Purchasing real estate in Mexico, especially for foreigners, is a dream for many, but it comes with its own set of challenges if you are not familiar with the buying process. I serve clients in the Los Cabos area of Baja California Sur, where the real estate market continues to evolve dynamically.
Whether you are seeking a vacation home, investment property, or retirement spot, understanding the legal and financial implications is crucial. In this blog article, I’ll cover the top three mistakes people make when buying real estate in Mexico and how to avoid them.
1. Not Understanding the Fideicomiso Process
A common mistake foreigners make when buying property in Mexico is not understanding the fideicomiso process. In the restricted zone (50 kilometers from the coast and 100 kilometers from borders), property must be held in a bank trust.
This legal structure allows foreign ownership while protecting Mexican sovereignty. It’s essential to fully comprehend how the fideicomiso works before purchasing property.
Many buyers misunderstand the fideicomiso process or overlook its costs. A Mexican bank acts as a trustee for the property, while you retain control, including the ability to sell, rent, or modify it. You as a buyer have the right to select the bank you want to do business with. Shop around for the best rates and customer service!
There are annual fees for maintaining the fideicomiso, which can range from a few hundred to over a thousand dollars. The fideicomiso is typically set for 50 years, after which it can be renewed. A common myth out there is that you’re “leasing” your property, which is not true. You hold the property title.
Before proceeding with a property purchase, make sure you fully understand how the fideicomiso works, including:
- The fees involved with creating, transferring, and potentially canceling the fideicomiso
- The process for transferring property in the event of a sale or inheritance
- How the bank trust structure works legally and financially
Taking the time to ask questions and understand these aspects will help you make an informed decision and avoid any surprises later on.
2. Skipping Proper Legal Due Diligence
Another critical mistake is skipping proper legal due diligence. Just as with any property purchase, you must verify that the property you intend to buy is free of legal issues. In Mexico, failing to conduct thorough research can lead to serious consequences down the line.
This includes verifying the property’s title, ensuring it is free of liens or encumbrances, and confirming that the seller has the legal right to sell the property. These steps are especially crucial in Mexico, where property records are sometimes less accessible or harder to navigate than in other countries.
When purchasing property in Mexico, you should focus on the following key areas:
Title Verification
Ensure the seller has clear title to the property. If there are issues such as unpaid debts or unresolved legal disputes, you could inherit these problems.
Property Encumbrances
Research if the property has any unpaid debts or restrictions, such as easements or zoning violations. A property may appear perfect at first glance but have underlying issues that could affect your enjoyment or resale value.
Seller’s Legal Right
Confirm that the seller is the rightful owner of the property and has the legal right to sell. In some cases, sellers may not be legally authorized to sell a property if there are family disputes or inheritance issues. In Baja California Sur, we have a Multiple Listing Service (MLS) similar to those in Canada and the U.S., which enhances transparency and provides valuable market insights. Additionally, real estate agents must be certified and licensed, ensuring a more professional and regulated buying process.
Developer’s Reputation
If buying from a developer, investigate their history of completing projects on time and within budget. Buyers should check whether the developer has any legal disputes or a reputation for delivering substandard properties.
Working with a reputable real estate agent who is experienced in the local market and a real estate attorney who is familiar with Mexican property laws can help ensure the legal due diligence is completed correctly. Having local expertise on your side will provide peace of mind.
3. Underestimating Total Costs
A common mistake that many buyers make is focusing solely on the purchase price of the property and underestimating the additional costs involved in buying real estate in Mexico. The reality is that property purchases often come with hidden costs that can add up quickly, especially for foreign buyers unfamiliar with the process.
Some of the additional costs you should be prepared for include:
Closing Costs
In Mexico, closing costs are typically higher than what foreigners might expect, sometimes ranging from 6-10% of the purchase price. These can include an acquisition tax, notary fees, registration fees, and various taxes associated with the transaction.
Property Taxes
Annual property taxes in Mexico in general or in Baja California Sur are generally lower than those in the United States or Canada, but they still need to be factored into your budget. These taxes are typically based on the property’s value. Paying your property taxes early, also called “Predial“, (usually by the end of February) can qualify you for a 10-20% discount. Property taxes in Cabo are based on the government-assessed value, which is often lower than the actual market price. As an example, for a $400,000 USD condo in Los Cabos, you can expect to pay roughly $400 USD for your annual property taxes.
Notary Fees
A notary public is involved in every real estate transaction in Los Cabos, Mexico. The notary is responsible for verifying the legitimacy of the sale and ensuring that all legal requirements are met.
Capital Gains Tax
If you decide to sell your property in the future, be aware that there are potential capital gains tax implications. Mexico imposes a tax on the profit made from the sale of a property, which varies depending on how long you’ve owned the property and the value of the gain and your residency status.
Maintenance Costs
Owning property comes with ongoing maintenance costs, including utilities, insurance, and general upkeep. If you plan to rent your property out, you’ll also need to budget for management fees, marketing, and repairs.
While it’s tempting to focus solely on the price of the property, it’s essential to budget for these additional expenses to avoid surprises and ensure that your investment remains profitable.
Avoiding Pitfalls and Ensuring Success
To avoid these common mistakes, it’s important to do your homework, seek professional advice, and fully understand the legal and financial aspects of purchasing property in Mexico. Take the time to explore the fideicomiso process, conduct thorough legal due diligence, and budget for all associated costs. Doing so will help ensure a smoother and more secure real estate transaction.
If you’re ready to explore the exciting real estate opportunities in Los Cabos Mexico, I’m here to guide you every step of the way. From understanding legal processes to helping you find the perfect property, I can help make your dream of owning a home in Mexico a reality.
Contact me today to get started on your real estate journey in Los Cabos!