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Fair Market Value in Mexico Real Estate

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Harriet Murray Blogs for Expats In Mexico on Real Estate
Credit: Harriet Murray

Those of us living in Mexico who are from other parts of North America probably take the concept of fair market value in real estate transactions for granted. We assume that this measure of value is used in other countries, but actually fair market value in Mexico real estate and elsewhere is not common.

In real estate transactions, data needs to be available to establish sales prices and to adjust for differences in properties. In most places around the world, that data is just not available.

If we start out with the objective to use fair market value, where do we as consumers normally go? There are no U.S. or Canada websites like Zillow and Trulia, which offer a large number of properties for sale, as well as average sales prices by areas.

In fact, until two years ago, there was no genuine multiple listing system for AMPI agents in Puerto Vallarta to collect data effectively to advise a buyer or seller on fair market value.

The classic definition of fair market value is the amount for which real or personal property is sold in a voluntary transaction between a buyer and seller, neither of whom is under any obligation to buy or sell.

If the buyer and seller are not informed through the open market, they must rely on real estate professionals or appraisals to help determine value based on sales data of similar properties or properties adjusted for differences.

Commerce, as we know it, works efficiently and to the benefit of the whole, if information is shared. Controlling prices comes when a few have information to the detriment of the many. It is unconscionable when a seller or his agent keep market information from a buyer and sell them a property 100-200 percent over its fair market value.

The issue is control. Knowing the fair market value in Mexico real estate enables buyer and seller to have control. Knowing fair market value can help price a home for sale, negotiate a purchase price of a property for sale and resolve an estate or divorce settlement.

Here are the factors that help determine fair market value:

1. Comparable Solds within a certain time frame help determine the subject property value. Adjustment can be made for differences in size, location and condition of a property.

2. Market Trends affect fair market value. Low demand versus high demand affects price, as well as high inventory versus low inventory.

3. Particular conditions also affect fair market value. If properties have mortgages or there are defaults with the lender taking the properties back, the listed properties may be offered at a much lower price to move inventory. Builders also can compete against an individual seller who wants to re-sell his/her real estate within their development.

4. Comparative Market Analysis (CMA) is a common way to determine a property’s fair market value. For it to be a valid CMA there must be sufficient information on sold properties and their characteristics in addition to price: condition, location, debt, etc. It amazes me to see experienced agents use “expired,” ‘’off the market” and “active” sales prices for a CMA. This is contradictory and misleading information, which can manipulate fair market value.

5. Appraisals use measurements and improvements to a property as well as allowable uses through zoning and permits. Appraisals are usually done by engineers or appraisers who also take into account in their reports the comparables or sold prices. Traditional appraisals are done to find fair market value from: 1) Market value, 2) Replacement cost and 3) Income.

AMPI in Puerto Vallarta is continuing to learn and become more proficient with its Flex Multiple Listing System. As AMPI agents become more knowledgeable and proficient, fair market value will become more available.

AMPI is very aware of cultural differences and understands it is operating in Mexico, and also understands the individual’s right to privacy. But, when information is withheld for the benefit of a few and manipulation of many, the result is harm to all.

This article is based upon legal opinions, current practices and my personal experiences. I recommend that each potential buyer or seller of real estate conduct his own due diligence and review.

5 COMMENTS

  1. Certainly it is true that the fundamental value of sharing information of historical data will allow the astute and experienced Real Estate practitioner to more accurately evaluate the comparative market of a property. I don’t agree though that there is not also value in the use of listing price within the evaluation. Agents also need to be somewhat of a futurist. The market asking price for a property is what a Buyer is willing to pay today or in the future not just what a comparable property sold for in the past. There could be a significant amount of time since the last similar sale and there could be market condition changes occur in that time. I have had a very successful career as a ” Realtor ” north of the border for 20+ years and I always take into account active and expired listings in building an evaluation. One needs to know why the proptiess expired and is the a general upward or downward movement pricing on current listings. In Mexico regardless of where , the Buyers are currently forced into a buying scenario where true overall market prices are extremely subjective. The majority of the people in the industry have little to no training, there is no ethical component to the association bylaws or regulations, there is no consequence or penalties to bad practise. Another factor the strongly affects values is the currency. Strangely and I assume only because the majority of the so called agents were originally from the US, the pricing is in US dollars which does an extreme disservice to Mexican , Canadian and all other non US citizens.
    Casused by the use of the US dollar pricing is an affect on supply/ demand. Using US dollars reduces the interest by the Mexicans and Canadians who in some markets represent or could represent the biggest part of the market. One only has to look at the significant drop in prices in the Manzanillo market to see the affect of the lack of Canadian and Mexican buyers .

  2. Thank you for writing, Craig. If I were still in the US, I am sure I would use more factors to evaluate fair price. The sold price is for a period of time, and if the trend is up in sold prices or down, we can see another element of what is happening to the market.

    We struggle, yes with the US dollar pricing which is prevalent in Mexican resorts. Strangely Mexico is dollarized in many areas of the economy. For example I am told from informed sources that new developments of condos are required to be priced by the developer in USI believe. If this is true, the purpose is to hedge against underpricing projects and running into financial trouble. The US pricing came from the large number of American buyers.

    • Your points are well taken and have many years of experience behind them. I believe we are both on the same wavelength ( so to speak) in the differences between US or Canadian practises and what you have to work with in Mexico. We have owned in Manzanillo and are currently looking to buy in the Lake Chapala area. I am finding the need as a “Buyer” to do more than normal due diligence in trying to get a handle on what is fair market value of a property. The old saying we used in Canada was: ” Market value is what a buyer is prepared to pay”. In Mexico it seems that is so very true but as you say not necessarily “fair value” . So what it comes down to is this.
      a) As Canadians or Mexicans or any other non US citizens, the bench mark is the US price like it or not. If your home currency is taking a beating to the dollar, the fault is not the local industry here but rather the issues in the world economic and currency markets.
      b) you are buying for the longer term and for your lifestyle and not as an investment.
      c) If your home currency gets stronger to the US dollar then yes you will have paid a premium however historically the US dollar always comes back so eventually so will your market value.

      My wish is that AMPI along with the Mexican govt agency will find a way to build the RE industry into a licensed and trained agency with some method of consumer protectionism.

  3. Thank you for exploring this important topic. Your cautions confirm my sense that real estate prices in Mexico are more subjective in nature than we’re accustomed to seeing in the US. Without a reliable source on comparable sales a buyer is really in the weeds. A friend of mine is getting ready to purchase a condo in Mazatlan sight unseen (!). He is relying on the advice of a nephew in real estate there. I’ve told him some of my concerns, but he is enchanted by the notion that the market is hot there and can only rise. Ulp.

  4. Dear Sarah,

    I agree with you that your friend buying in Mazatlan should be more cautious. Sight unseen is a risk. The market may be hot, but almost ready to peak and go down. How could your friend know where the curve down is going to be. Markets crash also, usually after and because of being hot and then overbuilding.

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