January 12, 2018 by Allen Shayanfekr
There’s a new decentralized and distributed ledger system that is gaining in popularity and picking up speed that will revolutionize the way real estate is bought, sold, invested in, and transferred in the very near future. In fact, this distributed ledger technology (DLT), known as the blockchain, has already arrived and real estate transactions are currently being recorded on it. One popular application of this blockchain technology, known as the Ethereum project, allows parties to real estate transactions to enter into legally binding contracts without the aid and assistance of third parties. These contracts are known as smart contracts.
Introduction to the Blockchain
The blockchain, or DLT, is a true peer-to-peer technology that acts as a public ledger. When a financial transaction takes place between parties on the blockchain, it is affirmed by all the other parties with access to the DLT. Because the record is a public record with embedded security, parties can record their transaction without divulging personal and sensitive information about themselves.
Since no one owns or controls the DLT, all transactions recorded are permanent, immutable, and irreversible making them much more secure and trustworthy than any other ledger, public or private. Once a transaction is recorded, it cannot be tampered with. Parties to the transaction cannot fudge the outcome since it is public and validated by all other members of the blockchain at the time it is recorded.
The first blockchain application was a digital currency known as Bitcoin. However, several applications have arrived since the advent of Bitcoin. One equally powerful application called Ethereum, with its’ own blockchain and currency (Ether) allows parties to enter into and set the terms of legal contracts that carry the same permanent, immutable, irreversible, and secure features as financial transactions recorded on the DLT.
What Is a Smart Contract for Real Estate?
Due to the nature of real estate transactions, there are many ways to structure a deal. If a homeowner wants to sell their house and they can agree to specific terms with their buyer, the parties can enter into a contract through the blockchain that allows the buyer and seller to name their terms based on certain pre-set conditions that are detailed in the smart contract.
For instance, if the inspection reveals that the house has a cracked foundation, the buyer may want a discount on the sales price based on that contingency. If the seller agrees, the contract can reflect that potential option.
When the Ethereum contract is written, coded and then validated on the public ledger, that sets the legal terms of the contract. When the property inspector makes his report, he can make that report a part of the blockchain, which then is validated by all other participants of the DLT. If the contingency is met and the inspector’s report shows that the house’s foundation is cracked, that triggers a reduction in the agreed-upon sales price and the transaction is conducted according to the contingency price in the contract. There is no need to rewrite the contract to reflect the new sales price. Instead, some of these contractual details can be automated into the transaction itself.
Ethereum Real Estate Contracts Are Flexible
There is no limit to the number of contingencies a smart contract may include. An Ethereum real estate contract may be written so that any number of final sales prices, reductions in price, or increases, can be triggered based on specific events agreed to by the parties.
A real estate developer may want to pay one price for a plot of land based on whether or not the seller has a clean title. A smart contract can be written as the title research is conducted with the final price determined upon completion of the due diligence and research by other parties involved.
Another scenario may be a landlord-tenant situation where the landlord sets rent prices based on various factors like: whether or not a family has a pet, if improvements are requested to the property before move in, or depending on the renter’s credit report and rental history.
Every contingency can be spelled out in a real estate smart contract and recorded on the DLT. This allows all of the parties involved to save time and money while performing due diligence. The benefits to Ethereum contracts are legion, and as the technology progresses, real estate professionals are learning new and efficient ways to use it to their advantage.