Blockchain and Real Estate: How Does it Work and How Can it Help?
Have you heard of blockchain? Initially known for its role in keeping track Bitcoin and other cryptocurrencies, blockchain technology has begun to expand. How to best use blockchain technology is an interesting and important topic in many industries, and real estate is no exception. In the search for ways to use blockchain, real estate companies and brokers have begun to sell properties using blockchain. This does not mean that properties are sold in exchange for Bitcoins or other online currency, but rather that properties are recorded on, and transactions entered into using, blockchain technology. Tru Realty, an Arizona real estate company, recently completed the first Arizona real estate transaction using blockchain, becoming only the third real estate brokerage in the United States to do so. Feedback for completed blockchain real estate transactions has generally been positive, with participants lauding the ease and speed of the transactions. Given the positive feedback, blockchain real estate transactions are likely to become common. As such, it is important to understand what blockchain is and what advantages blockchain holds for real estate transactions.
What is Blockchain?
Some think blockchain is essentially interchangeable with Bitcoin and other cryptocurrencies. In reality, while blockchain plays a crucial for cryptocurrencies, blockchain is not inherently tied to cryptocurrencies, but rather is a system of securely recording and maintaining information.
For example, imagine you are back in elementary school, and at lunch you realize that your lunch has a brownie. A new kid at school is sitting at your table and loves brownies. The new kid has chips. The two of you agree to a trade, your brownie for his chips. However, you don’t completely trust this kid you have never met before, and, to prevent him from later claiming that you stole his chips, the two of you announce to the entire table of 20 kids that you are trading your brownie for his chips, fair and square. Now, the entire table of kids can vouch that the trade occurred, preventing either you or the other kid from alleging that the trade didn’t happen or was unfair. Even if one of the kids forgets about the trade or lies, the other 19 will be able to refute him.
This idea, creating witnesses for and records of information regarding transactions, is the essential idea behind blockchain; blockchain just replaces 20 kids at a lunch table with thousands to millions of computers (depending on the particular blockchain) which all keep an encrypted ledger of the same transaction. The encryption of the ledger and sheer number of computers virtually eliminate the risk of hacking at the present time. This engenders a high degree of confidence in the information conveyed through blockchain technology. The confidence in this information creates several advantages for blockchain real estate transactions over traditional transactions.
Blockchain in Real Estate
Blockchain potentially provides many advantages in real estate transactions. While there are certainly many potential uses of blockchain in real estate, some of the most relevant involve reducing the cost of intermediaries, or middlemen, including bankers, brokers, and property managers. These uses include blockchain improving the efficiency of due diligence, improving the processes of title searches and title insurance, and allowing for smart contracts, which improve the efficiency of post-closing obligations. Though not an exhaustive description of the potential uses of blockchain in real estate, this section gives a good feel for the advantages that blockchain can provide.
The potential improvement in the due diligence process comes from the information recorded and stored in the blockchain ledgers. This information, particularly once information has been in the blockchain and confirmed through multiple transactions and by multiple owners, will not require the same level of due diligence investigation as information that is given in current sales with nothing to verify the information.
Blockchain can improve the title search and title insurance process by increasing the centralization of data and there decreasing the cost of accumulating the necessary data to assure and insure title to a property. Currently, different jurisdictions (states, counties, municipalities, etc.) have different requirements for how, where, and what information regarding title to property must be recorded and stored. If information on property title were aggregated on the blockchain, it would significantly decrease the cost of title insurance and title searches. Moreover, when combined with information from due diligence, the blockchain would allow information on property title to be stored in the same place as other information on the property, effectively creating a one-stop shop for purchasers to ensure they get what they pay for. However, it would be an extremely expensive and laborious process to aggregate and input data from all different jurisdictions, and it is questionable whether these benefits will come to fruition anytime soon.
Smart contracts are essentially self-executing contracts that are recorded using blockchain. After the contracts are negotiated, they are recorded as smart contracts using blockchains, and the smart contracts carry out the rest; for sales, generally transferring title to the purchaser, recording the new deed, and transferring the purchase price to the seller, for rental contracts, generally transferring rental funds to the landlord each month, all electronically using blockchain. This decreases the cost of or cuts out the need for an escrow company or property management company.
In sum, blockchain can improve real estate transactions by decreasing the expense and improving the accuracy of intermediaries performing services such as due diligence, title searches, and property management.
Why You Need an Attorney in Blockchain Transactions
While blockchain transactions are likely to diminish the cost of intermediaries, an experienced real estate attorney is still necessary to protect your interests in blockchain real estate transactions.
Attorneys are important to both buyers and sellers in the due diligence and title search and insurance portions of a block chain real estate transaction because, simply, a blockchain is only as good as the information put into the blockchain ledgers. Think back to the lunchroom example: imagine the promise witnessed by the table of lunchroom kids was that you were trading your brownie for Cheetos, but the new kid gave you store-brand cheese puffs instead. Or the new kid fails to disclose that the Cheetos are expired. Or that he stole the Cheetos, and didn’t have a right to give them to you. While the table of kids is helpful to demonstrate what the promise was, they aren’t very helpful in resolving difficulties and disagreements, or in informing the parties to the transaction what needs to be disclosed in the promise. Similarly, attorneys are needed in real estate transactions to advise buyers and sellers of what needs to be disclosed and recorded in blockchain ledgers and in resolving disputes regarding lack of disclosure or nondisclosure of information in blockchain ledgers.
Smart contracts actually increase the importance of legal representation in the negotiating stage. Because smart contracts are self-executing, it is very advantageous to carefully negotiate and ensure that the contracts are properly drafted so that what is executed is what you want to be executed.
In sum, while blockchain transactions will likely increase the efficiency and reduce the costs of many intermediaries in real estate transactions, an experienced real estate attorney is still vitally important to ensure that your interests are protected in your real estate transaction.
The attorneys at MacQueen & Gottlieb can help you evaluate your blockchain real estate transaction. Our attorneys have significant experience with the real estate industry and applicable technology. We can assist buyers, sellers, and real estate agents and brokers with the details of a transaction involving blockchain or other aspects of a real estate transaction. Contact us today for peace of mind at 602-562-7218 to schedule an initial consultation.