Smart Contracts and the Real Estate Industry- A Match Made in Heaven!

Rafael Soultanov
Jan 26, 2018 · 5 min read
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So what would you do if you wanted to buy a house? Simple -even if you’ve never bought one, chances are high that you already have an idea: you get pre-approved for a mortgage, then you find a real estate agent, you shop around, you make an offer, get an inspection and then close the deal. Guess what? Blockchain and Smart Contracts are set to disrupt this chorus in the $217 trillion worth of Real Estate global Industry! Areas of opportunity include: improved property searches, expedited pre-release due diligence, smarter decision-making, ease in leasing and subsequent processes like cash flow management and property management.

“The practical consequence […is…] for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

Marc Andreessen

Here are some highlights to get you imagining what the future looks like for the Real Estate Industry.

❖ 100% electronic and secure property sale where fraud and paper deeds are a thing of the past

❖ Digital leases which automatically withdraw rent payments and service charges with a full audit trail and no human error

❖ An autonomous accounting system where every transaction is automatically recorded and balanced without fear of anyone manipulating the system

❖ A secure electronic record for each individual and corporate entity showing all their details among them their credit history

❖ Can you imagine a commercial building that has every system (like utilities) connected securely and adjusts itself without the occupants or any other party intervening or instructing!

Ragnar Lifthrasir, Chairman of the International Blockchain Real Estate Association, hints that whereas firms like IBM, Deloitte, and KPMG among other giant firms are investing heavily in smart contracts and blockchain; other Tech cognizant real estate firms among others are already investing a lot of money, time and effort in a bid to strategically position themselves for the disruptions as well as the benefits/advantages smart contracts and blockchain offer for the real estate industry.

Benefits/Advantages that smart contracts and blockchain offer the real estate industry

The blockchain technology is rapidly hitting the mainstream and according to a World Economic Forum survey of 800 executives and information and communications technology sector experts, 57.9 percent of the respondents believe that 10 percent of the global GDP information will be stored on blockchain technology by 2025. Until recently, blockchain was known more as the technology powering Bitcoin. However, industry players now realize that blockchain-based smart contracts can play a much larger role in real estate dealings, potentially transforming core real estate operations such as property transactions.

Enter Smart contracts

Smart contracts are agreements and transactions that are concluded and their execution guaranteed without human intervention through computer protocols. These same protocols undertake to check the possibility and legitimacy of the transaction; no agreement can be concluded if its terms do not meet the established standards. Smart contracts execute themselves automatically once the requirements are met. The terms of the smart contract are transparent to everyone on the network, they are immutable and permanent. Smart contracts in conjunction with other technologies like IoT could provide safer and more reliable options for property sales as well as rental transactions. For instance, September 2016, saw Deloitte announce the launch of a pilot project for registering rental transactions using the blockchain in partnership with the Cambridge Innovation center and the city of Rotterdam.

Major benefits that smart contracts offer

Ø Enhance Speed of transactions

Real estate transactions aren’t fast, leave alone ‘real time’. While blockchain and smart contracts may not eliminate local government regulations on housing, these technologies could speed up the process of verification, search for homes and processing of ownership. Don’t you think it would be great if homes had digital identities with list of former home owners, the yearly cost of running the home, and the repairs and additions done on the home? It’s amazing on reddit that one blockchain user recorded that he had just warranty deeded his house into an Ethereum smart contract, AMA.

Ø Protection against fraud

Forged documents, false listings, and rental scams are impossible when the digital ownership of a property, documents and contracts is linked directly to blockchain. The records on blockchain and smart contracts are immutable, permanent and transparent, no one can alter them. And with every transaction of the digital property, everyone on the network is able to know.

Ø Significant reductions in real estate costs that lead to affordable investing

This is one of the areas that will see a major disruption. Traditionally only extremely wealthy investors would buy a property or building. It was simply out of reach for most people. Blockchain and smart contracts are giving power to every tax bracket to own a fraction of properties and buildings. Property owners, on the other hand, would be selling to smaller investors who have combined their purchasing power to buy the property and not just multi-millionaires. It would equally cut on the long talks with realtors and the long trips to banks among other annoyances that collectively make for the red tape.

Most folks will simple view this as a fad. But, consider this- Prime-Ex Perpetual are already at it. This is a real estate company from Panama (because it is a tax haven) that is making use of the Waves blockchain platform to lower entry barriers in obtaining financing for a home! Through Smart contracts they are reducing risk for the homeowners and as well level up security for their investments. With Waves, they are able to bypass all the red tapes and bureaucracy that is typical of residential lending.

Ø Cutting off the middle men

You can for sure cut quite a number of the middle men when you transact on blockchain using smart contracts. You cut out the brokers, banks and lawyers among many others; you deal directly with the seller or buyer. This would save a considerable amount of money that goes into fees like escrow fees. Saving a 2–3% on the buying or selling price could be a considerable amount when it comes to real estate. Take for instance if you are buying a property worth $500,000, then $10,000 saving could be enough to furnish the house with furniture!

Wrap Up

Currently, many real estate systems and processes are siloed, and information is consequently scattered on different point solutions. This lack of interoperability results in data redundancies, duplication of records, and opaqueness. As such, real estate management’s decisions are frequently based on data sets, which do not provide a real-time view of ongoing activities. Therefore, the advantages and potential for positive disruption are great, for many the challenge may lie in capital acquisition as well as transitioning from the current models to the digital modes. But given early market entry delivers more benefits, we encourage you to apply blockchain and smart contracts to your processes and the returns would be great.

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