Blockchain For Real Estate
Real Estate & Blockchain : A Match Made in Heaven
The real estate industry is plagued by a “Matrix of Imperfections”, with transaction costs and asymmetric information being the main drivers. The imperfections are closely related to the intransparency of real estate data. Intransparency has caused data in real estate to become very valuable, as a consequence companies in the industry have created business models around resolving this data.
Since there is no global standard or public ledger where all the data is registered, the industry has the need for third parties to verify the data more than once. Auditors, banks, financial authorities, appraisers and owners each individually have to validate the data which they receive. All these validations result in higher transaction costs in the brokerage, legal, recording, and banker fees. Stakeholders agree that there is a necessity for more transparency and standardized interoperable data structures Technical innovations and a growing availability of (open) geospatial data will improve transparency and reduce information asymmetry in the upcoming years. While big data is already finding its way into the real estate sector, blockchain is an innovation that could lay the foundation for a common source of truth in real estate.
Title Transfer Transparency
Homebuyer horror stories abound. Whether it means avoiding spending $15,000 to remove asbestos or $7,000 on a re-shingling job, the ability to view the critical details of a property’s history, from maintenance to foreclosures and beyond, reduces the likelihood that a home purchase will come back to bite overly optimistic new owners. Usually Title Insurance industry is comprises of several thousands of companies producing a combined annual revenue, depending on market and economic conditions. However there are billions paid out to such claims.
Blockchain can provide ‘uniformity’ across all stages and data across multiple touchpoints. It can used in creating a immutable and transparent system for properties, which could help enhance confidence in the real estate market, as well as limit foreclosures due to unforeseen, unsustainable costs associated with a lack of information upon purchase. Records of ownership and repairs can assist a potential buyer in making an informed decision, and the blockchain could serve as a ledger — augmenting, not replacing the physical paper trail — to boost buyer awareness by providing more complete, trustworthy information.
Preventing Deed and Title Fraud
Deed fraud has reached astounding levels in the age of internet property sales. Fraudsters inside and out of the system can be tricky to handle,Even in developed countries victims fall to criminals forging deeds to sell properties they didn’t own. With ease of access to deeds has come this unintended consequence of fraud.
A blockchain-based digitized solutions can tokenize deed and transfers of real estate titles, making fraudulent deeds nearly impossible to pass along thanks to immutable nature of blockchain, it becomes impossible to change, remove or manipulate data that is stored on it. Hence the records remain tamper proof across all channels.
Real Estate market possesses a huge potential for investment. However, the entry level entrance to real estate property requires huge capital. Hence, investments in real estate is a luxury only a few can have! But with blockchain it is possible to liquify, trade and tokenize property, much like stocks on exchanges. The seller can divide the shares of his property and hand it out to multiple buyers. A smart contract programmed on blockchain ensures that each party receives his/her return of the property depending on the amount of shares that he has invested in.
Decentralized payments projects could facilitate for low cost high transactional micropayments which are then distributed among the various stakeholders involved, This creates an opportunity for people who don’t have the capital to buy the whole property. Additionally, sellers can also sell fractions of shares on a particular property instead of finding one single buyer for the whole property.
Smart contracts have a huge leverage point in the real estate market. Introduction of smart contracts into blockchain real estate ledgers and transactions has potential in streamlining and completely changing the real estate process. Smart contracts can automate various complex and tedious real estate projects such that little monitoring is required. This allows an optimization in the complete sales process and exchange between the parties.
Rental contracts can be morphed into smart rental contracts. Smart contract will have terms of agreement, rental value, security deposit amount and terms and conditions. Once the Smart contract is digitally signed between two parties, the process of rental payments between these two parties become automated. On termination of the contract, it automatically transfers the property, terminates the rental contract and returns the security amount deposit back. Not only rental contracts, smart contracts can be used for automated payments between property owners, property managers and other stakeholders along with real time reconciliation.
Fighting Mortgage Fraud
CoreLogic’s Mortgage Fraud Index showed a 16.9% increase between Q2 2016 and Q2 2017, continuing a trend that has emerged since Q3 2010. The shift toward a purchase-heavy market has exacerbated this trend, and the continued rise in property values means that the issue of mortgage fraud will only continue to cause the industry greater losses, pending a significant change in market conditions. With mortgage fraud already costing an estimated $2.5 billion per year in the United States alone, a worsening of the problem is a frightening prospect.
Those tasked with preventing and policing fraud in the mortgage origination process are in agreement that digitization of processes is a strong start to minimizing the ability for fraudsters to sneak through undetected, as well as reducing the cost of oversight. Blockchain-based mortgage fraud prevention tools reduce the clutter, cost, and confusion associated with paper-based systems. In addition, the data contained on the blockchain — derived from verified sources — would be interoperable among the agencies and departments charged with detecting mortgage fraud.
Property Inspection Transparency
Did you know that for any home built before 1978, a property seller is legally required to sign a lead paint disclosure? Or that, according to California’s Civil Code 1710.2, a property owner does not have to disclose a death that occurred in a home so long as it occurred more than three years prior to the sale? Or that, while Florida’s 2nd District Court of Appeals ruled in 2011 that a home seller must disclose problems they know about, it can be virtually impossible to prove in court that the seller actually knew about, say, black mold at the time of sale?
While present services such as CARFAX allow would-be buyers to see a vehicle history report before purchasing a new ride, a similar service for home ownership has yet to arise. However, if somehow home owners could be required to input data about defects, repairs, and inspections on a public blockchain ledger, the element of trust between home seller and buyer could be significantly mitigated. As it stands, sellers actually have an incentive not to disclose a home’s problem areas, but many believe that buyers have a right to know such things. Ultimately, a blockchain ledger of home repair and defect history would protect buyers and help reduce legal costs that are a burden on individuals and the taxpaying citizenry.