If your hearing was sensitive enough and you were listening all over the United States, you would likely hear real estate agents, title companies, lenders and inspectors printing hundreds of thousands, if not millions, of papers. These papers are scanned, faxed, emailed, distributed and shredded in ways that feels somewhat reminiscent of the technologies of an old Friends episode. Common practices in the real estate industry are often archaic and wasteful — and they can be beacons for fraud across all sectors.
Blockchain technologies are poised to transform the real estate industry by drastically reducing fraud, reducing paper waste, minimizing mistakes, increasing transparency, aggregating information, allowing for better and more integrated records of title chain and creating eye-watering profits for the companies that can implement this blockchain metamorphasis. It’s fascinating to watch: I’ve recently jumped in with both feet to exploring blockchain and IOT technologies and their applications to real estate, and consulting for a blockchain/fintech startup to see the revolution up close.
The nexus of this transformative innovation could lie in one of the oldest and stodgiest subsectors of the real estate industry, the title and escrow sector. Chains of title have functions similar to blockchain, but they predate today’s blockchain technologies by centuries. Having clear title is imperative to prove you own a property, yes, but also to getting a loan, obtaining homeowner’s or title insurance policies and protecting yourself from unknown liens, encumbrances or easements on a property.
First- and second-generation blockchain technologies have shown promise, but ultimately the transactions per second are too slow, many technologies cannot meet banking or anti-money laundering requirements and, ultimately, the masses have not embraced the underlying technologies. With the introduction of smart contracts and third-generation blockchain technologies, we are seeing transactions per second increasing at a rapid to exponential pace, while banks and regulators look to the technology to cut fraud.
The potential for third-generation blockchain-powered smart contracts in the real estate industry is truly revolutionary. In the United States, title companies and escrow companies — which are often combined — are at the epicenter of the real estate transaction acting as an independent liaison between the real estate agent, lender, buyer and seller. Ironically, it is the boring old title/escrow industry that could be the lynchpin of the blockchain explosion that is coming down the pike.
The very term blockchain reminds us of a title chain, and the two operate with a very similar set of rules. As of this writing, the title industry is dealing with a phishing scam where realtors, lenders and/or escrow officers emails are hacked instructing the buyer to wire money to X. Since funds at closing are often delivered through a wire transfer, this scam can have devastating consequences on buyers wiring hundreds of thousands of dollars for a down payment. Blockchain’s promise is that it can create an immutable and distributed ledger between real estate agents, lenders, title officers, escrow officers, sellers, insurance, utility company, buyers and other parties. This means if one bad player decides to forge or alter a document, the fraud could easily be discovered by multiple parties. All parties could have open or restricted access to the entire chain of documents. This could reduce mistakes, save time, increase transparency and the availability of information, all while cutting costs cut and curtailing fraud.
The beauty of blockchain technology is that records would be both immutable (unable to be changed) and distributed/validated by all parties. The aggregation of information could be exponential as the blockchain develops. Imagine being able to see 150 years of title history and five years of electricity, water and gas bills along with all easements held by the utilities for access. You could find a history of insurance claims against the property, a record of home inspections and permit history. A buyer could easily access easements held by neighbors, encroachments such as fences which are not on the property and even a history of loans against the property. During the transaction, a buyer or seller could access real estate purchase agreements, brokerage agreements, loan documents, lead paint disclosures, property disclosures and other documents which would be stored in a secured chain where nobody could make any sneaky changes on unsuspecting parties.
As a buyer, you wouldn’t have to worry about wire fraud when transferring your money to closing. As the banking sector evolves you could pay in dollars, euros, pesos, yuan, cryptocurrency or any type of currency. The smart contract could include a provision to allow a third party to convert and distribute the money at the close of escrow. For example, a person from Canada selling his property in San Diego to a Spanish citizen could receive Canadian dollars and tokens at closing while the Spanish investor paid in euro and crypto while his real San Diego real estate broker received her commission in U.S. dollars. If the value of any currency tanked a week before closing, the buyer could change the form of their takings at the fulfillment of the smart contract.
At present, there is a lot of noise about various cryptocurrencies and their capabilities. Regardless, blockchain is here to stay and the technology is so vastly superior to current methods that the real estate industry will likely be caught off guard and reconfigured rapidly. Ultimately, I believe blockchain will reduce fraud and make dealings in real estate more efficient, transparent, secure and accessible. Blockchain also has the capability to create entirely new sectors in the real estate industry through smart contracts. These smart contracts could create opportunity for attorneys, real estate agent referral networks, new types of mortgage lenders, crypto and foreign remittence convertors, third-party block verifiers and others.
The internet transformed the landscape of retail and many other industries throughout the world but left real estate largely unchanged. Blockchain has the potential to be a catalyst of transformation for the real estate industry and it could all begin with the industry that created secure title chains decades before the first utterance of blockchain.