Sunday, April 16, 2006

Email Blogging failed and the subject of Riba


I tried to blog via email, but it failed miserably. So now when I go back to work I will have to repost that section of my blog. I just got finished reading some fiqh issues on www.SunniPath.com and I realized how grossly ignorant I am. They say that about knowledge that the more you find out the more you find that you don’t know. I know that I don’t want to be questioned harshly on the Day of Judgement though. I know that some of my actions thus far can lead to that happening. I really don’t want that because this life is just not worth it.

There are some protective measures that I must take to prevent this. Making my money halal is one of the fard ain that I must do to release myself from the massive burden of sin. I do remember saying that I would not go into Riba again, however here I am in a beautiful house sucking down more Riba. Now me and my family need to make evasive steps to get out of it and set aside a nest egg that will ensure that we are not tempted to fall back into it again.

I’ve thought of doing something with my house such as devising some kind of shares scheme where I have the house appraised annually against the market and deduct 5% off of the appraised value and then pay off shares at specific time periods. Like I owe $245K on my house if I issue $1000 certificates that would be redeemable at different time periods then I may be able to raise enough money to pay off the interest loan on my house and still provide a vehicle for persons to make money from the appraisal of my property.

So I would probably do something like this. On one side I would have people holding certificates that would be redeemable at different time intervals so 1 year 2 year etc. on the other side I would have an escrow account. I would pay monthly into the escrow account and then I would have eligible call dates that would be released for a time period annually to prevent a run on the house (forcing me to take out conventional loans to pay for it). Prior to the call dates the house would be appraised and the certificate value would be assessed for call value. Certificate holders would then be given the option to liquidate their shares payable through the equity account or continue to hold them. This process would continue for the length of the partnership term. As shareholders decided to sell their shares on the call dates I would then have the option to purchase them out of the monies held in escrow, which would be approximately $24K a year. This would then mean that I would have to structure my payments to coincide with the markets. The escrow amount represents my amount of shares. So if in ten years the home is worth twice the amount of the original purchase price then I would own a percentage of the shares.

The difference between this model and the guidance model is both the partner of the house and the investors have a potential to lose or profit. I don’t see how the guidance model allows for both profit and loss. I do see a benefit of your credit not to be negatively affected and the possibility of you getting money back from a foreclosure.

Ultimately there has to be an end to the payments. So then what I would say is this structure the partnership for ten or fifteen years at the end of which the resident partner has the option to buyout the other partners or shareholders. The price of the stock will be the adjusted price of the initial investment and the current appraised value of the home. So for example if someone bought a 1 year option for $1000 and at the end of the year the home appreciated 20% then the resident shareholder would be responsible to pay $1200 on the shares this is money that would be taken from the escrow account. It would therefore be prudent that the resident shareholder keep up with payments at the rate of the current market and structure his payments and term to account for large spikes in the housing market. If the housing market took a slump then it would be advantageous for the non-resident shareholder to hold their shares and the resident shareholder to buy shares.

If at the end-of-partnership dissolution the resident owner does not possess enough capital in escrow then the partnership can choose to either sell the property or enter into a new term of partnership that represents the outstanding shares on the property. This arrangement seems fairer for both the lending party and the resident party. Since all parties are shareholders all property expenses and insurance is split. Utilities and wear and tear costs shall be incurred by the resident shareholder. If at anytime the resident shareholder ceases to remain in the residence then he becomes a non-resident shareholder and the affairs of the property must be approved by the board of trustees. The escrow account would be the place of accumulated payments made to the property and would represent the shares of the resident shareholder. It would work for the resident shareholder to keep sufficient funds in escrow to buyout non-resident shareholders at call periods. There should be penalties for selling shares prior to a shareholders eligible call date. Essentially the program is a real estate investment trust on a singular level.

The other method that is Islamically legal is have a group of investors purchase a home and outlay a series of sales prices in advance such as if you pay at the 5 year mark then the house is $350K if you pay at the 10 year mark then the house is $400K etcetera and then I choose which price I am comfortable with. This seems to be the simplest plan. Everyone knows what they are responsible for. It just so happens that if one does not remain in the house until the agreed upon sales date then one has the possibility of losing money. I think that this is a fair instrument of home transferring where you could just walk in and pick your payment, and it would allow the financier the ability to sell his deed at a lower price if he wanted liquidate his assets. Man give me a little bit of money and this is exactly what I would do. This house is this price today, price x tomorrow and price y the day after that you choose your payments and how long you wish to pay them. Bam finished. So easy. So I have to give this some serious thought and work out arrangements so that I maneuver myself out of the debt that I have placed myself in.

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