Smart Contracts a game changer
By Werner Riekert
In part one of this series on the impact of blockchain on real estate (found in the August/September issue), we looked at how blockchain technology will transform the way land ownership and title deeds are transferred, recorded, and protected. In this part, we will focus on how blockchain based real estate transaction would work and what the implications of this would be.
Hailed as the biggest digital innovation since the internet, blockchain is the infrastructure that is changing the way people interact, transact, and exchange. It is a technology that, for the first time in history, guarantees any information (i.e. contracts, documents, assets, ownership, value, etc.) is 100% correct, original, and has not been manipulated. Although this already sounds remarkable, blockchain has one more trick up its sleeve, Smart Contracts.
What is a Smart Contract?
In 1996, over a decade before Bitcoin came to market, digital currency pioneer and computer scientist extraordinaire, Nick Szabo, introduced a contractual protocol that was entirely self-executing. We call this protocol a “smart contract,” an encrypted and trackable agreement between consenting parties.
Since the dawn of organized property exchanges, real estate brokers, agents, governments, and legal entities have existed in pairs. Sometimes they coexist productively, but more often than not, the cross-industry dialogue is a pain point. We need legal representatives to outline the terms and ensure these terms are met by all parties including, land registry, bond/mortgage providers, surveyors, the buyer, the seller, and agent etc. With a high-value exchange dependent on the compliance of such an immense web of people and organizations, the process frequently encounters long-term setbacks and unexpected tribulations.
Smart contracts eliminate the number of hands involved by cutting out extraneous third parties. Who remains? The buyer, the seller, and in some cases, the agent. The conditions are established and then programmed into a smart contract that lives on the blockchain. As soon as a predefined condition is met, it will trigger a reaction automatically, and the contract self-executes.
The process remains relatively similar to traditional contracts. A property is selected through a blockchain multi-listing service or agent, negotiation takes place, terms are agreed upon and a smart contract agreement is programmed. Payments and cash flow, real-time status of transactions and ownership transfers are all automated. However, this all happens without any legal involvement as smart contracts cannot be broken, manipulated or corrupted.
The property listing market is dominated by centralized, sometimes monopolistic listing platforms which are often subscription-based, charging high fees and subject to human error. These intermediaries have cut off the direct connection between the asset owner and customer. A blockchain-based listing gives the connection and valuable information about users back to the asset owners and allows users to view information such as the properties location and history, ownership information and the title information. Using blockchain for the property search process will reduce transaction costs and be more secure and efficient.
Currently, the due diligence process in a real estate transaction is predominantly offline and highly labor intensive, with documents surrounding proof of identity for the history of
property ownership, tenants and modifications. A blockchain solution for digital identities and title registers enables a streamlined and secure due diligence process for buyers or lenders on the properties they are purchasing, eliminating elements of human error and fraud. This would also open up opportunities in countries with no mandatory land register and/or field book as sensitive information secured on the blockchain contributes to the credibility and authentication of information.
Smart contracts (sitting on the blockchain) can be used to create smart tenancy agreements. This enables details of the contract such as rent value, payment terms, and information around the state of the property to be agreed and signed digitally between landlord and tenant. Following this, the payment of the lease and the eventual return of a security deposit and payments to external agreed contractors can all be initiated automatically via the smart contract once agreed upon criteria is met. Once again meaning a more efficient, auditable and legally enforceable process.
In the past, we have seen the Real Estate Industry fall behind the adoption curve, but blockchain offers brokerages an opportunity to pivot and be part of a digital and decentralized revolution where property exchange finally transforms into a self-sustaining entity.
Smart contracts will allow brokers, owners, and investment funds to maximize profits by speeding up processes and keeping intermediaries out of the ROI equation. Liberating buyers and sellers from third-party services free up funds to spend on higher-end property or more comprehensive agent services.
When profit filtrates through such an intricate system, as it does in real estate, there is always a loss. In simplifying the system with smart contracts and blockchain technology, real estate will profit in ways it never has before.