Valuing a Property for Tax Purposes
If you own a house in the USA, Canada or Europe, you are required to pay tax to the government, usually based on a rate-able value of the property.
In Mexico, the rate-able value is known at the Catastro, and is set by an officer of county; no onsite inspection is required.
The Catastro
The Catastro value will vary depending on the area in which you intend to buy, and can be a fraction of the commercial value of the property. This Catastro is used by the Notary Public to assess the value of the annual equivalent of the "Local Property Tax", known in Mexico as the Predial. Although the Catastro is an essential number for working out tax liabilities, in practice it serves of no use in assessing the commercial value of a property.
The Predial
The Predial is payable annually, on January 1st or soon after. In some areas, bills are dispatched to house owners; in some other areas you don't get a bill; you just know you have to pay it in January, and you show up at the Municipal building in town to do so each year.
You will find the Predial is very low (and could border on insignificant) when compared to say, property taxes (even at the lowest rates) in Europe, Council Tax in the UK, or the annual rental value of the property.
This is one of the reasons why cost of property ownership is low in Mexico.
Commercial Valuation
House prices in Mexico are very localized, and if you live in some countries like the UK, may be used to valuations of a property based on the number of bedrooms and whether the property is terraced, semi or detached, etc., not the square footage being bought.
In Mexico, values are not determined or measured on number of bedrooms; as a measure of value people instead look at a price per square meter of land and then per square meter of construction on that land as they do in the USA, Canada and Continental Europe.
For example, you could have a 300 square meter plot with 500 square meters of construction. The garden is likely to be small, or even, just a patio, in this scenario. "Construction" is usually based on outer measurements, wall-to-wall and includes garage, covered patios and out-houses or other buildings, not just the main living areas.
There is no standard for how the "construction" figure is measured; for example, some measurements includes patios, others don't—so be sure to ask what it includes.
Once you know the measurements you can make comparative values between properties based on land size and construction, including construction which is "traditional" living space, and construction which is "outdoor" living space (patios, terraces, out-houses, etc).
Some Common Valuation Models
Here are some of the more common ways in which properties may be valued:
Investment Value
This is deduced by determining how much the property would fetch monthly from a rental (based on similar rentals in the neighborhood / area) and multiplying by a factor. This factor is usually calculated by taking into account the cost of house maintenance and applicable property taxes. If you wanted to see a return in, say, six years then your formula would be: Monthly Rental x 12 + Annual Maintenance (Including Service Fees and Taxes) multiplied by Years (6).
Annual Rental Yield
By checking the level of local rents for similar properties (including location, area, condition and appeal), you can work out the rental yield of a property based on its price. This yield provides a comparative return on other investments, e.g. leaving your money in the bank or investing in shares.
For example, if local rents indicate that you could rent the property for US$500 a month, and the cash purchase price of the property (including closing costs)is US$200,000, the annual rental yield would be 3%. This is worked out by dividing the annual yield ($6,000) by the purchase price ($200,000) and multiplying by 100 to convert the decimal into its percentage value. In our example: ((6,000 / 200,000) * 100) = 3%
If local rents indicated that you could rent the property for US$1,000 a month, and the cash purchase price of the property (including closing costs) is $100,000, theannual rental yield would be: ((12,000 / 100,000) * 100) = 12%
Similar Recent Sales
If you are buying in a neighborhood where houses / land plots are similar, then you may be able to get an indicative commercial value from prices paid for similar size and type properties in the area during the last 12 months. A realty agent would be able to guide you in this respect.
Replacement Value
Another way of determining the commercial value of a property is to take the commercial value of the plot (land), and add to it the cost of construction, should you build it today (this is usually expressed in cost per square meter of construction) and depreciate this value according to the age of the house. You would then add on the value of any special features.
Features that can Add Value
Values of property can escalate when the following features exist on or near the property (remember that features attached to the property are subject to depreciation factor, mentioned above):
- Property is well served by local infrastructure (e.g. good roads, airport);
- The property is near a body of water; river, lake ocean (but watch out for rising water levels!);
- The property has good panoramic views of the area;
- Property is in good condition and requires little or no immediate maintenance;
- Property has a swimming pool / whirlpool, landscaping, driveways, garage, water pressure system, parabolic satellite system;
- Any furniture: Homes in Mexico are often sold fully furnished, but not always - check;
- Local security - for example in gated areas - where all residents in the community pay an annual fee to a security management company for 24x7 vigilance;
- Any features which make the property unique and added to the cost of construction and / or take up additional land; e.g. a large ornamental fountain.
Negotiating / Bartering
Try to find out (from the realty agent if you are using one) what the history of the property is: who owns it, for how long and why are they selling? Are they in a hurry? Do they need cash fast? How far would they be willing to negotiate or barter, especially if you can close quickly. How much discount you can negotiate will depend on each individual situation. However, you should not offer the asking price; be prepared to walk away (and show that you will even at the risk of losing the house) if you cannot get a deal that you think represents value. Even in Mexico, some people are sitting on property they paid too much for—make a cold, accurate assessment, and if necessary, politely say "no, gracias".
Open Market
Ultimately, the value of real estate in Mexico, like the value of anything, is what someone is willing to pay for it. If you fall in love with a particular plot or house, you may be willing to pay extra for it. If you can, keep emotion out of the equation, and if you can't, certainly make sure that you don't show any emotion as it will be immediately sensed and will erode your negotiating position.
There is no "formal" sales price market in Mexico, as access to historical and trend data to 'tell' sellers what to ask for and buyers what to expect to pay is difficult to come by. This is one reason why market prices are extremely localized.
As a result, one could say that property values in Mexico are more 'real' than in markets where reams of data 'demand' certain price levels by postal code based on historical precedent. The flip-side of this situation is that sellers in Mexico may often be quite specific about how much they want to be paid for a property they own, regardless of whether it is in line with similar properties, recent sales, rental yield equations or any other formula—or even reasonable!
Being prepared to keep emotions out of your buying decisions and, importantly, being absolutely prepared to walk away and let go—even if it may appear to be your "dream house"—is an essential skill if you are going to invest successfully in Mexico.
The "Open Market" in Mexico is an opportunity for those who have a clear idea about what a property is worth to them, and a danger for those who walk into the market without having done their homework and research.
A good Mexico Realty Agent will be able to advise you, but remember that it is your responsibility as a buyer to understand the value of the transaction.
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