Why Mexico Has Come Of Age As Retirement Property Market

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Why Mexico Has Come Of Age As Retirement Property Market

BY DAVID DEVOSS
FOR INVESTOR'S BUSINESS DAILY

Posted 4/20/2006

Fifteen years ago, San Felipe was an impoverished Mexican village at the northern end of the Sea of Cortez. Its fishing industry was moribund. Its farmland lay fallow.

American snowbirds who arrived every winter were about the only reason the town of 16,000 had a cash economy at all.

Still, former Marriott Corp. executive Patrick Butler saw only potential when he got there in 1993, just before the signing of the North American Free Trade Agreement.

San Felipe was off the beaten path, though just a six-hour drive from Phoenix and less from San Diego. The town's fishermen were poor, but they enjoyed a quaint port on a tranquil sea 15 degrees warmer than the nearby Pacific Ocean.

Butler realized any warm-weather beach town near a large population is bound to appreciate in value. So he bought 200,000 desolate acres for $12 million and named his new property El Dorado.

Today, Butler's Club Acquisition Co. presides over two hotels, a gated community of 750 homes and lots, 700 condominiums and a seaside golf course. These generated over $80 million in revenue from property sales, rentals and management fees last year. Revenue is set to top $110 million in 2006. No longer sleepy, San Felipe has a population of 25,000, including 5,000 Americans.

Those Americans account for 70% of all spending and are seeing their retirement properties appreciate 10% a year.

"NAFTA reforms and new laws protecting foreign investment are fueling a booming market in retirement property," said Butler, 61. "More than 1 million Americans live in Mexico. And that number will grow, if only because over the next 20 years 10,000 baby boomers every day will reach age 50."

In response to America's demographic, luxury developments are sprouting along Mexico's Pacific coast. Near Mazatlan, Butler's company is building an 816-acre gated community called Estrella del Mar.

Ground zero in the Mexican land rush lies between Rosarita Beach and Ensenada on Baja's west coast. Condos, town homes and detached villas there are appreciating 20% a year.

In Ensenada - where 40,000 Americans own property - English is the lingua franca, the dollar is the currency of choice at big box stores and most new homes have infinity pools and fast Internet access.

Mexico has always offered the prospect of comfortable retirement. But investing in a home there was long seen as risky. Land titles were murky, banks charged exorbitant interest and Mexico's judiciary rarely ruled in favor of a foreigner.

"In the past, a buyer would pay 30% down and the seller, or developer, would finance the balance," said Juan Moreno, a real estate attorney with international law firm Bryan Cave. "The danger was that the buyer did not get title to the property until the loan was fully paid. Because he didn't have title he couldn't get title insurance. And if his payments were delinquent for two consecutive months he could lose everything."

Reforms that have made Mexican real estate investing more secure began in 1993. The country's Agrarian Law was amended that year so members of ejidos - peasant collectives that received land after the Mexican Revolution - could sell their individual parcels once the land was privatized.

NAFTA's passage the next year created dispute-settlement provisions to protect direct foreign investments. In 2000, Mexico's Negotiable Instruments Law and Commerce Code were changed in ways that allow expedited foreclosure procedures. Reforms in 2003 provided for regulation of Mexican real estate agents, ethical guidelines for property developers and recognition of U.S. title insurance.

As the result of those reforms, a number of U.S. firms including First Capital Mortgage, General Electric's  (GE) unit GE Capital and CS Financial now offer mortgages to U.S. citizens buying in Mexico.

"Mexico's laws were changed several years ago," Moreno said. "But it takes time for U.S. investors and lenders to develop trust in the new system."

Buying property in Mexico is now easier. A foreigner can do it on the mainland outright by direct deed, except in what's called the restricted zone: 32 miles from the coast or 62.5 miles from the U.S. border.

Buying there, or anywhere on the Baja Peninsula, takes a Mexican bank trust called a fideicomiso. The bank, for an annual fee of about $400, serves as a trustee holding legal title for up to 50 years.

A permit to set up a bank trust is around $1,000. When the government approves the trust, an appointed attorney called a notario prepares the deed. Taxes, normally 2% of the purchase price, must be paid.

Then the deed is recorded and title insurance can be purchased through companies such as First American Title Insurance, (FAF) a unit of First American; Fidelity National Title, a unit of Fidelity National Financial; (FNF) and Stewart Title Guaranty, a unit of Stewart Information Services. (STC)

As a beneficiary of the fideicomiso, a foreign owner can use, improve, sell or bequeath his property. Co-owners can be listed to avoid probate. And the trust can be extended indefinitely.

Cost is a major factor driving Mexican real estate. An ocean-view condo in the planned community of Las Palomas at Puerto Penasco, a booming resort town across the Sea of Cortez from San Felipe, sells for $300 a square foot. Similar properties on San Diego's Coronado Island go for $2,000 a square foot.

Developed by Abigail Properties of Phoenix, Las Palomas is 60 miles south of the Arizona border. It will consist of 200 golf course homes and 1,800 condos. Half the condos, priced from $325,000 to $2 million, are already sold. Thirty-year fixed loans from U.S. lenders at 6% interest are available.

Meridian Development Group in Reno, Nev., is building two of the larger Baja communities under construction. Halfway between San Diego and Ensenada on 33 acres overlooking the Pacific, Brisamar will be a private residential club of 300 Mediterranean-style units.

Farther south, just outside Ensenada, the even larger Porto Hussong is planned. Ocean promenades and garden paths will connect a 250-slip marina and retail area with a five-star inn and four towers with 270 condos. They range in price from $550,000 to $1.8 million. Though construction won't start for four months, two-thirds of the 150 units in the first phase are sold.

Migration of Mexicans into the U.S. receives most of the attention. Chris Merson, the 62-year-old CEO of MDG Resorts, says the flow of American baby boomers to Mexico is also significant for property developers.

"California is the sixth largest economy in the world, and we're sitting right under it," said Merson. "All we have to do is wait for the richest generation in the history of America to retire."