Here’s how the blockchain will help international investors in the US real estate market

By Matt Jago, Marketing Manager, RealBlocks

What is the Blockchain?

The topic is being broached everywhere from boardrooms and social media to dinner tables and knitting circles. But what exactly is this revolutionary technology?

The blockchain is a decentralized distributed ledger that keeps a public permanent record of transactions and information. The decentralized nature allows for two parties to complete a transaction without having to use a third party as an intermediary. In addition to maintaining a trustless environment (eliminating the need to use trusted third parties, i.e. big banks, governments, etc.), the blockchain’s distributed ledger ensures that risk of fraud and manipulation of transactions is minimized due to its immutable nature.

While the blockchain was initially developed as the backbone behind the popular digital currency Bitcoin, companies have begun to disrupt industries outside of financial services, including healthcare, politics, real estate and more.

Where International Investors Stand In Today’s U.S. Real Estate Market

Between April 2016 and March 2017, the U.S. residential real estate market saw a 49% uptick in spend from overseas buyers, bringing the total to $153 billion. Additionally, foreign buyers accounted for 10% of all existing home sales by dollar value.¹ The most active foreign buyers come from China, with buyers having spent $31.7 billion between April 2016 and March 2017.²

While demand for property is high, the complications surrounding the transactions can lead to quite a few headaches. Long and complex background checks on the parties involved, as well as the details surrounding the property, must be completed before the transaction can occur. And according to the NAR, 44% of all foreign buyers use cash (often by way of wire-transfer) to make real estate purchases.³ Third-party title companies are then brought in to oversee complicated and drawn-out transactions involving a wide array of different rules and regulations. Chinese investors, in particular, have had to clear very difficult hurdles as regulators in China are closely monitoring their citizens’ overseas purchasing activity.⁴

For investors, time is money. And payments and money transfers for property transactions are both time consuming and expensive due to the multitude of partners and channels involved in the proceedings. While the typical time to close a commercial mortgage is around three months⁵, international investors face protracted and costlier transactions. Even with these complications and added costs, many foreign buyers have turned their attention to the U.S. due to rising real estate prices in Canada. As a result, the market must respond to challenges faced by foreign investors; and the blockchain can be a powerful tool to address these needs.

Solving the Issues Faced by International Investors

Smart contracts

A smart contract, a term dubbed by Nick Szabo in 1994, is “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.” Simply put, each party has a set of transparent, immutable conditions that they must fulfill. Upon completion of these conditions, the contract is enacted and recorded on the blockchain.

In the case of real estate, a smart contract may include an agreement of payment from one party to another for a piece of property, whereas the other party is required to transfer the possession of the property. Only after both sides fulfill their conditions will the smart contract initiate. The transaction is then recorded and stored on the blockchain for future records. Most importantly for international investors, the contract is executed without the need of wire transfer through a third-party title company, for example. These smart contracts can also be used to process future earnings payments on the real estate property.

Digital Identities

The real estate market is riddled with complex verification processes, transactions and more. Through the creation of digital identities stored on the blockchain for both assets and individuals, we can expedite the extensive background checks (and double-checks) that are the cause of much inconvenience. A digital identity is an online or networked identity adopted or claimed in cyberspace by an individual, organization or electronic device.⁶

For international investors, the importance of the pre-purchase due diligence cannot be understated. With the help of blockchain-based digital identities, background checks on both the buyer and the property can be performed with increased accuracy, saving both time and money for the parties involved. After every transaction that has occurred, the digital identities of the buyer and the property will update with new information that will be disseminated onto the blockchain.

Title Records Management

In 2016, the Cook County Recorder’s Office, in Illinois, became the first such office in the U.S. to test blockchain technology for the transfer and tracking of property titles and other public records.⁷ The outdated title recording system is a nagging issue that plagues investors of all kinds. Title fraud resolutions are common occurrence in real estate, with some estimates suggesting that nearly $1 billion is spent annually.⁸ For international investors, additional hiccups can be the difference in choosing to invest in one part of the world, or another. With less expensive and more transparent title management in the U.S., by way of the blockchain, investors can enjoy less legal fees and paperwork that may hamper negotiations, while also enhancing security and reducing instances of fraud.

Multiple Listing Services

The blockchain has the power to influence change in regard to the mainstay that is MLS (multiple listing service) property data. Currently, all real estate transactions go through the MLS, but the service is known to be highly fragmented and difficult to use. A peer-to-peer blockchain-based system can potentially offer a shared and nationwide database that would allow potential buyers and sellers to have a more comprehensive view of the market. For foreign investors, a holistic look at the real estate market would prove to be quite enticing as they aim to secure the best possible investment.

2018 and Beyond

So picture this: instead of the long, complex, costly wait to source and complete a transaction, you search the a P2P blockchain-based system for potential listings in the U.S. Once you find the property you like, you create a digital identity and make an offer. That identity feeds your smart contract, which transfers your digital title upon completion of the conditions. And like that, you’re the owner of a new property, far faster and far cheaper than the current landscape allows.

As you can see, the ever-evolving landscape of real estate is ripe for disruption, and the blockchain holds the key to solving some of the most pressing issues that international and domestic investors alike are facing in the U.S. market. As new companies come into the fold, the blockchain revolution is something to keep an eye on in real estate in 2018.

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¹ “Foreign U.S. Home Sales Dollar Volume Surges 49 Percent to Record $153 Billion”, NAR. 18 Jul. 2017.
² Ibid.
³ Ibid.
⁴ For International Property Buyers, U.S. Presents Stable Investment Opportunities,” PYMNTS. 13 Oct. 2017.
⁵ “What You Need To Know About Commercial Property Financing,” Mortgage Calculator.
⁶ “What does Digital Identity mean?”, Technopedia.
⁷ Torpey, Kyle. “Chicago’s Cook County to Test Bitcoin Blockchain-Based Property Title Transfer”, Bitcoin Magazine. 6 Oct. 2016.
⁸ Torpey, Kyle. “Why 2016 May Be the Year of Real Estate on the Bitcoin Blockchain,” Inside Bitcoins. 4 Dec. 2015.