REMEMBER; US Bank financing is BACK!
How to Make a Purchase:
Prospective Buyers and investors seeking Real Estate or homes in Los Cabos, Baja Sur, whether financing a property or paying cash, must remember to take into account the closing costs and the amount of time a closing will take. This is in addition to the purchase price and down payment. Typically, for financing, you will need a minimum 35% in down payment, plus the estimated closing costs, plus escrow establishment fees. Interest rates have come down on mortgages in Mexico. However, with the economic instability up north, they’re still viewed as a bit high compared to the rates now available for equity and new-purchases in the USA.
Find an agent you can work with, and use only that agent. “Agent Shopping” sounds like a good strategy, but in the end, ALL agents use the same MLS database. Once you’ve outlined your vision to your agent, they’ll be able to focus on your expectations, and during tours, that person will become an expert regarding your likes, dislikes, and concerns. Bouncing between agents, you’re very likely to be taken to the same properties you’ve already seen or discarded as unsuitable.
When buying real estate in Baja Sur, once your offer is accepted, if you’re paying cash, there are several steps (and fees) you and the selected closing service will contend with. If you are a foreigner, in order to own in the restricted zone, a Fideicomiso must be established. A Fideicomiso (Fido) is nothing more than a legal trust (much like a Family Trust elsewhere) held by a Mexican bank. This Trust confers upon its beneficiary every single right that any owner has when they buy real estate (including improving, selling, renting, passing on in a will, etc.) . Expect a one-time fee for trust setup, in addition to a small annual fee for trust management services with both setup and the first installment due at the time the trust is established. Note: The “Restricted Zone” is a strip of territory one hundred kilometers wide along the borders and fifty kilometers wide along the coast. It includes all of the Baja Peninsula. If you don’t live in the Restricted Zone, or are a Mexican citizen, a fedeicomiso is not necessary. You can title the property directly in your own name through an Escritura.
(1) Among the first steps in the Closing process on your Los Cabos home is securing the Permiso de la Secretaria de Relaciones Exteriores (SRE permit) which is your authorization from the Ministry of Foreign Investment to undertake the transfer of title/ownership. This request is made by the bank chosen to be your trustee, using information you are asked to provide including personal information, current ID, a telephone or electric bill with your name and home address as well as on the prospective alternate beneficiaries (who would become owners in your stead) in the event of your death.
(2) Another is obtaining a Certificado de Libertad de Gravamen, which is a certificate stating the property is free of liens, and an Avaluo y Deslinde. This is an appraisal of the property for tax purposes. This has nothing to do with the appraisals for loan purposes, nor with actual market value.
(3) A search of the title will also be made, and a certificate of clear title and history obtained.
(4) In addition, the person actually coordinating your closing will assemble their own set of identification papers for both sides, copies of seller’s ownership documents, and other materials the notario will require in order to complete the closing.
(5) A mexican notario, (a federally appointed public records keeper), will be selected to ensure that your property transaction is properly conducted and recorded, and that all government taxes are paid and regulations are adhered to by both parties. S/He is not working for you, the seller, the lender or the broker. The job is complex and notarios are paid substantial fees for doing it. Though notario fees vary they cannot charge more than the maximum fees as outlined by law. The depth and responsibility of their role in your transaction is exactly why many closings take up to 90 days
(6) Notarios also collect and pay (without adding a surcharge) the 2% acquisition tax paid by buyer, the ISR (comparable to capital gains tax) charged to seller, and any other state or local taxes in connection with the transaction
(7) The actual signing by both parties, the trustee and, if there is lending involved, by the lending bank, takes place before the notary, who retains the original of the document permanently. The notary, or a coordinator, will then process a certified copy of the document through the county tax registry (catastro) and Public Registry (a public record of all such transactions).
(8) Finally, execution of the fideicomiso must be registered before the Ministry of Foreign Investment, which issued the permit. Your trustee (a Mexican bank) is responsible for completing this step within 30 days after the title transfer has been approved. You’ll initially receive a draft of this document, and a certified original with all appropriate registry stamps about 8 months later. If you don’t receive notification of the final document’s readiness, check with your agent, who can locate and DHL the documents to you.
(9) Escrow and Escrow Fees – an escrow account is typically set up with instructions on how funds are to be disbursed. Mexican law does not recognize escrow accounts, so one of a select few escrow companies in the US is typically selected to handle all monies involved, receiving and transferring money as directed by the parties through interbank transfer. Stewart International is the most widely used in Los Cabos at this time. Closing costs may also be handled through 3rd party escrow, or in some cases deposited in “escrow” accounts maintained by the entity conducting the closing, such as the Settlement Company or P&H Closing. Escrow fees are paid by the buyer.
If you are planning to finance, several more items will likely be necessary:
(10) Title insurance is available but not required because lenders know if the sale passes muster with the Notario Publico, it is a legal sale, and the property title is not in question. Your agent will be watchful on your behalf, as will the Closing Dept. team, and assist you in deciding whether or not to order a policy.
(11) A U.S. style market appraisal will be required.
(12) Loan origination fees are paid to the lender, usually direct from escrow at closing. Closing costs generally run IN TOTAL about 4.5-9.5% of the purchase price. A closing cost estimate is created to aid you in calculating your potential closing costs, keep in mind that the lower the price of the home, the higher the closing percentage because most fees are fixed and added to the 2% acquisition tax.
This would mean, for example, that a lot costing $60,000 will probably garner closing costs of up to 10%, while an $8 million villa will run approximately 2.5%. Also remember, in Mexico, unlike the process you may be used to, it is customary that the buyer pay for all closing costs excluding agent fees and appropriate commission amounts, commission taxes, and any capital gains, which are paid by the seller.
Your presence at closing is not required. The actual Closing, completed in the Notario’s office, is easily handled through the designation of a representative listed in a Limited Power Of Attorney to act in your behalf. The Closing office will create the document for you, which you must sign before a notary in your state of residence. This document must then be ‘Apostilled’ by the Secretary of State in which you reside. Note that both of these steps will have additional fees involved in the US or Canada.
What is Fractional Ownership?
Fractional Ownership can be favorable for prospective buyers who intend to visit only a few weeks or months each year. For that group of users, the lower price paid to visit infrequently is worth the inability to redecorate or alter their surroundings. In the current market, however, it’s important to note that you can frequently find turnkey single family residences in gated communities with private or community pools and other resort style amenities for a similar amount, or less than the cost of a Fractional purchase.
Of course, these won’t always be ocean front beach properties, but they’ll be moments from everything with tremendous views, larger floorspace, and additional guest bedrooms & similar amenities.
You need to do your own research in this regard in order to determine what works best for you, but we want to aid in beginning your quest with the important differences between the two.
Fractional ownership refers to buying property with a group of other individuals and prospective buyers. People have been doing this for years as a means of ensuring an annual vacation. In some instances, family would get together and pool their resources to buy a vacation property the whole family could enjoy over the course of the year. You may have use this month, or these 2-3 months, and uncle Joe has that month, etc. In standard Fractional ownership, your weeks or months of usage change every year so that no individual owner gets all the primo times of year. Hence, you’ll know you have Christmas, or Thanksgiving, or Spring Break in specific years. Owners decide who manipulates the ‘calendar’, and that person is responsible for creating and distributing scheduled usage annually.
In today’s market, the developer or realtor finds buying partners for you. You must be careful if looking for this type of ownership on your own, as some very high end time share properties began using the term ‘Fractional’ a few years back as well, and time share usage is a whole different ball-game!
Just as often, your agent will be able to assist in finding and purchasing a Full-Time Fractional. This means the entire year is yours to occupy, either via vacation rentals for ROI, or personal use. In most cases these opportunities are actually “resales” and come with full title already registered.
Usually, Fractional ownership is also in a high-end resort or community, such as Villa la Estancia, Esperanza, Monte Cristo, Pueblo Bonito Sunset, etc. It is important to get in writing that your Fractional Ownership is actually Deeded (meaning you receive a Title to that UNIT) which you can use, rent or resell as you please. These high end vacation resorts will also have property management programs and rental pools that you can utilize for additional fees. Be aware there will be a rather hefty monthly HOA even for months you don’t own or occupy the unit.
In some instances, a Fractional Ownership is actually ‘undeeded’…sometimes the contract is written with a promise to ‘trust’ in the future. These are extremely difficult to resell, and usually you are forced to give the property back to the developer for resale purposes. Occasionally, your particular unit: the one you fell in love with, is not the one you’ll use during your visit. It may be ‘rented’ out much as a hotel suite as needed by the developer or manager, and your own visit will be in a similar suite with different views, etc.
You can see that offerings that are real property (deeded Fractionals) needed a way to differentiate themselves from the time share mentality/usage programs. Hence, the phrase ‘deeded fractional’ came into being. This phrase is supposed to convey to the potential buyer that this is real property and that the buyer will receive title to the property, the UNIT they loved, just as if they were buying a single family home.
Always keep in mind that because Los Cabos is within 50 km of the ocean, any purchase will involve a family trust with a Mexican bank and signing before a Notario Publico (a government appointed lawyer who presides over real estate transactions). If these steps are not part of the purchase process, the property under consideration is almost certainly not deeded real ownership, but a form of time-share contract of fractional use. Another good way to differentiate is to ask for title insurance from a US provider, which is always available for deeded fractional ownership.
We’re here, as your real estate professionals, to provide you with the necessary information to make wise decisions based on your own needs and vision of a future here at Land’s End. Don’t hesitate to ask those important questions. We have the experience and expertise you need because we live and breathe the local market, and are happy to aid in bringing your vision of a future Cabo lifestyle into your life today.