Emerging Technology

Identifying and researching emerging tech with the potential to enrich or disrupt the real estate industry.

What is Blockchain and How Will it Impact the Real Estate Industry?

Blockchains are systems that maintain an ever growing list of records or transactions across a network of computers. These transactions could be anything, like the deposits/withdrawals you make at your bank, or the records that are created when a property is purchased, refinanced, or sold. What makes these systems different from a regular database however, is that records added to this list are permanent, and easily audited by all parties involved.

Core Tenants of Blockchain

  • Distributed - each party involved has access to a full copy of the entire history of the data involved.
  • Immutable - existing records on a blockchain can not be changed, and new records are “append only”
  • Verifiable - an established and accepted method to digitally sign and audit transactions.

While this technology can sometimes be difficult to understand, the basic idea behind blockchains is actually pretty simple; they provide an independent, verifiable and trustworthy record of events/transactions.

In real estate, imagine a verifiable record of property data that would allow the parties to a deal, who generally don't know each other, to trust that the seller actually has true ownership of that property and see without any question or doubt that there are not any claims against the title of that property. Having a clear and undisputed history of record is incredibly important, and while this may be possible without this technology, using blockchain can help make the process more efficient and effective than what happens today.

How and Why was the Technology First Used?

The first popularized blockchain application, Bitcoin, launched over ten years ago as a digital currency system that didn't require a centralized party or bank. Bitcoin and Blockchain are often confused as one in the same, but in fact they are two distinct and separate components. You should think of Bitcoin as an application that is using blockchain as its underlying technology, similar to how a mobile app on your phone may run on iOS or Android.

Smart Contracts

Since the initial applications ten years ago, blockchains have matured well beyond the single use case of transferring value, and can now be used to verify, secure, and automate significant parts of a real estate transaction. This is possible due to smart contracts, one of the most important technical advancements that is enabled by blockchain.

When you hear the term smart contracts, these are not necessarily just digital representations of existing legal contracts, but instead are snippets of computer code that can be run on top of blockchains to automatically trigger actions, or in our cases, steps in a real estate deal. A few prime use cases for smart contracts in real estate are things like escrow management, payments, and of course transfer of title. For example, you can have all signatures needed on a purchase agreement trigger the payment of funds for escrow.

What Impacts Will Blockchain Have on the Typical Real Estate Transfer Process?

There are large number of opportunities for blockchain to be utilized in the real estate industry.

  • Title
    • Recording ownership of property - There is a potential impact on the world of title insurance since blockchain has the ability to provide an indisputable and instantly verifiable proof of who owns the property and whether or not there are any open claims against that property.
  • Automated Legal Agreements
    • Utilizing smart contracts - leases, purchase and sales agreements could be made programmable such that specific actions automatically take place when certain milestones are hit, opening up opportunities for automated execution and enforcement of the agreements that support a real estate transaction.
  • Payments
    • Accepting rent, escrow and purchase payments - Blockchain would reduce settlement time to seconds instead of days, while only costing pennies in transaction fees, even with international buyers.
  • Fractional Property Ownership
    • Fractional ownership of property - Through the use of blockchain there can be the opportunity to allow multiple parties to together own fractions of a property as opposed to today’s model which is primarily based upon one party owning it. This can increase accessibility by lowering the minimum amount of capital needed to get exposure to real estate as an asset class, while also allowing property owners to sell partial equity, providing liquidity.

Despite the number of opportunities, it will likely still be years before we see blockchain enter the mainstream real estate industry here in the United States. The technology is still gaining maturity, there are still many regulatory hurdles ahead and quite frankly folks are still in the early days of applying the technology to solve real estate industry specific problems. Additionally, many of the impacts will likely never be directly consumer or agent-facing - they will simply be a part of the underlying technology supporting the transaction. Similar to not having to be familiar with how the internet works at a technical level to use social media, blockchains will be providing value mostly behind the scenes to the average consumer. Again, with the most immediate use cases revolving around automated legal agreements using smart contracts, and recording of property ownership.

Using DocuSign as an example, the technology (PKI) behind their digital signatures product is based off research that was published in the early 1970s. And while founded in 2003, it wasn't until 2012 (with the help of NAR's lobbying efforts) that electronic signatures were accepted by the Federal Housing Administration. Blockchain startups will have a similar challenge ahead of them as policies will likely have to be modified one-by-one in order to reach their full potential. Considering these hurdles, we should expect to see the adoption internationally to continue to outpace our markets domestically.

What Companies are in Blockchain? 

It is important to know while blockchain is an emerging technology, there are hundreds of companies out there today building projects with it and many are specifically working to tackle parts of the real estate transaction.

From the largest players in tech like Facebook, IBM, Amazon, Apple, and major financial institutions like JP Morgan, all have major initiatives around promoting the use of blockchain. It will just be a matter of time before we see some of these projects enter into the main stream and eventually be utilized in the real estate industry.

By the way, its not just large enterprises either, there are also plenty of startups working on this including two companies (Propy & RE Consortia) that are a part of the 2019 NAR real estate accelerator, REACH. Both companies are using blockchain to improve and track the various parts of transaction process.

What is NAR Doing? 

Like with most emerging technology that we will be covering, there are no immediate calls to action for NAR members specific to blockchain. The emerging technology team is actively monitoring the development of this technology both within and outside of the real estate industry, monitoring companies that are gaining traction with this technology and keeping an eye on who’s getting funded. Forming relationships with these institutions, enterprises, and startups early on in their lifecycle allows us to actively monitor and hopefully positively influence them in a manner that is best for the industry and our members. Furthermore, from a legislative and regulatory perspective, we are closely following the Chamber of Digital Commerce’s initiatives around promoting the acceptance and use of digital assets and smart contracts. Additionally, we will be following up this blog post with a live webinar Tuesday, October 22nd to provide more insight as to the use of blockchain in our industry and answer any further questions members may have on this topic. Please add this to your calendar so you can join this conversation!

Closing Remarks

While it is still early days, it is clear that blockchain has the opportunity to impact the real estate industry in the years ahead. Whether it is the ability to have an independent, immutable and verifiable record of the title of each property or the automated checks and balances that smart contracts provide, there are many opportunities for blockchain to become an important part of our industry. Ultimately this can help REALTORS® and their clients get to the closing table faster while also lowering the cost and risks involved. What might be the greater impact, is that blockchain will make real estate transactions more programmable and automated.

We'd Love To Hear From You

What questions do you still have around blockchain? Have you heard blockchain mentioned in your market? How about your local and state governments? Is your town or any companies you work with testing any programs around land title, or identity-based services like voting? Are your clients talking or asking about blockchain? We'd also love to hear about which other emerging technologies you have questions about!

Please feel free to leave a comment below, email us at et@realtors.org, or submit a video question.

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