Property Auction Underwritting Agreements

Investment Questions and Chats Property
#1

As salaamualaikum,

I had a question regarding whether entering into an underwritting agreement prior to a property auction is permissible?

The process involves making an offer prior to auction (usually above the guide price), on the basis that you agree a purchase price with the seller while still allowing the property to go through the auction. In doing so you provide the seller with a guaruntee that if in the auction the highest bid is below your offer, you will honour your offer and still purchase the property at the pre-agreed price. Alternatively if the highest bid in auction is above your pre-auction offer, the property will conintue to be sold at auction to the highest bidder and the sale proceeds above your offer level will be distributred as follows…

Underwritter 45%
Seller 45%
Auctioneer 10%

This usually ends either one of two ways

Scenario 1
Guide price: £100k
Underwritting: £120k
Auction highest bid: £115k
…you end up buying the property for £120k

Scenario 2
Guide price: £100k
Underwritting: £120k
Auction highest bid: £140k
…seller recieves £120k plus £9k, underwritter recieved £9k, auctioneer receives £2k for facilitating.

Its worth noting the underwritting agreement is seperate to the sale contract. The auctioneer holds the underwritters 10% deposit and has authority to exchange contracts at the time of auction if nessesary (similar to a pre-auction offer), however contracts are not exchanged until the auction has taken place.

Abdul Haseeb

#2

Wa alaykum salaam,

So if the property is sold to a third party who bid higher, why and how does the underwriter receive a share of sale price? Does the underwriter purchase the house before that?

#3

The property is sold from the oringal seller direct to the highest bidder in that case. The underwriter would receive a share of the profits for taking on the risk and guaranteeing a sale at the pre-agreed price even if there were no bids during the auction.

#4

This does not meet Shariah principles as you are gaining from something you did not own. Further, you are profiting for “purchasing” the risk.

Allah knows best

#5

Jzk for your consideration Mufti Faraz, I had an inclining that may be the case.

Unfortunately I profited from such transactions 4+ years ago without knowing it was haram at the time. The profits have since grown over time as they were re-invested (through halal investments) . Am I now obliged to purify the entire amount?

#6

Apart from the initial capital you had paid to enter into this, all other gain would have to be purified.

From a Shariah perspective, this was an invalid transaction (Bay Batil) as the subject matter was unlawful. Therefore, any gain on this is not entitled.

The Qur’an states:
“…squander not your property amongst yourself unjustly (batil) except it be a trade among you by mutual consent…” (Qur’an 4:29)

Abu Hurayra reports that the Prophet prohibited the pebble sale and the gharar sale. (Muslim, Abu Dawud, Tirmidhi)

Allah knows best