There are tremendous potential applications for blockchain technology, an innovative distributed ledger database system, within the real estate industry. The commercial real estate (CRE) industry appears to take pride in keeping several aspects of its operations secret, such as comparable lease rental rates, property prices, and valuations, to create a possible competitive advantage. However, secrets are hard to keep—and may not even be desired—in todays hyperconnected and digitized world. In response to greater demand for transparency, technology advancements and the disintermediation by startups are gradually making some of this information public. As a result, property-related information is increasingly available in digital and paper form. However, a significant portion of the digitized information is hosted on disparate systems, which results in a lack of transparency and efficiency, and a higher incidence of inaccuracies that creates a greater potential for fraud.
Benefits of blockchain technology
As CRE companies invest in a multitude of technologies to meet their varied business requirements, it may be worthwhile to first understand the benefits of blockchain technology:
Near Real Time – The blockchain enables near real-time settlement of recorded transactions, removing friction and reducing risk, but also limiting ability to charge back or cancel transactions.
- Trustless environment – Blockchain technology is based on cryptographic proof, allowing any two parties to transact directly with each other without the need for a trusted third party.
- Distributed ledger – The peer-to-peer distributed network records a public history of transactions. The blockchain is distributed and highly available; it also retains a secure source of proof that the transaction occurred.
- Irreversibility – The blockchain contains a certain and verifiable record of every transaction ever made, which mitigates the risk of double spending, fraud, abuse, and manipulation of transactions
- Censorship resistant – The crypto economics built into the blockchain model provide incentives for the participants to continue validating blocks, reducing the possibility of external influencers to modify previously recorded transaction records.
Why consider blockchain for real estate leasing?
Need for a common database
Shared databases are critical for leasing transactions. One of the key examples is a multiple listing service, which collates property-level information from private databases of brokers and agents.
Multiple entities can modify database
Managing real estate properties involves several entities, such as owners, tenants, operators, and service providers, who provide, access, and modify a variety of information.
Lack of trust among entities
Many times, different participants in the leasing lifecycle do not have pre-existing relationships, which results in mistrust.
Opportunity for disintermediation
Trusted intermediaries in real estate, such as notaries, can be disintermediated through blockchain, as transactions can be independently verified and automatically reconciled.
Many leasing and property management transactions are correlated and part of the same database. For instance, in case of a net lease structure, the tenant pays a base rent amount to the landlord and maintenance expenses directly to the vendor.
Property search through blockchain-enabled MLS
The lessor and the lessee or their respective brokers list their requirements on the multiple-listing services (MLS). A transparent MLS system enables all parties to view the available listings based on their requirements.
How Blockchain will transform real estate:
Transacting real estate is cumbersome, opaque and expensive because of middlemen:
- Government property databases
- Title companies: Insurance and property databases
- Escrow companies
- Inspectors and appraisers
- Notary publics
Blockchain will enable every property, everywhere, to have a corresponding digital address that contains occupancy, finance, legal, building performance, and physical attributes that conveys perpetually and maintains all historical transactions. Additionally, the data will be immediately available online and correlatable across all properties. The speed to transact will be shortened from days/weeks/months to minutes or seconds.
Real estate fraud is rampant. It’s perpetrated by petty thieves on $500 sub-leases up to the world’s largest banks and mortgage lenders doing hundreds of millions of dollars in transactions.
Fraud is accomplished by forging paper documents such as driver licenses, bank statements, and deeds. Photoshop isn’t just for making celebrities look thinner. How can Bitcoin prevent real estate fraud?
Bitcoin is a digital currency. Ethereum has its “Ether” token. Unlike the Dollar or Euro, blockchain currencies aren’t paper that are later represented by software, but are 100% software from birth. The power of software is its programmability. You can code it to play music. Without software, you’d need humans with guitars. The power of cryptocurrency is you can program it to escrow and distribute itself. With fiat (Non-crypto) money, you need humans and banks.
Bitcoin can be used to create a programmable escrow. Instead of sending the landlord dollars to a bank account, the tenant and landlord create a multi-signature transaction. The tenant and landlord each has one private key, and a third one is given to neutral third party (Arbitrator). For the security deposit to be spent, two out of the three people will need to use their private key. The funds are locked in crypto-escrow for the duration of the lease.
Blockchain protocols such as Bitcoin and Ethereum have the ability to perform “Smart contracts.” The goal of a smart contract is to reduce the need for humans to process and verify an agreement. A software protocol automates and self-executes an action when certain conditions are met. How could a smart contract be used in a property contract?