Real Estate on the Blockchain
There are many use cases for blockchain on real estate. But before that, let’s dive into why is there a need for change in the real estate market?
Steps of real estate transaction at the moment
Now that we have know the hectic processes of transacting real estate, how can we use blockchain technology to improve efficiency?
Opportunity 1 : Improve property search process
Existing challenges :Inefficient property search process due to fragmented listings data
Currently, CRE brokers, realtors, owners, tenants, buyers and sellers often use multiple listing services or MLS to access property-level data such as location, rental rates, capital values, and property features. Generally, these platforms are subscription-based, demanding steep fees from users.The accuracy and detail of property-level data is completely dependent on the preferences of the brokers, due to a lack of standardized processes and substantive human intervention. This may result in the information being inaccurate, dated, or incomplete. Also, the search process itself tends to be ineﬃcient, as the data, tends to be fragmented across multiple platforms. Thus, there are delays in decision-making for landlords and tenants, and low levels of trust on the quality of information available on MLS.
The blockchain opportunity: Eﬃcient and reliable property search
A blockchain-based MLS would enable data to be distributed across a peer-to-peer network in a manner that allows brokers to have more control over their data, along with increased trust, as listings would be more freely accessible. This enhanced, blockchain-enabled MLS would also provide clear details on property location and address, comparable rental rates, capital values, ownership history, tenant details, age of the property, and title clarity. As a result, market participants could have access to more reliable data at a lower cost. In fact, per a recent Deloitte survey of 308 executives, 36 percent of respondents perceive eﬃciencies (lower costs/greater speed) as one of the key beneﬁts of using blockchain technology. While many blockchain uses are in proof-of-concept stage.
Opportunity 2 : Expedite Pre -lease due dilligene
Existing challenge: Time consuming, paper-driven, predominantly oﬄine due diligence and ﬁnancial evaluation process
In a CRE leasing or purchase and sale transaction, usually signiﬁcant time is spent on due diligence activities related to ﬁnancial, environmental, and legal review to assess rental rates/bid price. This is predominantly due to the use of physical documents for proof of identity, documents that are often stored in siloed places and have limited ﬂexibility to be customized to suit various needs.9 For a property, these could include documents supporting the history of ownership income and expenditure, occupancy, tenants, and repairs and maintenance activities. This manual veriﬁcation process increases administrative tasks and is prone to loss of information and errors. Further, involvement of numerous third-party service providers tends to elongate the due diligence process, and increase transaction related cost. Finally, if the buyer is ﬁnancing the acquisition of the property with a mortgage or other third party ﬁnancing, many due diligence steps and documentation are duplicated by both the buyer and the lender.
The blockchain opportunity: Drive eﬃciency and accuracy in due diligence process
CRE market participants should consider developing digital identities for a property to keep pace with the growing preference for digital transactions. As the name suggests, digital identity with respect to a real estate property would imply a digital identiﬁer that consolidates information such as vacancy, tenant proﬁle, ﬁnancial and legal status, and performance metrics in digital form.10 A combination of blockchain technology along with digital identity can alleviate the above-discussed challenges of physical identity proofs, and expedite a few of the pre-transaction activities such as underwriting, ﬁnancial evaluation, obtaining a mortgage commitment, etc. An August 2016 Deloitte-World Economic Forum report titled “A Blueprint for Digital Identity: The Role of Financial Institutions in Building Digital Identity” mentions that a “digital identity would allow ﬁnancial institutions to perform critical activities with increased accuracy over that aﬀorded by physical identity, and to streamline and partially or fully automate many processes.” Having said that, data integrity is critical for accurate digital identities and blockchain transactions. The reality is that the initial data would be as good as the user entries. To ensure accuracy, diﬀerent participants such as tenants, investors, ﬁnancing sources and advisors, etc. could validate the data. In addition, companies are developing solutions to address data integrity challenges.11 In fact, if companies experimenting with blockchain technology also consider using the digital identity of property and people, the result can have a powerful impact on reducing the current ineﬃciencies and inaccuracies. Digital identities of properties linked to the digital identities of transacting parties can create valuable and secure online records for a property, improve lease information management, and greatly ease the due diligence process. Figure 6 on the following page illustrates a digital identity-based system for real estate transactions, linking digital identities of individuals, organizations, and assets.
Opportunity 3 : Transparent and cheaper property tittle management
Existing challenge: High title insurance, fraud risk and related costs due to chain of title and lien recording issues
Current paper-based property titles have several disadvantages. To begin with, there may be concerns about the authenticity of the mortgage and title documents, as well as accuracy of recorded liens and other information attached to the title. For instance, according to American Land Title Association, in nearly all real estate transactions there is at least one title defect that must be corrected before transferring the title. Additionally, in 25 percent of transactions, title professionals need to take extraordinary action to ﬁx title defects that could impact the buyers’ ownership. As a result, property owners often incur high legal fees proving ownership. Certain estimates suggest that nearly $1 billion is spent annually on title fraud resolutions.
To meet the above challenge, banks often require buyers to take out title insurance for purchase and sale transactions, which adds to the property purchase cost. Additionally, some insurers raise premiums on a regular basis, and are not transparent about the changes.
Further, in the event of mortgage ﬁnance for a property purchase, banks usually end up duplicating the title check eﬀort to complete their own due diligence for loan clearance and disbursal. As a result, there can be an increase in buyers’ ﬁnancing costs.
The blockchain opportunity: Reduce fraud and simplify the process of title records and checks
A blockchain-based digital identity of a property may include its history, location, and title details. Usually, buyers and banks can potentially rely on this digital identity of the property for title assessment, as any change to existing data would have to be made through a consensus across several blockchain nodes. Also, the distributed, tamper-proof, and encrypted nature of blockchain is likely to make it diﬃcult for perpetrators to commit fraud related to liens, easements, air and subsurface rights, titles, or transfers.This increase in security and transparency may reduce both title-fraud risk and costs by simplifying the title check process.
A more digitized and transparent process could also speed up title transfer execution, use of title as a collateral, and reduce overall transaction time. In fact, a few governments across the world are planning to use the blockchain platform for broader social impact as land title registries have the potential to reduce corruption and improve transparency about land ownership.
Opportunity 4 : Enable more efficient processing of financing and payment
Existing challenge: Slow, expensive, and opaque ﬁnancing mechanisms and payments, especially in cross-border transactions
Payments and money transfers for property transactions are expensive and time consuming due to the involvement of multiple-channel partners and extensive documentation.
The typical time to close a commercial mortgage is about three months,and the ﬁnance approval process tends to involve extensive paperwork during the due diligence process. Often there is less coordination among diﬀerent parties, and the lack of standardized data increases the risk to the mortgage lender.
In a cross-border transaction, foreign exchange charges and involvement of multiple intermediaries typically increase both the payment lead time and transaction costs. As an example, consider a property transaction wherein the buyer is from the United States and the seller is from the United Kingdom. In this case, the buyer’s local bank would typically transfer the amount to its correspondent bank in the USA, which in turn would transfer the amount to the seller’s correspondent bank in the United Kingdom, and in the ﬁnal leg, the amount is credited to the seller’s local bank account. The existing modes of payments and transfers are typically opaque and thereby susceptible to errors.
The blockchain opportunity: Financing and payments systems that are faster, cheaper, safer, and simpliﬁed
Blockchain-enabled digital identities and smart contracts can potentially reduce ineﬃciencies and increase transparency in the ﬁnancing and payments processes.
To begin, blockchain can simplify the ﬁnancing process during the loan application, documentation, due diligence, and servicing stages. The digital identity of a property would reduce both due diligence and loan documentation time, and perhaps even data integrity concerns. Then, the borrower and lender can execute a smart contract-based loan document. The smart loan contract would be accessible to all involved legal parties.
Moreover, execution of smart contracts on blockchain platforms would inherit all beneﬁts of blockchain, including a series of complete, immutable, and traceable records, oﬀering audit trails of transactions such as ownership history, property cash ﬂows, and mortgage payments. The buyer could also track the mortgage in real time.
In cross-border real estate transactions, blockchain can provide a common network for the transacting parties to interact and share information without intermediaries such as correspondent banks. The information shared on the common network can include details of sender and receiver, transaction fees, foreign exchange rates, delivery time, and many others. Moreover, the settlement process could be more seamless as the ledgers of the parties on either side of the transaction would be connected through an open network. The robustness of the process would be improved through software that cryptographically veriﬁes the fund availability and facilitates simultaneous transfer of funds. In this way, the technology can help in real-time settlement across all ledgers, while minimizing settlement risk and payment delays. Currently, there are many blockchain-based B2B payment solutions that are being developed or tested by traditional payments and blockchain startups. In the next article I will describe how Rego which is a blockchain startup aims to target these opportunities in its unique way.
Rok Sivante, “Blockchain Venture to Upgrade Africa: How Bitland Is Revolutionizing Land Registry & Community Development in Ghana and Beyond…,” Steemit.com.
Brady Dale, “Three Small Economies Where Land Title Could Use Blockchain to Leapfrog the US,” Observer, October 5, 2016.
Deloitte, “Blockchain in commercial real estate”… https://www2.deloitte.com/us/en/pages/financial-services/articles/blockchain-in-commercial-real-estate.html