Today we’re going to explore how leveraging blockchain in real estate may transform the entire real estate industry.
Imagine a world where buying a home is as easy as logging onto a website, adding a home to your “shopping cart,” then clicking “buy.” While there is still a lot of work to be done, a blockchain enabled future makes this a real possibility.
In the future, all real estate transactions will likely be done on a blockchain, eliminating middlemen, aligning incentives, and saving time and money.
In this article we will cover:
- The current challenges in the real estate industry
- Brief overview of Blockchain Technology and Smart Contracts
- Benefits of using blockchains in the real estate market
Problems with the Current Real Estate Industry
There are several problems in the current real estate industry. Most of the problems can be traced back to intermediaries seeking rent from market participants.
Let’s explore a few challenges in the current real estate industry…
Buying and Selling a House is Complicated and Expensive.
It’s become so complicated that most real estate deals are touched by over a dozen different intermediaries such as banks, brokers, notaries, insurance companies, title registries, etc. Each of these “middlemen” charge a fee for their services. Many first time home owners are hit with “hidden fees” that they weren’t expected.
According to Nerdwallet, if you purchase a $300,000 home you will pay $6,000-10,000 in closing costs alone.
Here are a few more examples of typical fees in the real estate industry:
- Exchange fees
- Appraisal fees
- Insurance fees
- Transfer fees
- Broker fees
- Attorney fees
Real Estate Market Incentives are Misaligned.
Unfortunately, when you’re looking to buy or sell a home, many incentives are misaligned. For example, your broker is incentivized by volume – they want to sell as many houses as possible, no matter the price. However, you, as the potential home buyer, want to get the best deal possible.
Not to mention, all the 3rd party intermediaries take a cut from the transaction. Some of these intermediaries perform a valuable service. However, what happens when intermediaries are no longer truly required for a transaction? Do they voluntarily give up their business and stop charging for services? Absolutely not, they dig a trench and defund their revenues.
It’s unrealistic to expect the real estate industry to voluntarily remove unnecessary procedures and expenses. Instead of fighting the incumbents, it’s easier to create a new and better way of doing business.
Buying or Selling a Home is Very Time Consuming.
According to Realtor.com, it takes on average 50 days to close on a house. This is after both buyer and seller have agreed to make a deal! Wasting time is expensive for all parties – think of the opportunity cost for all parties involved!
However, to be fair, not all intermediaries are bad. In fact many are helpful. Most intermediaries were originally created because they added value to the transaction in some way. However just because some intermediaries add value doesn’t mean we should stop innovating.
Real estate is the single largest asset class in the entire world and yet, it’s had almost no innovation in terms of transaction efficiency.
Looking to the future, what if instead of a dozen middlemen bogging down commerce, we could replace them all with technology?
Benefits of Blockchain Technology in Real Estate
Replacing intermediaries with blockchains and smart contracts enables buyers and sellers to transact directly. This makes the entire process more efficient, ensures incentives are more closely aligned, and saves time and money for both the buyer and the seller.
Before we get into some specific examples of blockchain technologies improving real estate, let’s examine the underlying technology: Blockchains and Smart Contracts.
What is a blockchain?
Fundamentally, blockchains make it possible for people to transact between each other directly, without going through trusted intermediaries. Intermediaries like banks, governments, credit card companies, and brokers all contribute to making transactions expensive, slow, and easily corrupted by those wielding the most power.
Traditionally these “trusted intermediaries” were necessary to ensure both parties could confidently do business with a counterparty. Thankfully, blockchain technology can become the “trust layer” in all commerce, which effectively replaces the intermediaries.
What are Smart Contracts?
Smart contracts enables humans to automate a process through a cryptographically secure computer program. Smart contracts are similar to regular contracts except they leverage technology to automatically execute once the conditions are met.
“Smart contracts are often compared to a vending machine concept: You deposit your money, and the machine spits out a product with no human intervention.” (Forbes)
For example, you could set up a simple smart contract that requires multiple parties to sign off on a transaction before funds are released. This is a standard practice for businesses that could be easily automated with a smart contract.
Let’s take a look at three specific benefits for using blockchain in real estate transactions.
#1 Save Money by Cutting out the Middleman
Blockchains enable two people to transfer value in a peer-to-peer, trust-minimized manner. This replaces the no need for an expensive middleman such as a broker.
In the US, the standard broker fee is 6%. With a blockchain solution, you could remove that entirely. If you remove the broker fee of 6% on a $200k home, you save $12,000 on the transaction. And this is only ONE of the middlemen taking a cut from the transaction.
Both the buyer and the seller can enter into an agreement in a smart contract on a blockchain. Assuming both parties fulfill their end of the deal, then the transaction is completed automatically by the smart contract. The smart contract can be programmed to only execute if all conditions are met.
Here’s a simple example: If the home assessment confirms the house is accurately represented by the seller, and the buyer demonstrates proof of funds, then the deed is transferred from seller to buyer automatically on the blockchain.
This enables transactions to be completed in less time, with fewer fees, and with less chance of fraud.
In the future, it may be possible for someone to log onto a website, purchase a property like you would buy a book on amazon. The blockchain enabled smart contract would handle all the details such as the escrow, insurance, file public records, etc.
#2 Increase Trust by Aligning Incentives
Fundamentally, blockchains remove the need to trust your counterparty. This means you can transfer value to someone you don’t trust without fear of either party being cheated. This “trustless-ness” is built into the protocol rules and automated by “smart contracts.”
Instead of having a mess of competing incentives fighting over a real estate transaction, you can enable buyers and sellers to work directly. Do we really need 12 different intermediaries for every real estate transaction?
Removing intermediaries with misaligned incentives minimizes transactional friction, uncertainty, and counterparty risk.
If real estate brokers will exist in the future, they will not look anything like the brokers of today. Instead, Brokerages will need to adopt new technology, adapt their business model, and focus on services that humans are uniquely capable of.
#3 Save time by closing faster
Instead of cumbersome middlemen, using blockchain in real estate has the potential to replace your broker, escrue, title/deed company, lawyer, and notary all in one. This saves both the buyer and seller from wasting time!
In this example, it’s helpful to think of blockchains as “programmable” money. In other words, you can program money to do whatever you want, much like programing software today.
For example, you could use a “smart contract” to transfer the deed of the house, if and only if, the money is transferred and the house passes an inspection. Blockchain enables the buyer and seller to create a financing arrangement by programming the terms of your “mortgage” and letting the smart contract automatically adjust interest rates and make payments.
This solution will streamline the transaction and remove intermediaries which decreases the time it takes to buy/sell a home. Saving time is saving money.
Leveraging smart contracts and blockchain technology in real estate reduces the need for middlemen which aligns incentives, saves time, and saves money.