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Economic System of Islam 20 – An Alternate To Mortgage 2
Channel: Jamal Badawi
Series: Jamal Badawi - Economic System of Islam
File Size: 6.68MB
Episode Transcript ©
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In the Name of God, the benevolent the Merciful, the creator and Sustainer of the universe, peace and blessings upon his servant and messenger Muhammad forever. I mean, I bear witness that there is no god worthy of worship except the one true God. And I bear witness that Muhammad is the messenger and servant of God, I greet you, our viewers with our usual greeting. The Universal readings of peace agreement has been used by all of the profits from Abraham to Prophet Muhammad peace and blessings be upon them all. Assalamu Aleikum, which means peace be unto you. I'm your host Ahmed Rashid. Today we start our continuing with our second program and our special series that we've been
doing on the concept of week which we call sir, or shared equity in rental is a viable alternative to high mortgage rates. I have joining me on the program as usual. Dr. Jamal Baddeley of St. Mary's University. Hello, Jamal Assalamu alaykum Monica
melodrama since we did our first program in the series, the number of questions have been raised by the viewers relating to the to that program. One of the common questions that's been asked of me is that as a program like Islamic focus, which is a religious program, doing talking about the topic of homeownership, and I thought, perhaps it might be interesting to have you comment on that at the top of today's program, right? Well, this is normal for people to ask that because in the western civilization, the term religion use Word usually is used to refer to a set of beliefs and values or devotions. And what's happening here is that in the case of Islam, it's not only a religion in that
sense, it is also a religion in a sense of a comprehensive way of life, that deals with and direct aspects of human living. Part of that human living is the economic problems of mankind. And, in fact, I should add here also that one of the my image of motives of trying to develop that system, even though the idea basically is not really totally new, but to develop it, is the fact that Islam prohibits usury, or interest in the modern term, while allowing and encouraging people to participate in ventures on the basis of equal sharing in profits, or losses. So this is the main idea behind it, which I feel would not only be significant, as a concept, are useful for Muslims
alone, by way of avoiding dealing in usury, but I'm sure it would be of interest to those who don't mind the present high interest rates, and I haven't found anyone yet, who does not mind that. Certainly the interest rates are making the situation very, very difficult for a number of people in the country at this point in time. But before we go on and explore the concept a little further in today's program, perhaps I could just ask you to take a few moments to the back. And to summarize the main points that we touched upon in program one, our introductory program, when we introduced the concept of Sir, socially, perhaps you can do that in a brief way by referring back to the charts
here, which are basically similar, or the same as the ones we used in the previous program, show equity, Lincoln. And suppose you have a Harris, whose fair value is $50,000. You have your mortgage coming back for renewal, and you still owe the company $30,000.
That was suggested here, but you could divide the value of your house into 50 shares, seven better each. And then you can send the other publishers, besides yours, will own equity to other investors were interested, who can provide you with 37 betters that's in terms of cash. That amount could be used to retire the mortgage, which might be too expensive for you to manage. In some cases, even if you're just buying the new home, the 10,000 would be your down payment data first up 70% of the place. And then we said how do you reward those investors? We showed you do that first by determining a gross rental value for that property. The assumption in this example is $450 per
month, which is 50 $400 per year. Minus the expenses mean expensive I should say.
taxes and insurance, that's 900 estimated. So that gives you a net rental value of 30 $500 or $90 per share, because we have a total of 50 shares,
that the home owner does not have to pay that amount because he can deduct his own share of rental because he was also a co owner, or co investor. And since he has 10 shares multiplied by 90 better, so his share of that would be $900. That leaves 30 $600 the share of rental due to the investors.
And then we said emerges for the homeowners to accumulate more equity here will be allowed according to the contract, by mutual agreement to buy back some of those shares every year. The assumption made here is that he can afford to buy three shares per year. And assuming that you pay the same price at the beginning of the year, which will be 3000. That means that every 3000 to 3600 gives you $6,600 per year, come into a monthly payment of $550, which in fact is less than what you would ever otherwise pay for mortgage at any rate now, except maybe if you talk about the 2%. rate. And then we said that in the second year and in every subsequent year. And we have to do is just update this
basic information that we were talking about, you have to have a new appraisal of the property, which in this case has been up, we assumed by 10%. So it's worth 50,000. That means that the price per share would go up by 10% 1100. The
new furniture value might also go up by 10%. It could be less, but I assume that throughout the model, that gives you $5,930 minus expenses, again updated to $990. That gives you 30 $950 new net rental value for the second year, which is divided by the number of shares, which is constant in this case 50 shares, it comes to $99. For sure. Similarly, the owner would have to pay back his shares of bathroom, which in this case would be for teachers. So that means that his proportion of rental would increase and the proportion of rental for other investors would decrease because now they hold on the 37 shirts out of 50. So that gives 3663. And again, you'd have to buy three shares
back at the new price, which is 11 $100 per share, we start now with the appraised value, the appreciated value of the shares in that case would be 3300. So the total payment in the second year. And that example comes to $6,963, which is a monthly payment marginally more than the first year at $180 per month. Instead, he comes on top and accumulate much larger equity than he would otherwise accumulate through the traditional mortgage system and stayed with very affordable monthly payments.
Now the first program were indicated that
the homeowner would have to get together with the investors and then they'd have to reach some kind of agreement in terms of the fair value for the property. Could you explain how this is determined? And what happens? If you can't come to some kind of an agreement? I mean, if there's any dispute about the fair market value of the property, okay, the basic rule is just like you said, the mutual agreement of both the investors and the homeowner as to what is a fair value. But of course, it is practical to ascertain impartiality of the estimate is to go and make a professional appraisal. And there are some people as you know, around who have professional training and making a presence.
If you have some difficulty accepting a particular appraisal, you could do for example, to appraise it and take the average. However,
it seems that most of the appraisers probably would come with a very close type of estimate, because they have a certain formula as they apply plus some consideration of the market value. So to do it, but it is a matter of course, if you have to have a presence, then the cost of course, will will increase so that he could resolve it by specifying in the contract that this is the way how a presence are going to be
how personal how much of the cost to have an appraisal done. And who would pay for it, would it be the homeowner or would it be the investors? Okay, I mentioned in the previous program, that one property in Halifax is now under the system.
In that particular case, it costed about $125 to make a professional appraisal. as to who pays for it, my feeling is that it should be shared by all, because we are treating it as a cost of rent and our cost of running the property. So I think that could be deducted from the total or gross rental for the year, hold that prison is made that distribute the load for everybody in proportion of their shares.
Now, you suggested that the property should be divided into shares. Does that mean going through the process of firmly issuing shares in the form of documents? And same ways? When might you get from the company? Right?
Or is it something that's a little less than that? And what about the question of title? Does it mean that the title has changed?
from the original owner to worker ownership kind of situation?
Just has a better? Guess I'm asking a series of questions here. I mean, it's annoying, but better motivation for more shares. So the question of title, and we talked last time $1,000 shares Why $1,000? Okay, first of all, with respect to your first question, in terms of issuing a particular document, you could do that if you like. But I don't think really that this is needed, because you have the full legal guarantees.
If you sign a document, having the owners, the home owner, and the investors signing a document, which hold the property and collateral, until all the principal as well as the profits are totally paid for service guarantee, and could specify in the document that these are the shares contributed by each party. So you don't have to issue a ticket, if you like.
Secondly, with respect to the title, you don't necessarily have to change the title. Even mortgage companies themselves, do not ask you to change the title. The title is simply how much you know about them until you pay your
mortgage, your mortgage and your application. So there's no need really, to change title.
However, if you decide to pursue that not within a small circle back within a group, or corporation, or let's say a credit union,
or whatever other's corporate bodies, it is quite possible that you could operate it as a housing crop, in a sense that the housing crop would hold titles of all the properties under the system. And if everything is paid off, the title can be transferred back to the owners to the homeowner, so that it's flexible, that you don't necessarily have to do that. Because if you do that every year, you have to change the title, because the proportion of shares do undergo some changes. And that require lots of taxes and costs, which are not really needed, can just do it like the mortgage company doing essentially, simply holding the document
getting your property as collateral.
second issue was with respect to
the shares. The question shows why the $1,000? Well, I'm not claiming that this is a magical number. It could be $10, it could be $100. There's no reason why not. In fact, if you have a credit union, as you know, you could have even as small as $5, for sure, in the credit union, that I just suggested better as a reasonably convenient number, because when you talk about a house worth $50,000, you can go about collecting $10, or something of that sort, and most people want to make this kind of investment can possibly make at least $1,000 as a unit cache. However, if you want to apply that in a mosque or church group or club, for example, where there are some people who are
much less work to do and many people are willing to participate, but nobody really can afford not too many can afford more than $500. Well, you can reduce the number, you reduce the value of the shirts to 500 digits increase the number doesn't make any difference.
Far as the value of the shares. It's mutually agreeable and practicable.
Some people may wonder
how you could charge rent to a homeowner for use of his own home? How would you respond to that? I received the same question also similar to yours. But the point is this, if you totally own your home, and nobody else has any claim on it, then obviously nobody is going to charge you and your mentor. I mean, it's just beyond reason to expect that. But when you talk about a home that is worth $50,000 and you own only by way of equity 10,000 when it's not really fully, we're on home, but in a system like that, the next step happens because the concept is totally different.
mortgage, because in the case of mortgage, surely you are not paying rental to the mortgage company, but you're paying interest, because you are a better word. And mortgage company is a lender,
that under this system, the home owner is not a borrower, and the people, people invest that money, or provide that money, I'm not lenders, that's why they don't charge interest. They are current investors, all of them are co investors, including the home owner himself. So just like you and owning a home, you have half of it, and half of it, right. But none of us needed to live in. So I saw that I was rented to you, or you rent to me.
It's fair enough, we both own it. And we rented you one of us rent it to the other. But of course, we both share the rental value. So I tell you only half of the rental. So it's just a very simple concept in terms of sharing, in the end the consequence of the whole deal.
And, of course, obviously, it was unfair for the investors to contribute the money, they don't get interest and don't get centers, what do they get, there must be some fair return. And the closest thing done is this rental agreement. I think I find it useful if you could give him some ID some idea of how the rental value was determined.
It could be determined basically in the same manner as the determination of the value of the property.
That is to say, you could also ask whoever is making a present of the value of the house to tell you also what is the fair rental value of a house with this facilities or that
In that particular area, and this information are available, people who are in the field, especially companies with rental departments would have some of this information available. But as I said before, this is similar to the appraisal of the value of the property. It's a matter of mutual agreement and what is regarded as a third
rental value to be to be charged. But I may make a suggestion here, however, that as a rule of thumb, a very useful rule is that you could determine also the rental value as a percentage of the value of the property.
And I think anywhere between three quarter of 1% to 1% of the value of the property by way of monthly as a monthly rental value is not really the andreesen seems to be about the average that you may find in the market. And that could also be incorporated in the agreement and resolving this whole problem. Of course, needless to say, but we're talking here about rental value
rental value, not including the course basic expenses. Let's turn to this question of expenses. Now. I think many people would want to know, what you include what are included as legitimate expenses? And what kinds of expenses are excluded? Could you explain you mean the expenses that are deducted from the gross rent has to reach? Yes, December of next month have to be estimated, right? Okay. Well, there are two items that I would have no doubt at all, including two or three items, I should say. When his taxes and insurance because when you rent a home or apartment, you don't pay taxes.
What do you pay insurance, and since the whole concept is should gentle and equity or shared equity, and then it's only fair that this basic expenses would be paid that also that would be just the equivalent in the market of a house that you weren't in the same condition, same area, or similar area? How much do you pay, we pay back x $150, but not taxes and insurance. So this should be netted against all in professional wishes. And that's why we said that these expenses should be deducted from the gross rent.
I think it's useful also to add a few dollars to cover minor
basic repairs like you know fixing the leaking faucets or something like that or maybe allowing for painting every so many years. Just taking that into account by averaging breath out. Because that again seems to be the practice that when you rent a home still the homeowner is responsible for this basic repairs minimum minimum repairs. And of course, the homeowner is only partly owners, other investors are partly on it in that sense, so they have to share it. So this also be deducted from from the gross rental value as well as your second part of the question that should be excluded from vers expenses. Well, my answer to that is that things like a grass cutting, snow removal, of course
would not be good because I
In the normal practice, when you rent, you have to take care of that yourself, in most cases, I should say, nor should it include any basic capital investment or improvement in the house, like, for example, building an extra room or something of that sort. That, of course, does not automatically come as a current expense to be deducted from renting is basically
a case of a capital improvement. So you're involved in a
contract, and after a couple years, you decide that you want to add something on that amount, maybe a swimming pool, or do a repair to the basement or some
alterations alteration to the structure of the house and so on.
Who would pay for that house? Okay, this again, has to be specified. And in fact, one of the documents that I made by way of example, how to apply the system that also was taken into account, you cannot, of course, prevent the homeowner from improving his property and wait for 14 years, even in my previous example, it takes 15 years before you take ownership of your home and this monthly payments.
That there are one or two alternatives, that you could solve that problem. When Is this okay? If you people, as a homeowner, you tell them, if you people are interested, we can share this additional cost of improvement because it would reflect on the value of the property, which in turn, reflects also on your shirt, the value of your shares. Because the appraisal of the property, after you do that would go up not only about inflation, but it will also value the improvement you're adding to the value of the property. In this case, everybody home owners as well as investors can share, let's say the $3,000 or so additional improvement by splitting that in proportion to the number of shares
that each one win.
This is one way of dealing with it.
The other possibility would be to let the home owner make this improvement, let's say spend without $7 to finish his basement, let's say and then issue him three shares. For example, in the first year, the share is valued at $1,000. So he would be entitled to three shares. Of course in subsequent years, it would have to be the price of the share, which is current appreciated value.
That means simply that the formula would basically remain the same, except that the total number of shares would vary. In the previous example, we're assuming 50 shares. Now he spent $3,000, to fix the vestment
becomes 53. So the number of shares becomes 63. And his share would be nice for teachers instead of 10. And gradually he keeps going back more and more. Sure. So just a mechanical problem where the
many people who've watched the program, found it hard to believe that they're really which
one can increase their equity under the search system, or some people have found it hard to believe that you can add as much as maybe $3,000 in any particular year.
The question, I guess, one would ask yourself, Is there any price that one has to pay for being able to acquire equity so fast? Okay, first of all, I think the point is well taken, because as we have shown in that example, you can build, for example, $2,000 equity per year as a
monthly payment and a $30,000 that you're getting from investors, that's just beyond imagination, I argue that
most people will get under maybe 100 150, or three years out of doTERRA. When they make an academic mortgage plus mortgage, you have to pay the taxes and insurance in this system is covered. So that net payment, including taxes and insurance and everything. So that yes, there is a price for that. But I think it's still a very reasonable price. The price for that is that under mortgage agreements, when you contribute, let's say $150 per year to your principal, the total amount of principal remains the same from year to year. In other words, you're paying $30,000 it's an interest, it has interest for the 1015 or 20 years that you're making them again, you could just
deduct them from that the very minute contribution that you make to the principal every year.
Okay. Now, in this system here, you contribute a lot more in 1000s, to
principle, but in the meantime, in the following year, when you want to buy shares, you don't buy them at the original price of 1000. Better, you buy them at the new market value, which could be 10% more, and every year you buy, you have also to keep increasing what you pay by way of getting back. This ensures that I believe that this is still a very fair system. It's very reasonable and I did make some computation with that and you're touching
Payment under search system in the example we have given as compared to the mortgage would be equivalent to something like 13 to 15% mortgage, depending of course on the acquisition of the property.
Sir agreement, the homeowner homeowner may buy back more shares in order to build up his equity each year.
who receives the money when he buys these additional shares? Okay, there are two ways of doing that. First of all, the investors want to have this investment as long term, they're not really in a hurry to get the money back what you could do, but the money that is received by way of purchase of shares could be distributed among them in proportion of their shares, which means that everybody would have a reduction proportion, reduction in the number of shares or decimal points of shares that he possesses. That would be one thing, the beauty of the system that is very flexible, you could also with the consent of other investors, or you could specify that suppose you want to contribute $5,000
to a project like that, that you do expect, but you might need that money yourself in two years to buy a home or a car, when you could agree, and specify that with the investors that, for example, in the first years, when the owner buys back, he shows that you take it all yourself, which means that you reduce your holdings from let's say, $10,000, or 10 shares to seven shares. So this could work out, that can be worked out between the investors in any way they like it. It's a very flexible system
benefit from the investor's point of view to participating in a scheme like this,
and other all kinds of kinds of investment schemes. And again, I guess the question is at that price I talked about, first of all, the investor gets the rental income every month, and that comes close to nine to 10% of his investment, he gets an appraised appreciation of the value of his shares when it's paid back to him. And that's again, compounded in that example, at about 10% per year. So that's another about 10% at the minimum, we should say in this area. And thirdly, in addition to that he gets also this monthly payment by way of cash, which could also be reinvested. And that would be a third source. At what price Well, the main price here is that you have to be fair, and
expect to participate in a smaller increase, or possibly even decline in the property value of the property. So it's still fair for both sides.
We're getting our signal that our time for today is gone. And we want to thank you for watching our program where we've been discussing, the concept of shared equity and rental is a viable alternative to high mortgage rates. Thank you for watching. Assalamu alaikum peace be unto you