Mexico Real Estate Costs Uncovered

Video Transcript - (with Alex & Chris)

Alex:

The other key legislative change that was effective, and this is a federal tax code, so this would be across all of Mexico, but the other key change that's effective earlier this year is that the notary is now required to validate the value of the property via a commercial appraisal. So that's the big change. Before, even in a cash transaction, so you're not using financing from MoXi, let's say, and you're just paying cash for a property and you're closing legally, which is important, you have to have at least one appraisal, and it's called a cadastral tax appraisal. And that's, again, a municipality-driven appraisal that sets the value for property tax.

Chris:

Hey, how you doing everybody? Alex, good to see you. I'm Chris Childress with MoXi. I run the sales division over here at MoXi, and I'm with Alex Koper, our CEO and President of Moxie. And we're here today to talk about starting off 2025 with growth and new opportunities here with MoXi in Mexico. How are you doing today, Alex?

Alex:

Hey Chris, I'm great. How are you doing? Thanks so much for having me, and it's fun to think about what we have ahead in 2025 and really appreciate you having me here today.

Chris:

Absolutely. I always get excited for these sessions to learn new things and explore what MoXi's up to. So let's dive in.

Alex:

All right, sounds great. Let's do it.

Chris:

Let's talk for a moment about some of the exotic features already built into our guidelines that a lot of people don't know about and don't take advantage of. There's a couple of new things that we've really started rolling out. It used to be out there. We didn't really advertise it a whole lot, and now we've recently launched it with some of our new developments we've had in our offerings, one of which is the ability to finance a portion of your closing costs. We call that our LTV enhancement. That's pretty exciting, especially we know that acquiring real estate in Mexico, the acquisition part of it, it's a little bit more expensive than it is in the United States. It costs more to get into that entry.

So what we found is that a lot of folks are trying to come up with a larger down payment, which is required. We all know that MoXi's got a minimum down payment today of 35% plus settlement charges of, let's just say, an average of 10%. We tell customers anywhere from about 7% to about 12%, depending on purchase price and so forth and so on. But let's just average that. Let's just call that 10%. So entry level, customers need to be thinking about, "Okay, I see a house I want, there's a sales price of X. I really need to figure out how to come up with approximately 45% of that purchase price in order to acquire that piece of property." With this new enhancement that we've got, MoXi is able to support in that, up to 5% of the purchase price in an enhancement for closing costs. So that's a pretty big chunk, very exciting, and we're finding a lot of people are taking advantage of that today.

Alex:

Yeah, and I think it's interesting. It's really good timing bringing this back from a prior version of the guidelines because transfer tax in Mexico has increased effective January 1 in a lot of markets. So Los Cabos went from 2% of the purchase price to 3%, which is a 50% increase, right?

Chris:

That's tremendous.

Alex:

Yeah, we hear all the time, "Wow, closing costs are so much in Mexico." And they are. Compared to the United States, it's a lot. You mentioned 10%, we've seen many transactions where it's 10%. There are so many fixed costs, like notary fees, appraisal, title, search title, insurance, legal property transfer fee, all the legal work that's involved in doing it the right way. All those things are pretty much fixed costs. And so if you're buying a $250,000 or $350,000 or $450,000 house versus a $2.5, $3.5, $4.5, $5.5 million dollars house, those costs as a percentage of that loan amount or of that purchase price are going to be a smaller percentage if it's a larger price.

In any case, it's becoming even more expensive now for anyone. So this is not just for foreigners. Transfer tax applies to anyone that's buying property, or even if you're switching the vesting of the property you already own from a Mexican corporation into US LLC or anything like that, you're going to be subject to transfer tax, and that's now more expensive. I think it's in Quintana Roo, so Tulum, Cancun, those kinds of areas, it was 3% already and it moved to 4%. And so I don't think we have the official word on whether or not municipalities like in Nayarit and Jalisco, for example, Puerto Vallarta, Punta Mita, or in San Miguel de Allende, some of these other markets, whether or not they'll increase their transfer tax or not. But so far as of now, January 2025, we know Los Cabos and Quintana Roo are the first.

Chris:

Sure.

Alex:

Anyway, so back to your point, I think 5% LTV enhancement is really helpful for a lot of our clients. Well, hopefully they're not surprised by the closing costs that are required, but who are looking for some help with easing that burden a little bit, getting into the property and making sure to do it legally. I think that's the other-

Chris:

Yes. Yeah, absolutely, absolutely. Another great value, talking about closing costs and cash to close for the customer, another great feature of our program guidelines is the fact that we will allow, similar to how it's done in the United States, but we will allow our sellers in a purchase environment, the seller to pay a portion or to contribute towards buyer's closing costs as part of a closing cost concession. So for the last several years we've seen that down here has been a seller's market. This place has been on fire, markets have been appreciating aggressively, there's been limited inventory, there's a lot of long-term new construction going on, but there wasn't a whole lot of immediately available inventory. So it was, for all intents and purposes, a seller's market. We're starting to see a little bit of a shift in that. We saw some turns in the United States in the way that the resale market is working down there, and you're starting to see that trend here as well as more inventory comes online.

And a lot of people think that, "Hey, man, when it becomes a buyer's market that gives me more negotiating power." And they want to instinctively go in and try to ask for the discount. Let me get $20,000, $30,000 off the sales price of the house. But a lot of people don't really sit down and do the math, if you will, and see how that actually affects their cash to close. In a lot of situations, you can improve your cash to close position by having the seller pay concessions rather than asking for a discount. And again, we can do up to 6% of the closing costs and depending on the transaction and how willing the seller is, you could even couple seller concessions with our closing cost enhancement and almost cover all of your closing cost obligation, therefore positioning the buyer to get in for down payment alone in the right environment. Pretty exciting.

Alex:

Totally. And I think not to be the bearer of all the bad news from all these legislative changes in Mexico, but I think there's a lot of new rules. So one is the increase in transfer tax and that's municipality based, but there's a new federal law effective January 1 that impacts reverse capital gains tax.

Chris:

I was hoping we would talk about that today.

Alex:

So if the value of your property is, judging by the standards of a commercial appraisal, higher than what you're paying for it, you're going to pay capital gains tax right away at closing, which is very unique to Mexico. And so to your point, Chris, there's not a lot of advantage necessarily in getting the very lowest purchase price you possibly can because going to be taxed on paying below market. And so paying the actual value of the property, but negotiating a concession or a credit toward closing costs is a really effective way of structuring that transaction.

And we're only a few days into this new law, so it remains to be seen how these transactions will actually get papered in the notary offices across the country. One thing I think we could both attest to, when there are any sort of sweeping legislative changes in Mexico, it always takes a couple of months to see how they're interpreted and how the regulators look at the transactions as they close. And that's something we pay very, very close attention to on purpose. But I think theoretically speaking, there's a lot of value in-

Chris:

Negotiating the concessions versus the-

Alex:

Yeah, closing cost credit.

Chris:

It benefits the buyer today from a cash to close perspective, but it also benefits the community as a whole by keeping your comparable sales data higher versus having these wild fluctuations in sales price from a comparable perspective. And that helps to keep property values consistent and appreciating in markets versus seeing a city's volatile swings there.

Alex:

Yeah, that's a really good point. It's really interesting. I was chatting with the marketing team, I think you were on the same chat. We started looking at some of the data historically. So MoXi has been around since 2017. We really started making a lot of loans beginning in 2020. And so we're starting to see MoXi customers who've paid off the loans over the course of time. And generally, we're finding people are paying off the loan only when they sell the property.

And so looking back at some of the data, we can see what did they pay for the property in 2020 or 2021? What did they sell it for when they paid off the loan through MLS data? It's pretty amazing to see the uplift, the property appreciation we're seeing. Los Cabos is a great example, but it's really countrywide. I think we've seen it even in Mexico City, in San Miguel de Allende and PV, especially Puerto Vallarta and even north of PV in Riviera Nayarit and in Punta Mita, huge uplifts in values, which really makes the whole construct of these really high closing costs immaterial when you think about it. If you're doubling your investment in three years, who cares if you paid 2% or 3% in ISABI tax and transfer tax to the government? Doesn't matter. You made-

Chris:

100%, 100%. I see markets today, for example, the Lake Chapala area, Ajijic, south of Guadalajara, when we started this back in 2017 and we were entertaining which markets could use our services, we didn't exclude that market, but we were like, "Well, there's an expat market there, but the property values and such didn't really drive a big demand for it." And now we're seeing the same house as two or three times more than what it was just a few short years ago in that market. So you're right, we're seeing this countrywide.

Alex:

And that is showing also in refinance. We've seen such a big uptick in refinance applications just in the last couple of months, cash out in particular, people taking advantage of those values. And we really don't have any restrictions. People can take the cash and do whatever they want with it, but many choose to invest in more real estate in this country because I think there's really incredible opportunities. So it's really fascinating to see what's happened. And it's happened in many parts of the United States as well, but it's also happening in Mexico and continues to. We're starting to see a semblance of continuity in those kinds of trends, which is really powerful.

Chris:

Yeah, absolutely, absolutely. Do we want to talk a little bit more about reverse capital gains tax and what that looks like? That's a really unique topic, and it comes up sometimes here. It's almost an uncomfortable conversation from a Mexico mortgage guy perspective because I'll get calls from folks and we'll be talking about what they're working on in Mexico and they're so excited, "Hey, I got this great deal on this piece of property. I'm paying half what it's worth." In the United States, that's a win. You buy a house, it's worth a lot less than what you're paying for it. That's wonderful. When you sell it online, then you pay your capital gains taxes on your gain there, on your profit.

But in Mexico, if you get a really smoking deal, you buy a house for half what it's worth, and we were talking a few moments ago when that appraisal is done and we're going through the closing process, if the property appraises for more than 10% of the purchase price... Now I'm no attorney, so I don't want to misquote this guideline, this is the way I understand it, full disclosure here, but the way I understand is that if the property appraises for more than 10% of the purchase price, then the buyer could be exposed to what's called reverse capital gains tax, basically charged capital gains tax on that newly realized equity and that tax is due at the point of acquisition. You don't get to hang out and pay it when you sell. You got to pay to play now.

The good news in that is that they base your value at that level now. So if you're buying for 500 and it appraises for 600, and you got to pay the tax to get the pot right, well, then now your base is 600. So if you sell for a million later, you're only paying gains on 400 versus 600 because you've already paid to be on the field there. But it's still an interesting concept.

And a lot of people, when we go in and we're having conversations about, "Hey, we need a 35% down payment," or whatever the down payment is for that particular borrower, plus settlement charges of approximately 10%, let's just use that number for math, now we're looking at what could be, and I don't want to misspeak on the percentage, but it's anywhere from, say, 25% to 35% of the gain, depending on how you approach that, is what the exposure is. So now you've got additional exposure to capital gains taxes on the newly realized equity. That could really affect your cash to close perspective and could be quite the surprise if you weren't informed and didn't see that coming.

Alex:

100%. And for those watching this, that might want the very specific details or want to do some additional research, I'm going to share some details about this. This is rule 2.7.1.44l, so this is the new rule that is effective... Originally it was effective October 11, and then it was pushed to January 1, 2025. And this is articulo veintisiete, article 27 of the federal tax code, which is [foreign language 00:15:51]. It's regulation and rule 2.1.35. And so for anyone watching that wants to look that up, I thought I'd share that information. We have an infographic on this as well we can share, but a couple of key changes with [foreign language 00:16:08] that's the name of the tax. So we have ISABI tax, which is the transfer tax due to the government that's set by the municipality.

And then we have [foreign language 00:16:23], ISR, and that's the capital gains tax, or in this case, the example you're talking about, Chris, is the reverse capital gains tax and that [foreign language 00:16:33] tax is assessed, you're right, if the appraised value of the property is greater than 10% of the purchase price, then you're assessed tax on the difference.

The other key legislative change that was effective, and this is a federal tax code, so this would be across all of Mexico, but the other key change that's effective earlier this year is that the notary is now required to validate the value of the property via a commercial appraisal. So that's the big change. Before, even in a cash transaction, so you're not using financing from MoXi, let's say, and you're just paying cash for a property and you're closing legally, which is important, you have to have at least one appraisal and it's called a cadastral tax appraisal. And that's, again, a municipality-driven appraisal that sets the value for property tax assessment. So you have to have value in accordance to be billed your property taxes on an annual basis.

Now, in an acquisition transaction, a notary must also have a commercial appraisal. This is not new for MoXi. We've been ordering commercial appraisals on every transaction, I think forever, as long as we've existed, but it is now a requirement of non-MoXi transactions as well. So the notary must look at basically two appraisals on every transaction. One is the commercial appraisal, which is going to assign a value to the property that's being transferred, and then the cadastral appraisal is required for the property tax base. The commercial appraisal and cadastral appraisal can be very different values. And so the commercial appraisal is the value that'll be used to calculate the [foreign language 00:18:22] or that reverse capital gains tax. And then as well on the seller, the seller always is going to pay capital gains tax. There's lots of different strategies that can be employed. We've seen it across the board, so it remains to be seen how some of this change will impact MoXi clients. But we're watching very closely and providing as much guidance and advice as we can, connecting people with the right folks.

Chris:

And I'll use that almost as a shameless plug, if you will, because a lot of people, the fact that we stay on the field and we keep our finger on the pulse of what's going on in the market and understand new legislation and new changes and that, we're able to inform our clients. And we have clients that come to us now who... And I am proud to say this because when we first entered the market, it was an all cash market and we saw a little bit of resistance. Everybody's like, "This is an all cash market. It's working fine." Now, many years down the line, we have people coming to us and saying, "Hey, we don't really need to borrow the funds. We don't need to mortgage this property, but we're choosing to do so and choosing to do business with MoXi," because of the expertise and because of the level of protection they feel they receive by working with us and our team to make sure it's a safe and secure transaction once it's finalized and closed.

Alex:

For sure, the guidance, the advice, all of the work we do on the legal side is critically important and our clients really benefit from that. And the liquidity and the well-priced capital doesn't hurt either, as far as I know.

Chris:

Alex, it's been so much fun. Every time I get together with you, I feel like I learn something new every time, even though it's stuff we've been developing for a while and the future is certainly bright.