It was fishing that led me to real estate – and I don’t mean dangling a bottom-feeder offer in front of a desperate seller’s nose.
My genuine interest in property came from the constant wondering of “who is the lucky person to own that place,” while bobbing in a boat on a wondrous mountain lake or sparkling section of ocean.
Many years ago, while searching for yellowtail tuna with a group of older fishermen off the warm waters of Ensenada, Mexico, I was drawn to the tiny cottages that dotted the dry hills above the sea. What a place, I thought then. Who owned those spots?
Sometimes, nobody really knew – including the folks who had houses there. For Mexican families, it often did not seem to matter. For U.S. citizens seeking an affordable option to outlandish waterfront prices – especially second-home buyers and retirees – the property ownership question became a moving target.
Jack Smith, the late Los Angeles Times columnist, for years described his experience of building a weekend second home just south of Ensenada. His contractor, confidant and eventual longtime friend – the curiously wonderful Romulo Gomez – often frustrated and delighted Smith with his extremely casual “manana” attitude toward property rights, construction and life in general.
(“How will we get water?” Smith would ask Gomez. “The water will come,” Gomez would reply. “God will bring the water…”)
Smith, who died in 1996, compiled his columns into the legendary book, “God and Mr. Gomez,” a must-read for anybody building in a foreign country – or hiring a contractor anywhere. It also served as a reminder that Americans should understand the ramifications of obtaining an interest in Mexican property, especially near the water.
The Mexican Constitution prohibits direct ownership of real estate by foreigners in what has come to be known as the “restricted zone.” The restricted zone encompasses all land located within 62 miles of any Mexican border and within 31 miles of any Mexican coastline. However, in order to permit foreign investment in these areas, the Mexican government created a special trust, known as the “fideicomiso” in 1972. Since foreigners are not able to enter directly into contracts to buy coastal real estate, they must have a bank act on their behalf – similar to a trust established to hold property for minors.
The bank, as trustee, buys the property for the foreign buyer, and then has a fiduciary obligation to follow instructions given by the buyer. The buyer retains and enjoys all the rights of ownership, while the bank holds title to the property. The buyer is entitled to use, enjoy and even sell the property held in trust, at its market value, to any eligible purchaser. The trust lasts 50 years and is perpetually renewable.
According to Mitch Creekmore, director of business development for the Mexico Division of Stewart Title Guarantee Co., the horror stories present and past about Americans losing their Mexican property can be traced to the development process of the land and how the land is sold. Certain “ejido” properties – those set aside for Mexican farmers, cannot be sold before the ejido is privatized. This process, known as “regularization,” was created in 1992.
In some cases, U.S. citizens obtained a leasehold interest in an ejido property while awaiting its conversion to a fideicomiso. Leaseholders had built expensive homes on the leased land, yet could not afford the new terms when the property eventually gained fideicomiso status. Some terrific buildings were sold for bargain prices, while some other leaseholders were evicted.
“The most publicized case occurred southwest of Ensenada,” Creekmore said. “It was an anomaly because it involved the extension of ejido land boundaries. The Americans knew there were problems with the property, but they went ahead with their plans anyway. They were acting on a promise and it ended up as a nightmare.”
While ejido property is still being “sold” to unsuspecting Americans, properties offered for sale with title insurance policies and enforceable contracts of indemnity under a U.S. state jurisdiction are becoming more readily available.
The active participation of U.S. title insurance companies – including First American and Stewart – definitely has helped to delivery the acceptance of the new trust method of obtaining an interest in Mexican real estate. And, while U.S. banks are not eager to lend cash on Mexican property, the new trust arrangement, with proper title insurance, is beginning to open new financing doors.
(Next installment: A Canadian company goes to Mexico with a “no-high-rise” plan).
Tom Kelly, former real estate editor of The Seattle Times, is a syndicated columnist and talk show host. He can be reached at news@tomkelly.com.
