Buying That Dream Home -- In Mexico

The real estate market heats up south of the border.
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When the cruise ships started coming to Mexico's Costa Maya, mainly two small towns called Mahajual and Xcalak, about four years ago, property values soared.

Prices "have been consistently increasing at 20% a year for the last four to five years," says Denis Couture, a Detroit-based real estate developer and broker who has been buying and selling property in Costa Maya since 2000. "I bought two properties four years ago and they have appreciated 20% each year."

In fact, over the past five years, home values have increased all across coastal Mexico. Although some investors have pulled out after lost investments due to the slowing U.S. housing market, there is no reason to believe the homes in Mexico will not continue to appreciate, experts say. And though there are a number of drawbacks to living south of the border, there are a lot of benefits, too.

"American interest in Mexican property as a weekend getaway, summer holiday retreat or a retirement home destination is strong," says Brent Gleeson, co-founder and president of

NewCondosOnline.com. "And with more and more baby boomers coming to retirement at a time when pension incomes are not buying a lot in America, Mexico is continuing to witness inward flows of American migrants seeking a better quality of more affordable life."

An estimated 1.5 million Americans currently own property in Mexico, says Oscar Franck, managing director of Integra Realty Resources, a commercial real estate valuation and consulting firm. "Overall real estate foreign investments in Mexico for the 2007 period continue on an upward trend," he says.

Buyers see property in Mexico as both an attractive investment and a great asset, given that they view Mexico as a relatively safe and stable nation, says Gleeson. "Property values have been going up steadily every year for the past five years. Values do not climb at the pace they do in the U.S., but they also do not skyrocket to overvalued levels leading to a bubble," he adds. "The pace of Mexico real estate appreciation is healthy in most areas."

Americans are attracted to newly redeveloped areas along the Baja California peninsula, such as Ensenada, La Paz, Loreto Bay and Bahia de los Angeles. But they also continue to purchase residences in traditional locations such as San Miguel Allende and Lake Chapala (near the City of Guadalajara, and Cuernavaca near Mexico City), says Jorge A. Vargas, a University of San Diego law professor who is an expert on Mexican real-estate law.

CB Richard Ellis

(CBG)

, a global real estate services company, ranked Puerto Vallarta, Cancun, Ensenada-Rosarito, Acapulco, Puerto Peñasco, Los Cabos, and Mazatlan as the most popular residential sales locations. The company's study calculated that 70% of the first-time buyers are foreigners, principally Canadian and U.S. citizens. The rest are Mexican citizens.

"Many Americans are rushing to invest in coastal areas, especially in Baja California," says Vargas, who penned a paper this year called "Acquisition of Real Estate in Mexico by U.S. Citizens and American Companies."

But there are drawbacks. Vargas adds that sellers aren't fully disclosing to American buyers potential environmental and structural issues, such as the limited water supply along the Baja California peninsula or the lack of proper sewage systems, which can lead to illegal discharges of sewage in areas where the developments are located.

"Most of these brand new real estate coastal developments are starting to have serious defects," he says. "The peninsula has very limited and few underground aquifers. If these developments continue at a very high pace, it is likely that the aquifers will be exhausted sooner than later, thus creating very serious problems for their occupants. Maybe in 50 years or less the peninsula will exhaust all of the limited water deposits and this may become an international problem for Mexico."

Some wary buyers have also been querying real estate agents more about how the dollar losing value against the peso might affect home appreciation values. But at least on that score, even though the peso has been increasing in value relative to the dollar, the change might not be impeding the market very much. "Sellers set their prices by the dollar," says Couture, "and there is little correlation to how the peso is doing."

Lynne Bairstow, director of marketing and operations for Punta Mita resort, agrees. She says the resort's real estate is priced in dollars, as is that of other resort areas in Puerto Vallarta and Cabo.

More than 90% of owners at Las Palomas Beach & Golf Resort, a 350-acre golf community and an upscale full-service destination resort located on Sandy Beach on the Sea of Cortez, are Americans. The master plan, designed by Swaback Partners, includes some 2,000 residences, each individually owned, at prices ranging from $340,000 to $1.9 million. Nearly 1,000 units have been sold in less than four years, its agents said via a release. The marketing team expects sales to grow even more as the commercial flights and a new highway make the destination more convenient and accessible.

With property taxes in most municipalities in Mexico at a fraction of the cost of those across America, the low cost of living and often-favorable climate, Mexico is an appealing place for retirees and investors, say others.

"There has been a whole world of real estate market potential in Mexico during 2007, which will continue in to 2008," says Gleeson of NewCondosOnline.com. "We will definitely see more expansion in the Mexico real estate market in 2008 and beyond."

How Foreign Real-Estate Ownership Works in Mexico

American citizens looking to buy real estate in Mexico need to know that non-Mexican citizens are restricted from actually purchasing land in many parts of that country.

The Mexican constitution prohibits foreigners from having direct ownership of real estate in its "restricted zone." This zone includes land located within 100 kilometers (62 miles) of any Mexican border or within 50 kilometers of the coastline, and constitutes almost half (45%) of Mexico's territory, including the entire Baja California peninsula, where many Americans flock.

So how is it that Americans end up with coastal property in Cabo San Lucas, Acapulco or Cozumel? The title to the property is actually held by a Mexican trustee -- perhaps a friend or a Mexican bank. And the "buyer" -- in this case, the American investor -- becomes the beneficiary. This real estate trust, called a "fideicomiso," allows the beneficiary to develop and use residential property, or even instruct the bank to sell or lease it.

"These restricted areas in Mexico adversely affect small investors, such as retirees, who must undergo the cumbersome and costly fideicomiso system," says Jorge A. Vargas, a University of San Diego law professor who is an expert on Mexican real-estate law. As a result, some politicians, bankers, entrepreneurs and other investors are looking to change the system.

"Japanese investors have been demanding an open and outright system whereby Japanese companies can own directly any real property anywhere in Mexico, especially in coastal and border areas," says Vargas.

As it stands now, the same restrictions do not apply to land in the interior of Mexico. Thus, a trust is not needed if you're purchasing land in Mexico City or Hidalgo, though those areas aren't usually as desirable as beach-front property.

Outside of the expense of Mexican real estate attorneys to help you wade through the paperwork, the trust, and thus the land, behaves essentially as if it is yours for 50 years, as any given land can be held via a trust for 50 years with a renewable 50-year term.

Sheree R. Curry is a freelance journalist who writes primarily about real estate, management best practices and personal finance. She lives in the Minneapolis/St. Paul area. Learn more about her at her Web site, www.currymedia.com