannot be regularized. The survey process has already begun and can take several months.
• The identity of each property owner is determined by the Ejido, based upon your ’Constancia de Posesion’. See item #5.
• The required documents are then requested of each Ejido property owner. Please make sure that you only provide COPIES of these documents, as the Ejido will not be responsible in the event of loss of any documentation. Originals will be required for verification, but should not be provided for this process.
• Once all of the above has taken place, an Asemblea is conducted to formally recognize each individual owner, their specific parcel, complete with survey measurements. In the event a foreign buyer/owner, the Fideicomiso on behalf of the foreign buyer/owner will be recognized as the titulos will actually be held in the name of the Ejido itself. This is also the time where the pricing is agreed to be paid from the buyer/owner to the Ejido. In the event certain buyers/owners do not agree to the price structure, they will not be included in this Asemblea and/or agreement and will have to renegotiate at a later date. They will remain ejido owners without titles or escrituras until an agreement is made with the Ejido and the process is formalized in an Asemblea.
• It is very important to note that the title will be issued in the name of the "owner of record" with the Ejido, as shown on your "Constancia de Posesion". If you are Mexican, you will need to make sure that this is your name and it is accurate. If you are not Mexican and you have been using a prestanombre, you will need to have the records modified at the Ejido. For both Mexicans and foreigners, to make changes in the name of the "owner of record" means receiving a new ’Constancia de Posesion’ at the Ejido. There is a charge for this of $6,000 pesos and can take as long as a month to effect. Your physical presence is REQUIRED to make this modification (otherwise, anybody could do it without your knowledge). A title can only be issued in ONE person’s name. Therefore, in the event of a husband and wife or partnership, it is important to determine the proper name for the constancia, and therefore, the title.
• All necessary documentation is delivered to Guadalajara and the preparation of each individual "titulo" (title) commences. In the case of a foreigner, a titulo cannot be issued directly to them. Therefore, it will be issued to the Ejido and immediately transferred to the Fideicomiso on behalf of the foreign buyer/owner.
• Once the titles are returned to the Ejido, they will be issued directly to the owners, and in the case of foreigners, they will be transferred to the Fideicomiso of the buyer’s/owner’s choosing for preparation of the escritura.

Q:What are the things we need to look out for when thinking about ejido land? - Part 2
- April Dice, La Cruz, MX

A: Of course, there is another important question that you are probably asking right now. How much with this cost? Well, it’s "almost free" - well, not quite. PROCEDE (which is Programa de Certificacion de Derechos Ejidales y Titulacion de Solares) is the governmental forum that is in charge of converting or "regularizing" ejido land to titled land. PROCEDE is comprised of five agencies: SRA (Secretaria de la Reforma Agraria), PA (Procuraduria Agraria), RAN (Registro Agrario Nacional), INEGI, and SECODAM. All of the services of PROCEDE are completely and absolutely without charge! True. Ah, but don’t think the whole process is free... it is not. Engineers and/or surveyors will need to be employed and there will be fees involved in their services. (The homeowner’s association of the region, called Asociación Costa Platino, A.C., is paying for surveyors separately as well as other fees so that they can expedite the regularization process.) But most importantly, there will be fees that will need to be paid to the Ejido itself.

This is where there will be some bitter pills to swallow. When you "bought" your land from the Ejido, you paid a price for that land. In addition, you have been paying a "use fee", if you will, which has been in lieu of having to pay property taxes to the government. Also, if you transferred the property to another, you also paid a "transfer fee" of 10% of the value of the sale. During all of this time, you have still not been the "owner" of the property, just the "rights" to its use. Therefore, this process is going to require you make a final payment to the Ejido. Oh, I can hear it already - "But I ALREADY bought my land from the Ejido." Yes you did, but no you didn’t. The legal transaction that will recognize you as the titled owner of the property is now taking place. What happened before was out of the confines of regularization process and therefore is meaningless. It granted you the opportunity to get in on the ground floor, of sorts.

The Ejido now will establish a final payment for each square meter of land. There will actually be three prices in this zone as they will reflect pricing for the hillside properties, riverfront properties, and beachfront properties. It is important here to understand that a concerted and combined effort to negotiate pricing on these properties is in your best interest. There will certainly be more power in numbers, rather than attempting to negotiate independently the pricing of your individual lot. The association previously mentioned, Costa Platino, is organizing such an effort. Clearly, for those of you who "purchased" your property many years ago, you paid considerably less than what those who bought relatively recently would have paid. The bitter pill will certainly come with those recent buyers - but that is one of the many risks of purchasing ejido property. Therefore, a joint effort to negotiate the best pricing on all of these properties will make that pill easier to swallow. All property owners should join the Asociación Costa Platino A.C. to benefit from their work.

You will also have the cost of the Notarios to issue your paperwork. But you’re going to have to pay attention to this part. The title that you will get for the lot that you purchased from the Ejido will NOT show any improvements (house/condo). Remember, we’re talking about the regularization of the LAND that you purchased from the Ejido. Therefore, the improvements that you’ve made to the property will need to be incorporated into your ultimate escritura (this is different than the "titulo" that will be issued from the Ejido). This process is called "manifestation" and you will want to make sure that the full value of your property is manifested for accuracy on your escritura. You should consult with your Notario Publico for full and accurate information in your particular case regarding this process and the costs involved. Standard Notario fees will apply in relation to the preparation of your escritura, with the manifestation being additional.

Phew! That was easy. And how long did it take to get it all done? If everybody provided all their documents in a timely fashion, the surveys were conducted and there were no disputes, everybody agreed to the price structure from the Ejido the first time around, and the governmental process went like clockwork, it would be nine to ten months from measurement to escritura. Given that there will be border disputes, given that not everybody is going to agree with the pricing from the Ejido and given that documents will be lost, misplaced, and/or the governmental process itself will not be like a well oiled machine, plan on 1.5 to 2 years - if it’s less, you’ll be dancing in the streets (well, hopefully not too much as those buses are still blazing at about 100 mph even on corners). If it’s more, then we all know why. The good news, as if the concept that the ejido land can and will be regularized within our lifetimes (and hopefully in the relatively near future) is not good enough, is that any delay will probably only mean more money in your pocket from the appreciation that Vallarta continues to enjoy.

Thanks goes to Ing. Aurelio Urena Gonzalez of the Procuraduria Agraria for explaining the process and bringing this information to light, Dennis Owen of Asociación Costa Platino, A.C. for translating to all attendees at this meeting, and to Kelly Trainor of the American Consulate for keeping the American community informed of events that concern us.