Questions On Home Financing | Dr Yusuf DeLorenzo

delorenzo-2

In our last Talk, the following questions were posed. In this Talk we will discuss these questions in a series of numbered Q&As. And Allah knows best!

Q1. Will the partner agree to allow you, the home buyer, to exercise your own discretion in choosing the house? Or the neighborhood in which it is located?

A1. Generally speaking, the answer to this question will be no. Why would an equity partner, basically an investor, allow a one-sided decision on as important, and as costly, a matter as this? Everyone has heard the expression, “Lo
cation, location, location!” as the single most important factor in real estate. Then why would a partner agree to have no say on that most important of all factors? Guidance Residential has a different point of view on the matter. It will insist on a professional appraisal of the value of the property you choose, and no more. So the choice of the neighborhood, the structure and its size, the location and size of the lot, the number of rooms, whether or not there is a garage, the school district, all of that is left to you by Guidance because Guidance is in business in order to help you purchase the home you want to live in. At the same time, it has to look out for its own interests because it is a business, after all. That is why it requires an appraisal. Then, as long as the price of the home you choose falls within the parameters of an independent appraisal, Guidance will not interfere with your choices in regard to the matters of size, location, and so on.

Q2. What if your contribution at closing represents ten percent or less of the price of the home? Will Guidance agree to forgo its majority share and allow you to make those choices?

A2. Regardless of the size of your down payment, Guidance is concerned only that you pay fair market value for the house, and that the price is consistent with the findings of the professional real estate appraisal.

Q3. Will Guidance agree to allow you, the homebuyer, and exclusive use of the house?

A3. The answer to this question is ‘Yes,’ Guidance will agree to your enjoying the exclusive use of the house you choose. In other words, even though Guidance will become a co-owner of the house, it will not seek to occupy its share of the house. Instead, it will grant you the right to occupy the house without interference. Guidance will not, however, allow you to occupy its share of the house without consideration. In other words, the right to occupy its share of the house, leading to exclusive occupancy on your part, will have to be purchased. You will therefore make payments of rent as a part of the monthly rate you pay to Guidance. Over time, as you continue to purchase your partner’s (Guidance’s) shares of the house, you will pay less and less rent because you will own more and more of the house.

Q4. Will Guidance agree to allow you to occupy the house without insisting on occupying a part of the house itself? Or otherwise put it to use, for storage, for example?

A4. Yes, the Co-Ownership Agreement you sign with Guidance at closing guarantees you exclusive use of the house. You can paint the house as you wish, decorate it, and use the bedrooms and garage in ways that you and family choose. Even though you share ownership with Guidance, you rent the space that belongs to it and are therefore entitled to dispose of it in accordance with your own needs and preferences.

Q5. In such an arrangement, too, the matter of taxes must be considered, and insurance. Who shall be responsible for these? In what proportion will these be shared?

A5. This is a two part question. One part has to do with taxes, and the other with insurance. Each will be answered below.

Like this?
Get more of our great articles.

A51. Taxes. Real estate taxes are collected by the municipal authorities, either the city, the town, or the county. In return for the taxes, the municipality provides services and facilities for the residents. In other words, the benefits from the taxes go directly to the taxpayers, the home owners. Those benefits are generally things like roads, schools, libraries, snow removal, public gardens, water and sewage treatment, and the like. Better neighborhoods are generally taxed at higher rates and provide better services, especially in the form of better schools.

When there is a direct relationship between taxes and facilities, and when the only one of the co-owners to benefit from those facilities is the occupant of the home, Guidance has determined that the responsibility for paying those taxes should fall on the occupant. Clearly, if there was some benefit to Guidance from the taxes, then Guidance would pay its share. However, the system of taxation has been established to benefit the occupant. Therefore, the Shariah Board of Guidance Residential ruled that the burden of paying taxes should be borne only by the co-owner who actually occupies the house.

A52. Insurance. Guidance offers its customer/partners/co-owners an option in regard to insurance. If the co-owner so chooses, it may opt to have Guidance pay the insurance. The co-owner may also choose to get its own insurance. The Shariah Board has allowed this option for the reason that although the ideal from a Shariah perspective is to have the two co-owners share the expense of insurance, the practical situation with regard to insurance in the United States is that a homeowner will get a better rate if he or she insures the family car or cars along with the home. Then, if a co-owner wants to take advantage of that facility, then he or she may forgo the right to insist on sharing the payments with Guidance. Some criticism has been leveled against Guidance in regard to how it treats the matter of insurance. What the critics ignore, however, is that Guidance offers its co-owners an option. In most, nearly all, cases, it is economically advantageous for the co-owner to opt to purchase his or her own insurance. In those cases, when the co-owners have taken the matter into their own hands, Guidance cannot be criticized for not sharing the costs of insurance. The Shariah Board was careful to insist that Guidance at least offer the homeowner, co-owner the option to choose from either of the two plans. If the option chosen by the co-owner is not completely in alignment with the principle of sharing in a partnership, it was the decision of the co-owner and not Guidance to do so. In the Shariah, the co-owner has the right to waive or forgo its right. Then, if the co-owner finds that he or she will have a better rate by purchasing a package insurance plan, it may waive the obligation that Guidance has to share in the payment of insurance. This does not mean that Guidance has attempted to avoid its responsibility in the matter.

Q6. What happens if the home increases or decreases in value? Who will own what?

A6.1. Increase. The short answer to this question is that Guidance will allow its partner, the co-owner, to realize any and all increase in the value of the property. Over the long run, real estate in the United States has always increased in value. At times, such as during the years of the global financial crisis in 2007-2009, there was a short term decrease. But, clearly, this is not the norm; and it does not happen often. Therefore, when the time comes to sell the house, if the value has increased beyond what was originally paid for it, all of that extra value will belong to the co-owner. For example, if the house was purchased for one hundred thousand dollars and at the end of ten years, it has increased in value so that the co-owner sells it for one hundred and fifty thousand dollars, the extra fifty thousand will belong to the co-owner and Guidance will not seek to have a share in it.

A6.2. Decrease. Here, the short answer is that Guidance will share the losses from decreased value. If, for example, the city, town, county, state or federal government decides to seize the property by means of eminent domain for the purpose of building a highway, or a public building, or a school, and then pays less than the market value of the house, or less than the outstanding amount required to buy its share in the partnership, in that case Guidance will absorb the loss and will not require the co-owner to ‘make it whole’ by repaying the entire amount that remains outstanding. The same will apply when the house is destroyed by natural causes, lighting or hurricane and so on, when the house is declared a total loss by the insurance company and the payment it makes to the policy holder are less than the amount required for the co-owner to acquire the shares of its partner, Guidance. Then Guidance will absorb the loss and will not seek further payment from the co-owner. In adopting this policy, Guidance has opted out of the right given to it by the Shariah to require the co-owner to share in the loss. Instead, it has chosen to soften the burden for the co-owner by waiving its right to collect from him or her. In our next Talk, we will discuss the several different roles of the partners in the arrangement between Guidance and the co-owner. And Allah knows best.

 

 

9 / View Comments

9 responses to “Questions On Home Financing | Dr Yusuf DeLorenzo”

  1. Siraaj says:

    “Real estate taxes are collected by the municipal authorities, either the city, the town, or the county. In return for the taxes, the municipality provides services and facilities for the residents. In other words, the benefits from the taxes go directly to the taxpayers, the home owners. Those benefits are generally things like roads, schools, libraries, snow removal, public gardens, water and sewage treatment, and the like. Better neighborhoods are generally taxed at higher rates and provide better services, especially in the form of better schools.

    When there is a direct relationship between taxes and facilities, and when the only one of the co-owners to benefit from those facilities is the occupant of the home, Guidance has determined that the responsibility for paying those taxes should fall on the occupant. Clearly, if there was some benefit to Guidance from the taxes, then Guidance would pay its share. However, the system of taxation has been established to benefit the occupant. Therefore, the Shariah Board of Guidance Residential ruled that the burden of paying taxes should be borne only by the co-owner who actually occupies the house.”

    A very strange calculus. Whether one owns an apartment complex and rents units or owns a house and rents it out tenants, the “owner” is responsible for all taxes, irrespective of whether they live in the locale for which taxes are collected.

    Whether one benefits from services or not is irrelevant for whether taxes are collected. Landlords may never benefit from any services in the housing units they own, but they will pay taxes. A homeowner may never benefit from services in the locale they live in (eg someone without kids paying for school districts).

    Generally speaking, the idea that taxes are only collected for services from which we directly benefit, while it sounds nice and fair, has no basis. We may benefit from some services and not others, but we will still pay at the local, state, and federal levels. The taxes you pay are the price you are willing to pay to attain some benefit of residency and ownership as mandated on owners.

    • Aronno says:

      I think you forgot one point – the example you provided is about the total ownership of the house to one person but Dr. Yusuf was talking about a shared ownership.

      • Siraaj says:

        Aronno, there is a clearly delineated agreement of rent – they are renting out what they own. Likewise, they should pay taxes on what they own. Owners pay taxes, renters don’t, period. To get to this point, the contract has to pretend to be a rental contract in shari’ah terms but ignore prevailing laws and safeguards which renters have. This can be done by telling federal and state governments it’s a loan, and pretending among ourselves it’s not.

  2. Nuruddeen Lewis says:

    If the house sells for any price, the proceeds should be split amongst the co-owners based on their ownership percentage. That would be a true partnership. So if the house sells for less than what was paid, will the money be split based on the ownership percentages, or will Guidance take all of it, assuming it was less than their initial investment?

    • Nauman says:

      I checked with guidance and they will take all of it. To me this is the most basic flaw because in a real business world, what kind of a “partner” would not be obligated to bare the loss?

  3. Nauman says:

    The response to Question 6 (What happens if the home increases or decreases in value? Who will own what?) is misleading because it leaves out an important and a lot more likely scenario than eminent domain or natural disaster. If you have to sell the house (for example if you lose your job, etc.), and if the house is sold for less than the buying price (i.e. in loss), Guidance does NOT share in that loss and will claim it’s entire amount due at the time.

    This is the a fundamental flaw because if there is a true “partnership” with Guidance in owning the house (which is the premise of being shariah compliant), then Guidance should take up this loss based on percentage of its ownership.

  4. Shabeeb says:

    I’m glad this was placed in a public forum I often find there’s a lack of transparency in these Islamic financing companies. I’m glad comments fields are permitted to show both side of the coin.

  5. nazia08 says:

    Nice well thanks to share this information.

  6. Ufaquarian says:

    What is very disappointing for me , that these islamic companies would publish their side of story but not respond to any questions raised by the consumers/ potential home buyers. :(

Leave a Reply

Your email address will not be published. Required fields are marked *