Question
I am buying a house on paper in E"Y. The project is slated to be complete in 4-5 years. But meanwhile already from year 1 I must put down 20% of the funds, which the builder will have access to. Does fronting the money require a heter iska since at the end I will receive a property whose market value is much higher than what I paid?
Answer
What you are doing is called peseko- paying in advance for a possession that the purchaser will only obtain ownership at a future date. As you correctly noted, the problem is that at the time when the customer takes possession the value of the purchase will perhaps be higher than the amount that the customer paid.
To understand the exact nature of the issue it is important to note that the time that one is obligated to pay for a purchase is at the time when the purchaser acquires the purchased item. In the case of real estate this is at the time when you will receive title to the property. Therefore, the money that you will pay prior to the time that you will receive title to the property is similar to a loan. Since the property may well rise in value in the interim it would seem that the difference between the value of the property at the time you receive title and the amount you pay in total would appear to be interest on your loan. Since the money is actually not a loan the issue is only an issue of rabbinic ribbis since the Torah's prohibition only applies to actual loans.
When the Rabbonon enacted the prohibition against paying in advance they allowed for two exceptions. (They are both written in the Mishna BM 72B and discussed in YD 175, 1-4). One exception is if the seller at the time of payment owns an object which identical to the one he will eventually give to the purchaser. The rationale for this exception is because we view what transpired as if the customer actually bought the object that was owned by the seller at the time of the payment. Even though the customer did not perform an act that would serve to acquire the object and even though the customer eventually does not receive the object that the seller owned at the time of payment we consider it as if the customer purchased the object that was owned by the seller at the time of payment. Even though this is not actually occurred, the Rabbonon allowed for this exception since it is similar to a transaction which is permitted.
The Rabbonon went a step further and ruled that not only if the seller owned an equivalent object at the time of payment but even if the object has a fixed price a customer may prepay for the object he wishes to eventually receive. The reason this is permitted is because the seller could have conceivably immediately purchased on behalf of the customer, the object that the customer eventually will receive and if he would have done so, the customer would not have earned anything from his prepayment because it is as if he acquired that object when its price was low.
Even in case a person buys a house that already exists and belongs to the seller at the time the customer begins paying for the house we are faced with the issue of prepayment because the customer will only acquire the house when title is transferred. However, based on the above, many poskim (see Nesevos Sholom 175, 4, 15-23) permit prepayment because we view the payments of the customer as if he is immediately acquiring a part of the house even though formally he does not acquire the house. The reason this is permitted even though the customer did not really acquire any part of the house at the time of payment is because the entire prohibition is only Rabbinic, therefore, the Rabbonon could make an exception if it is possible for the customer to acquire part of the house.
However, in your situation since the house that you are purchasing does not yet exist, you cannot rely on this leniency since there is no house for you to acquire before it is built. Furthermore, the second leniency that in case there is a market price also does not apply because your seller cannot give you any house besides the one that the you are contracting to buy. Therefore, you are correct that you must make a proper heter issko that all the money that you prepay will be used by your seller as an investment on your behalf and not as a loan.
We should note that perhaps it is possible for you to arrange that the problem of ribbis will be avoided. If your seller already owns the land perhaps, he will agree that the payments that you will make prior to the commencement of the building should be towards the purchase of the land upon which the building will stand and later payments will be made according to the progression of the building. The reason there will be no problem if he agrees, is because you will not be paying anything in advance.
If you can't arrange to avoid the problem of ribbis and must use a heter isska, there are a few important points that you must be aware of. The first is that every heter isska has a sechum hispashrus an amount the recipient of the money will give the one who gave the money in case he does not prove as per the terms of the isska document that the money that was received was invested in an investment that lost money. In your case the sechum hispashrus is the house that you are purchasing.
The Toras Ribbis (10, 54) stresses the importance to write in the contract that all the money that you are paying is an isska. The reason it is imperative to write this in the contract and not rely upon what is said orally is because otherwise what is written in the contract will contradict the isska since the contract says that the money that is given is towards the purchase of your house which means that it is being given as a peseko-a prepayment and not as an isska. Since the written agreement overrides any oral agreement your heter isska will be null and void.
A third very important point is that your seller must understand that he is agreeing that the money is being given as an isska- an investment on your part and not as payment for your house since many including the Iggros Moshe (YD 2, 62, 63) maintain that a heter isska is only valid if both parties understand what it means to make a deal based on a heter isska. He says that it is critical that you don't tell your seller that the isska is just a religious document to circumvent the prohibition of interest.
Finally, we should note that it is important in any case to write in your contract that any money that is owed will not be a loan but an investment i.e., as an isska. The reason is that often there are other circumstances that will arise that involve issues of ribbis. For instance, almost all contracts have clauses that are concerned with late payment or late delivery. If one must pay more for late payment or delivery there is a problem of ribbis. If the contract does not state that the money that is owed is an isska then one may not eventually charge for late payment. Thus, if your contract does not state that it is governed by a heter isska and your contractor is late in transferring ownership of your house, even if the contract says that he has to pay x-amount of money for each month that he is late, you will not be able to collect since one may not charge (See YD 177, 16 and see Chelkas Binyomin 177, 164 for example) penalties that grow with time.
In conclusion: There is a way to avoid the problem of ribbis if your contractor cooperates but if not, you must make your contract subject to a heter isska and do so properly. In any case you should make your contract to be bound by a heter isska in order to avoid other ribbis issues.
