In 2009, Brent bought a house in Mérida Centro. The house was a small ruin that sat on one of Mérida’s typical long lots. He paid 60K USD.
Alongside his partner Stan, they renovated and tripled the size of the home, greatly increasing its value in the process.
Fast forward 12 years and late last year, the couple decided it was time for a change and so they put the house up for sale. So how does one sell a home in Mexico? Brent had questions.
How should he go about figuring out what documents he needs to gather and get himself organized? While the real estate agent said that he should relax until he closed a deal with a buyer, Brent wasn’t so sure. He had heard stories from friends about how it took them months to close or that when they did, they received surprisingly large tax bills.
This is not what Brent wanted. While he was waiting for a buyer to make an offer, surely he could get organized and obtain some answers to his questions.
Apart from getting organized, the biggest question of all is how much he would be expected to pay in capital gains taxes. Today, the renovated property is worth about 10 times what they paid. On paper, this is a big gain, but factoring in the cost of renovation, not so much. How would all this be worked out by the government and what capital gains would he owe?
From researching online, Brent couldn’t tell what his capital gains burden would be. Depending on what he read the answer was anywhere between 10k or 100k in US dollars.
All the advice he read said that you seek the advice of a professional to understand the details of your particular situation. So he tried. His first stop was again his real estate agent. But with the recent rules changes, even the realtor didn’t know.
Brent tried connecting with a few lawyers to get professional advice. While each lawyer was happy to assist, they would only start working with him after he got a firm offer from a buyer. This was a problem because Brent wanted to prepare in advance and receive information necessary to plan his sale. In his mind, there was no point running around last minute when it was too late when he had time to get it sorted now.
The situation was extra complicated because Brent had previously renovated. In such cases, sellers need to demonstrate the cost of their renovations so that these costs are deducted from the gain in the property value. The government wants facturas, but Brent doesn’t have any. He renovated it in 2009 before the introduction of electronic invoices. How was he supposed to prove expenses?
Closing the sale of a house has always been a chore for sellers. Sellers need to gather a lot of paperwork. In Mexico, this means finding a lawyer to assist with the gathering of all the right paperwork to complete the transaction. From there, both the seller and the buyer need a notario to actually execute the deal and record the new owner of the property with the government registry.
Both the lawyer and the notario incur a cost to the seller of between 2 and 4% of the overall sale value. In combination with the real estate agent fee of 5-6%, again paid by the seller, this can add up to a large amount for the seller. On the buyer side, the government imposes a tax on the acquisition of the property. This tax is based on the value of the property and ranges between 2 and 6% in Yucatan.
The process has gotten harder
Recent changes in the law that came into effect in early 2022 are making it harder still. New state laws in Yucatán now require each sale to be registered at its appraised value. The state is also tightening the process around the Plano Catastral, a document you receive from the municipality that shows the official boundaries of your property. If the document is old and doesn’t meet new standards, the city has to come to your home and reassess your boundaries.
The new rules around appraisals are catching sellers off guard. Before the rule went into effect, the value recorded with the government for the sale was often lower than the actual amount that changed hands. For example, longtime Mérida real estate agent Keith Heitke had clients recently who bought their house for US$400,000, but on paper, the registered value was US$200,000. Now that they are going to sell for 500K, their gain on paper is 300K even though their house has only appreciated 100K since they purchased it.
At an assessed rate of around 30% for capital gains, the seller now faces a tax bill of close to USD $100,000 in capital gains based on the low recorded value of the property at the time of purchase.
With the new law requiring the recording of the property at its full value, sellers are often unaware that they may be in this situation where additional tax is owed. Instead of finding out before they reach a deal with a buyer, they are finding out a few days before the closing when there is no longer time to do anything about it. Sellers are being forced to pull out of deals at the last minute to give them time to reassess their situation and reduce their tax liabilities.
Other delays have crept into the system. With the new requirement for appraisals, it is putting pressure on appraisers to ramp up to handle the new workload. The state has also become more particular about the documents that are required to close the sale and are often asking sellers to re-survey their properties to confirm and update boundaries.
All of this is creating strains on the service professionals required to complete the work and delays on closings. Mitch Keenan, owner of the real estate firm Mexico International for the past 25 years, says that he now advises his agents not to schedule their closings in anything under 90 days, and even adds another 60 to 90 days just in case it can’t be completed in even that amount of time.
These delays are creating havoc for buyers and sellers who need to fly to Mérida to attend their closing in person. Changing airline tickets or purchasing last minute because of the uncertainty is adding cost and frustration to the process. Real estate agent Robert Slaats said his clients are frustrated and angry because they don’t understand what the long delay is all about.
To make matters worse, there are also problems with fideicomisos. In the “old days” of five or six years ago, when a seller owned their property with a fideicomiso, it was a simple matter to transfer it to a new foreign buyer. Now, not so much.
The banks are demanding that the fideicomiso is voided and a new one is created for the buyer.
Instead of taking four weeks to complete and costing around US$1,000, it is now taking up to six months and costing up to $4,000 with these costs being split between the seller and the buyer. With the costs and frustrations mounting, many professional property flippers are considering leaving the business.
Back to Brent
Four months after realizing he needed to get himself organized, he was still working on the problem.
One thought that kept coming back was how hard this was and how crazy it would be to start this process AFTER he got a deal with a buyer.
After all, if it takes six months to get an offer on his house, and another six months to close the detail, couldn’t he do these things at the same time and cut the time in half? If sellers do the work, why can’t they be prepared to close the very day they get an offer.
This thought was the impetus for Plano. In talking with friends in the real estate industry, as well as notarios, he formulated an answer. In February 2022, joined with three other experts in real estate and technology, they founded Plano with the goal of making it easier to buy and sell real estate. In true “post-COVID mode,” all four are in different parts of the world and are organizing the business with a combination of Zoom and WhatsApp.
The goal of Plano is to solve two basic problems. It would give the seller a tool to become “clear to close” the minute a buyer showed up. For the buyer, Plano would give them a way to “Buy Now.” Best of all, the entire solution would be online so buyers and sellers could close a deal remotely.
Brent doesn’t just want to solve the problem in Mérida. Buying and selling real estate is hard all over the world. A “Buy Now” button for the world of real estate. “Why not?” he says. “You can buy everything online these days, so why not real estate?”
So what is the hold up in Mexico?
Notarios in Mexico do essentially three things with regards to real estate sales. They first check all the documents submitted by the seller and buyer are complete and accurate. They draft the paperwork to show the change in ownership of the property. Finally, they record the transaction officially with the government.
The first of these functions can largely be automated. If you have signed up for a new bank account or crypto product recently, you have probably encountered some of these “Know Your Customer” (KYC) solutions where customers ask you to upload your identity documents, verify your phone number with an SMS code and maybe even collect a selfie or biometric face scan.
These KYC solutions are a much better way to gather the documents needed for a real estate transaction. You see up front exactly what is required and end the back-and-forth of email with the broker and the lawyer trying to figure out exactly what is required.
As for the documents to transfer the title, this is largely boilerplate legal language. While it is important that these documents are drafted by a notario, there are a lot of contract preparation technologies that help make things more efficient.
Plano sees this as a key to success. Instead of thinking about the documents as a bespoke piece of lawyering, Plano wants to drive the cost down by creating an assembly line for getting the documents created, signed, and recorded.
Earning your ‘clear to close’ badge
While you can’t change the law, you can change how, and crucially when you do the paperwork.
Plano has created an easy and specific process for sellers to understand what documents they need to gather and how to get it done. Plano can offer sellers instructions on how to gather the documentation themselves. Or with a few clicks they can authorize Plano to organize everything on their behalf.
Plano can also produce the all-important Settlement Statement that details all of the taxes, fees, and other costs that are involved in the transaction. This document can be generated by sellers based on an estimated sales price so that sellers can see clearly what the costs at the start of the process instead of at the end when it is too late. Plano also offers resources to sellers on fiscal strategies to manage their tax liabilities, including connections to accounting and tax planning experts when required.
By delivering these services online via a web app, Plano can cut out the lawyer and a number of other intermediaries to save sellers money and time. Plano will still work with a notario to legally complete the transfer of title to the seller, but with a streamlined process that works at the speed of the Internet, things are both cheaper and quicker.
Once a seller is “clear to close,” a “Buy Now” button can appear on their online real estate listing. Buyers who are comparing multiple properties across multiple sites know that property listings with this button are ready to buy, often on the same day as they make the offer.
Giving a buyer the ability to move in the same day their offer is accepted is an exciting innovation that doesn’t currently exist anywhere in Mexico. Within the country, Plano started in Mérida with a partnership with Mexico International (MexIntl.com), the largest real estate agency in Mérida serving foreign buyers.
However, Mexico International is just the beginning. Brent sees a day when there is a buy button on every real estate website in Mexico and ultimately the world. And to think that this innovation started in Mérida.