For years, owning oceanfront property in Baja California, Mexico has been the impossible dream for Americans. Thanks to the availability of traditional, US style mortgages and the forming of land trusts, the Baja market is primed for major development. Cheap oceanfront property is available and Americans are pouring across the border to satisfy the desires for ownership of beachfront property that have been held in check for so long.

Pre 2005 Financing Dilemma

Before 2005 there were basically two ways for you to purchase oceanfront property south of the border. You could borrow money from a Mexican bank, but the Mexican Peso-based loans have higher interest rates than US loans, tie to inflation indexes, and oftentimes cause negative amortization. The other option for making your beachfront property purchase was to pay cash. Even though there was cheap oceanfront property available, for most "would be" property owners, the options for purchasing the property were not viable. And so most Americans were visitors, staying in some of the most luxurious vacation homes, and dreaming of living the lifestyle that the Baja area has to offer.

Aren't Foreigners to Mexico Restricted From Owning Beachfront Property?

In Mexico, the law declares the Mexican nation has original ownership to all land and water in Mexico, as well as minerals, salts, ore deposits, natural gas and oil; "but that such ownership may be assigned to individuals". 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 includes all land located within 100 kilometers (or about 62 miles) of any Mexican border, and within 50 kilometers (or about 31 miles) of any Mexican coastline.

Fideicomiso - Real Estate Trust

Yes it's true foreigners are restricted from directly owning oceanfront property but, in order to allow foreign investment in these areas, the Mexican government created the "fideicomiso," (FEE-DAY-E-CO-ME-SO) which is, roughly translated, a real estate trust.

A "fideicomiso" is a trust agreement created for the benefit of a foreign buyer, and executed between a Mexican bank and the seller of property in the restricted zone. Foreign buyers cannot own oceanfront homes or invest in vacation homes in the so called "restricted areas" because of Constitutional restrictions.

The bank acts on behalf of the foreign buyer, taking title to the real property. The bank, as trustee, buys the property for the foreigner, and then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary.

The trust beneficiary retains and enjoys all the rights of ownership while the bank holds title to the property. The foreigner is entitled to use, enjoy, and even sell the property that is held in trust at its market value to any eligible buyer.

Can The Mexican Government Take Back The Property?

The terms of the North American Free Trade Agreement (NAFTA) guarantee Mexico may not directly, or indirectly, appropriate property except for a public purpose. This is the equivalent of America's Eminent Domain clause.

Further, should it become necessary to expropriate land, NAFTA rules ensure swift and fair market compensation is paid, with accrued interest. There is still a lot of cheap oceanfront property available in many areas of Mexico.

These rules of fairness, combined with the ability to use financial instruments with which Americans are comfortable, have been the key to the tsunami of new interest in the Baja beachfront property and Mexico's real estate market as a whole.