Smart Contracts and Real Estate Transactions
Modern technology is making life easier than before, especially when it comes to contracts, with the introduction of smart contracts and blockchain technology.
What is a Smart Contract?
Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller directly written into lines of code. The code and agreements exist across a distributed, decentralised blockchain network. Smart Contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority or external enforcement mechanism.
Smart Contracts therefore offer a potential solution to the management of real estate transactions via the introduction of a universal, distributed ledger that does not require trust in a single third party.
According to Vitalik Butern, programmer of digital currency Ethereum, Smart Contracts are the ‘simplest form of decentralised automation, and is most easily and accurately defined as a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated’.
How do Smart Contracts work?
The main principle of a Smart Contract can be compared to the work of a vending machine. They execute only the instructions given to them automatically. Firstly, assets and contract terms are coded and put into the block of a Blockchain. This contract is distributed and copied multiple times between the nodes of the platform. After the trigger happens, the contract is performed in accordance with contract terms. The program checks the implementation of the commitments automatically.
How Smart Contracts can benefit the Real Estate industry
Cryptocurrency powered by blockchain technology and smart contracts, has the potential to eliminate the need for third parties in the facilitation of real estate transactions. In the case of real estate agreements, contracts can be verified and enforced automatically without the need for human interaction, reducing the need for agents, lenders, inspectors and title insurance providers. There are three main ways in which the real estate market benefits from Blockchain technology: it allows for faster, more secure and fully transparent transactions.
Here are the basic benefits that Smart Contract technologies bring to the real estate industry.
- Automatic Signatures
Smart contract technology makes it possible for everyone to create a smart contract, e-sign agreements (obligating both parties to follow terms set in the contract), and automation of all processes. This could help with cutting out additional inspection costs, registration and loan fees, as well as taxes, and mean the process is all enforced by quantifiable smart contracts. - Payments Overseas
Currently, if you’re wanting to transfer money to people or institutions in another country, payment services like PayPal or bank transfers come with large minimum costs and can be heavy with fees. With Blockchain technology, this transaction can be done quickly and with very low costs. Eliminating intermediaries removes additional fees, allowing businesses and their customers not only to interact and transact directly but also to do so with low to no fees for transactions. - Property Ownership
Any digital property ownership is able to be managed with Smart Contracts. Digital content ownership can be established and manipulated in a simple and transparent way with Smart Contracts. For example, upon the primary owners death, a Digital Will can automatically trigger the contract execution in favour of a primary beneficiary. - Leasing Transactions
Real estate owners have an opportunity to reduce some of the existing big challenges in their leasing transactions using blockchain technology, making it near impossible for fraud to undermine the rental procedure on any level. - Reducing risk of breaches and fraud
For example, a seller and a buyer agree to transfer title as the agreement with $300,000 in digital currency. The transfer of the money to the seller would trigger the automatic transmittal of a specialised coin or digital certificate that represents the title to the buyer, with the title transfer immediately recorded in a block on the blockchain. - Keep a record of transactions
All agreements via Smart Contracts are stored in chronological order in the Blockchain and can be accessed along with the complete audit trail. This allows - Land Title Recording
The facilitating of property transactions will be met with decreased fraudulent activity, improved transaction transparency and efficiency, and strengthened confidence in identity. Additionally, it will speed up land registration, become a simpler process, and provide for an open approach to be taken to data. - Trust
Smart Contracts generate absolute confidence int heir execution. The transparent, autonomous and secure nature of the agreement removes any possibility of manipulation, bias or error.
The advantages of Smart Contracts that have been so innovative in so many industries — automation, predictability and speed — could finally be brought onto segments of the legal industry. Representing contractual terms in code, rather than natural language, could bring clarity and predictability to agreements.
Legalities in Australia
In Australia, legal title can only transfer by deed. Legal charges over real estate assets are also typically created by deed. Some jurisdictions, including England, Wales and Australia, require deeds to be executed by hand on a paper document. Other jurisdictions go further, requiring the in-person involvement of notaries. Some form of legislative change will be required if Blockchain is to eliminate the entirety of real and online world interaction.
Smart Contracts and Real Estate Crowdfunding
Within a few years, financial markets may be trading fully-digital assets across blockchain networks, with the terms of those trades enforced by code.
Banks, exchanges, and other financial institutions are actively developing blockchain technologies that will enable them to store and trade real assets over blockchain systems.
Real estate crowdfunding and blockchain technology will create a new way to invest and raise capital. As a result, any platform will have the ability to offer Investors from anywhere in the world, investment in real estate assets using cryptocurrency generating profits paid in cryptocurrency like Ether or Bitcoin.
