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by Enrique (Henry) Saldana
I am constantly asked this question by clients wanting to obtain a mortgage to purchase property in Mexico, and my common response is, the bank does not require title insurance to close the deal, which is naturally a fact. However, to give a more appropriate answer to this question, I did some research and came across the following document which not only tries to answer the question, but gives us a good reference as to the legal aspects of holding fee simple title in Mexico, a quick overview of Mexican Real Estate Law.
I have thus selected some important excerpts from that document and have also included the link to that document, so you may read the full working paper*, and determine for yourself the answer to the above-posted question.
Jeffrey G. Boman, "Do Foreigners Need Title Insurance in Mexico? - An Analysis of U.S. Title Insurance and Mexican Real Estate Law" (October 15, 2006). bepress Legal Series. Working Paper 1836.
Abstract
This working paper* analyzes the title insurance industry in the United States and comparable institutions in Mexico. It begins with an overview of the history of title in both countries, followed by a description of their respective real estate systems. Finally, a summary of the laws that affect holding title to property in Mexico reveals that, although title insurance may provide other benefits for foreign investors, it provides duplicitous coverage for property in Mexico.
… An estimated 700,000 U.S. and Canadian citizens currently live in Mexico. However, the different legal systems of the United States and Mexico have produced different processes for acquiring title to property.
In the U.S.(and Canada), title insurance has become a part of almost every real estate transaction. However, until U.S. title insurance companies began offering policies in Mexico, title insurance did not exist in Mexico. It is the purpose of this paper to analyze title insurance and its comparable Mexican institutions, as well as to produce a conclusion regarding the necessity of title insurance for individual purchasers of property in Mexico in the present and the near future.
To avoid … restrictions that prohibit foreign ownership of land in the Restricted Zone, many foreigners set up legal trusts with Mexican banks. These trusts, in which a bank holds title to a property in trust for a foreigner, are called "fideicomisos."
The fideicomiso has become the common vehicle through which foreign individuals acquire Mexican real estate in the Restricted Zone.
Thus, a Mexican bank still holds the title in trust for the foreigner, but that trust can be renewed every 50 years and is transferable.
The real estate systems of both Mexico and the United States (and Canada) have similarities and differences. However, the major difference in the two systems is the transfer of title.
U.S. real estate transactions involve title and escrow services to act as an impartial third party to research, transfer, and guarantee title while the public offices of the Public Notary and Public Registry handle these services in Mexico.
All trusts concerning real property must be recorded in the public registry where the property is located …
Escrow Services
In U.S. real estate transactions, buyers and sellers usually employ an escrow service to act as an impartial third party. These services handle the exchange of money, documents, and ultimately the transfer of title if all parties agree and perform the contracted obligations. The company from which the buyer purchases title insurance usually provides escrow services. There is no parallel, private service in Mexico.
In the U.S. (and Canada), title insurance companies research and insure title as well as indemnify the owner in the event of a loss. The comparable entities in Mexico are the Public Notary and Public Registry. These public offices research, record, and provide legal protection for individuals who purchase title to property in Mexico.
The Public Notary performs the services of a U.S. escrow service by providing an impartial third party to handle the transfer of title. Title is transferred through the Public Notary and then recorded in the Public Registry.
Do Individuals Need Title Insurance in Mexico?
In Mexican real estate transactions, there are three places where liability can fall in the event of a title discrepancy. These places are the Public Registry, the Public Notary, and the seller of the property. … In the case of an omission or error, the Registry and its officials are liable for the mistake.
After the Registry issues a certificate stating that the title is clear of encumbrances, the Public Notary is then charged with determining the legal accuracy and completeness of the documents in a transaction.
Therefore, even if a title discrepancy is overlooked, a purchaser of real estate receives a presumptive validity of title from the Public Notary's formalization of the transaction. If a mistake in the transaction results in a loss, the Public Notary is responsible to fix the mistake.
Finally, sellers are required to warranty title of property they sell unless the title problem is included in the transaction. This provides a third layer of protection for a buyer of real estate in Mexico.
Analysis
With these three layers of legal protection, a foreigner does not need to purchase title insurance for a property in Mexico as long as the real estate transaction is formalized by the Public Notary and recorded in the Public Registry. The "negligence gap" in U.S. law that created the need for title insurance does not exist in Mexican law.
Mexican law provides multiple sources by making the seller's warranty the title of their property, Public Notaries responsible for the accuracy and legality of the their transactions, and the Public Registry liable for the accuracy of its information.
A distinction should be made between a foreigner who wishes to reside in Mexico and a foreigner who wishes to purchase property in Mexico as a second residence or vacation home.
Foreigners who wish to purchase property in Mexico but do not intend to reside there, consistently employ reliable, local counsel, or educate themselves about the civil legal system should consider title insurance as a cheaper, simpler, and less time-intensive way of resolving a problem, should one occur.
Therefore, even though Mexican law provides protection and compensation for mistakes and losses of title in real estate transactions, this does not mean that a problem will not arise and have to be litigated.
If a foreigner has the resources to litigate in Mexico and/or knows reliable Mexican counsel, purchasing title insurance for the purpose of gaining access to local litigation services would add no value to the transaction.
Title Insurance in the Future
It has … been shown that Mexican law provides ample legal protection to ensure that purchasers of real estate in Mexico will be able to receive legal title and will be compensated in the event that a defect occurs.
There are … possible explanations for the increase in title insurance in Mexico. The first is the complacency of U.S. (and Canadian) citizens in accepting title insurance as a part of every real estate transaction … because they are not informed of the rights and remedies that Mexican law affords them in relation to title problems with real estate.
(And) As Mexico develops technologically, … U.S. (and Canadian) citizens will become more familiar with Mexico's real estate processes and relevant law. They will realize that Mexican law already provides the coverage offered by title insurance. Consequently, as Mexico becomes a more advanced and integrated nation, the need for title insurance will most likely decline.
Read the full working paper.
*A working paper is often a record of a project's research activities or interim findings.
This article is courtesy of Enrique (Henry) Saldana, Mexico Realty Solutions. Feel free to contact us at: moneylendingbus@hotmail.com; www.mexicorealtysolutions.com; Tel. 984-147-0100, Cel: 984-111-8743; Skype: Henrys1955. Check our new Mexico MLS Network system: www.mexicomlsnetwork.com.
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