How blockchain can create trust in Real Estate

Real Estate industry has historically been opaque and characterized by an inherent lack of trust between transacting parties. Blockchain can bridge the gap.

What we need to know: blockchain and the Real Estate industry

Blockchain is an exciting and still emerging technology that can be more revolutionary than evolutionary for the real estate industry. It could offer a more effective way to handle a wide range of transactions. 

There is no question that the concept of blockchain has garnered a lot of interest from a diverse range of stakeholders, including Real Estate operators, financial institutions, governments, companies, and more. So let's begin with a review of what blockchains actually are and why they're important.

What blockchains are:

A blockchain is a decentralized ledger of transactions that exists across a network. Let's break this definition down.

A transaction ledger is simply a place where a record of a transaction may be made. Blockchains are referred to as decentralized ledgers since each participant on the network has their own synchronized copy of the ledger. Each and every participant is able to view and verify simultaneously that a transaction has taken place and has been recorded in the ledger.

What is so unique about these ledgers?

It all stems from the technology, which is built on applied cryptography.

Consider a participant who wishes to add an item to the ledger, such as when an asset's ownership is transferred. This proposed transaction is encoded using well-known methods, and all active network participants are alerted. Each blockchain is equipped with its own consensus mechanism  to validate that the transactions are genuine and that information is recorded to the permanent record.

Once confirmed, the new transaction or ledger entry becomes yet another data block in a chain of connected transactions. And, because everyone is working from the same data, the transaction record, once completed, cannot be contested or modified.

Current state: A status quo for the last 20 years

Market participants currently rely on reliable records of the ownership of each asset in order to complete a real estate transaction. They often look for dependable intermediaries to facilitate different phases of the transaction and ensure that all parties are in agreement. Some of these intermediaries are:

  • a title company to confirm that the seller has clear title, which can then be transferred to the buyer; 

  • a confirmation from the financial institution that the buyer has the necessary funds; 

  • a mortgage lender to confirm that the buyer is eligible for a mortgage; generate mortgage documents, create a lien on the property, and then wire funds to the escrow company at the closing;

  • an escrow company to hold the earnest money; receive funds from the buyer & the buyer's lender; and disburse funds to the seller, mortgage company of the seller, real estate broker, etc.

  • and a few dozen other participants.

A summary of the current state: a ton of friction in terms of both time AND money.

Functions like custody, clearing, and trust are layered on top of one another in any traditional real estate transaction.

It takes a set of activities and steps to validate the paper trail of what took place in the past and generate a new paper trail during the execution of each transaction, which includes more reconciliations, confirmations, and identity management steps.

Stride in the right direction

Blockchain technology's potential to increase transaction speed, enhance transparency, streamline processes, and fortify security could significantly reduce transaction costs and provide greater liquidity to the real estate asset class.