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Real Estate

The Blockchain and Real Estate

Key Takeaway: Blockchain technology can disrupt the real estate industry by eliminating obtrusive middlemen, removing existing inefficiencies in key processes, and demystifying the black box of property transactions.

Real estate is by far the largest asset class in the world – and yet the industry as a whole is not exactly known for its willingness to adopt new technologies. Despite the proliferation of online listings, real estate as a whole continues to be plagued by common problems such as poor communication between interested parties, blind bidding wars, and a lack of transparency across a number of important processes. Delays in settlements and agreements, an all too common phenomenon caused by inefficiency and redundancy, introduce unnecessary buyer and seller fatigue. Worse yet is the fact that important details are all too easily overlooked, increasing the risk of errors in ownership records and other documents, due to the sheer number of interested parties and touch points involved in both residential and commercial real estate, such as sellers, buyers, agents, banks, notaries, and the property authority.

Property and wire fraud is likewise rampant in the real estate industry, despite the best efforts of regulators and industry watchdogs. Individual criminals often monitor title company communications for upcoming closings and create false email addresses and other aliases to trick prospective renters or buyers to wire money to them. On a corporate level, criminals forge paper documents such as licenses, bank statements, and deeds in order to set up business fronts to trick prospective buyers or sellers.

These issues, however, are by no means insurmountable. Blockchain technology presents opportunities to maintain a certifiable and instant way to verify credentials, allow proper access to documents, eliminate errors and fraud, and increase the speed of transactions and other key processes. To eliminate fraud, for example, companies can use a blockchain to create an incorruptible resource that logs the sending and receiving of funds between parties in a deal and that which provides digital ownership certificates. Here are a few detailed use cases that illustrate the value of blockchain technology for the real estate industry:

#1: Smart contracts and escrow accounts

Complex dependencies between vendors, financial institutions, landlords, tenants, and property managers make managing and selling both residential and commercial property a cumbersome, opaque, and expensive proposition. Managing even a single mid-size commercial lease can mean organizing and maintaining multiple payment and service transactions that need to tracked, recorded, and audited on a regular basis. Closing on a new property, for example, requires an escrow agent to manually read through every page of a contract and confirm that certain written conditions have been met. Blockchain technology would allow companies to conduct new or existing transactions using a smart contract stored on a blockchain platform in place of a traditional escrow account. The platform could automate payments and other transactions, such as the transfer of titles, once all predetermined verification requirements have been met by all prospective parties, vastly reducing the possibility of human errors or negligence and increasing overall transparency. Closings would also occur much faster in this scenario, allowing for near real-time reconciliation and reducing overall accounting and compliance burdens.

#2: Government land and title records

Despite the proliferation of electronic document recording devices, the process by which deeds, mortgages, and title encumbrances are recorded in the United States still largely relies on paper filings or outdated systems maintained by a local government office. Government resources dedicated to these records are scarce. Even when electronic document systems are used, the process of converting paper filings to electronic records is time intensive and cumbersome, requiring human operators to inspect a scanned image of a document or instrument and retype any data points as necessary. Typing errors, willful fraud, and incidental errors made by private parties who are preparing the original documents increase the time and costs associated with searching for and “clearing” titles. Owners and lenders are often forced to purchase a specialized form of insurance known as “title insurance” to mitigate these risks. These insurance providers, for a hefty sum, will manually review public records to examine titles and fix potential errors.

A property focused Blockchain could maintain a viewable and legally immutable history of property transactions and ownership records, replacing traditional paper filings and archival systems. Such an easily searchable database will combat fraud and reduce costs associated with governmental ownership ledgers such as insurance, notary, registration, and legal fees.

Blockchain technology, while still relatively young, has significant potential to drive transparency, efficiency, and cost savings for residential and commercial property owners and all other interested parties by removing many of the existing inefficiencies. Blockchain technology can and will bring significant value to the industry as a whole in the coming years.