Real estate transactions are traditionally accompanied by numerous problems including delaying deadlines, unjustified commissions and variety of frauds. Moreover there is a wide range of stakeholders involved in real estate transactions in all countries. Citizens, developers, banks, real estate brokers and a huge number of government agencies, all of them regularly face imperfections of transaction process. Let’s figure out how blockchain technology can help.
Problems of the real estate market in terms of information systems
As a rule, states maintain registration offices which record a history and characteristics of real estate objects. However, it is impossible to call such systems perfect. Information concerning certain real estate property may be put into a database out of time or falsified. Besides documentation provided online may not correspond to paper one.
Government officials or citizens can change some conditions of the property and do not record it in a registration office. In this case, if a transaction with the property takes place in another region, the changes will not be reflected in the documents. A human factor and centralized databases is not the best combination for properties ownership transaction.
Furthermore, each participant in the transaction (bank, officials, seller, buyer and their representatives) cannot examine documents on the transaction at the same time. Let’s assume that a citizen needs to receive aт inquiry about his property and send it to a potential buyer, a bank or a government agency. For this, a citizen has to spend a lot of effort. In the worst case, he will fill out an application, disclose information about himself and the property, give the application to the government office and wait the inquiry for several days. When a citizen receives an inquiry, he has to verify its copies, send out these paper copies to each recipient and wait for confirmation of receipt. That is because trusted and accessible to all participants communication channel still does not exist in real estate industry.
A seller and a buyer of real estate also lose money because of the existing procedures. A cost of the transaction sometimes reaches 7 percent of a property price. First of all, these 7 percent are associated with the payment of services of real estate brokers and notaries.
Citizens usually use the services of notaries, because they do not know all the formal procedures necessary for a real estate transaction. In other hand, they just want to shift the risks to the intermediary, because legal support of the transaction is one of the main services of real estate broker as well as interaction with the bank and government agencies. Reducing the cost of intermediary services is a key global trend in recent years.
State bureaucracy is also an unsolved problem in the industry. Real estate transactions still require a huge number of formal procedures from participants to follow, which is both time and money consuming.
Worst of all, the existing system is vulnerable to corruption and fraud. Even in the United States, according to official statistics, for every 100,000 people, there were 2,362 real estate crimes in 2017. This is the most widespread type of crimes in the U.S. You can hardly find the best indicator showing the need for change.
How blockchain can improve the industry?
Introduction of blockchain technology is a costly and long‐term process. It does not solve the issue of factual verification of documents received by registration offices. Government officials still will be responsible for such procedures. The use of the blockchain also requires restructuring real estate market IT infrastructure which is not insured against delays in an information processing and cyberattacks.
At the same time, the technology contains a number of advantages which overlaps the minuses. Blockchain eliminates a possibility of subsequent data falsification. Even if intruders succeed in changing information about real estate transactions, the data will be changed only in one data block, while the rest will contain reliable information. This is because the technology encrypts not only the data itself, but also places an information footprint in the next data packet. Moreover an attempt to fraud documents in the blockchain can be easily detected.
According to Roland Berger consulting research, the blockchain technology increases a transparence of the real estate market. All participants can exchange real‐time data about characteristics of a property (cadastral passport data, debts, encumbrances). Documents generated by government agencies may be available almost in real time. The fact of document storage in the state blockchain may mean its official verification. Infinite amount of inquiries becomes history and the time of the real estate transaction may be significantly reduced.
The technology may change existing documentation procedures in public offices. Officials may be able to instantly receive reliable information, process and transmit it directly to participants of real estate transactions. Deloitte claims in its report about the blockchain technology usage in the commercial real estate market in 2017, that this is quite achievable with the use of smart contracts and digital verification of real estate.
Real estate brokerage may be automated if blockchain technology is chosen to conduct sales transactions. In this case, real estate agents may focus exclusively on the real estate selection for customers and marketing activities.
Theoretically, the use of blockchain may reduce a time of transaction registration from a week to a few minutes. In practice, this is possible only after an increase of blockchain networks overall speed and an absence of their overloads. Such overload was happened, for example, in Ethereum network in December 2017 due to the growing popularity of Cryptokitties game, significantly reducing the rate of transactions pending. Nevertheless, the most important factor for blockchain platforms operations is recognition of electronic contracts legal significance and a change in registration offices procedures.
Automation may also affect notaries. There may be no need to certify the transaction if blockchain technology is used during all its stages. Such notarial certification of transactions is developing by the National Agency of Public Registry of Georgia, jointly with Bitfury.
Blockchain‐based platforms for the real estate market
Georgia, Ghana, Russia and Sweden have already begun to implement blockchain‐based real estate transaction processing platforms.
Georgia is the first country which has established blockchain for registering ownership rights with Bitfury technical support. This platform exists in the form of a mobile application and combines functions of lease and sale transactions processing and registration of changed ownership rights. Further, mortgage lending and notaries are planned to be integrated into it. With such technical support it may take only a few hours instead of three days earlier to complete real estate transaction.
Blockchain platform integration is urgently relevant for Africa. Most African land owners are legally defenseless against land‐grabbing. In Ghana, according to the International Monetary Fund estimations, 90 percent of land ownership is not officially registered. The Bitland platform, created by Ghana resident Narigamba Mwinsubo, uses blockchain to create unchangeable public records of property rights. Employees of the company meet with lend holders, verify ownership in coöperation with local officials and register it in the network. In addition, the platform allows you to make real estate transactions based on smart contracts. Law effect of land ownership registered in this way also extends to water, mineral resources, livestock and other resources there. Bitland is operating in 7 countries in Africa and India at the moment. Moreover, Time magazine has included the project in its list of the top 50 Genius Companies of 2018, along such giants as Apple Netflix and SpaceX.
Another example of the industry transformation beginning is taken place in Russia. In February 2018, the first contracts of equity participation in construction (means property purchase at the stage of construction) were concluded with the use of technology. Participation in the project was taken by Polis Group construction firm, Rosreestr and the Agency for Housing Mortgage Lending. The platform for the pilot project was created by the VEB bank blockchain competence center. Using blockchain participants want to protect the investments of citizens and provide them with open information about all actions of the developer.
The most developed example of such platform is presented by Swedish government. Blockchain platform for property ownership registration has been operating in Sweden in parallel with the traditional system since March 2017. Real estate transactions can be directly made in the mobile application. A collection of necessary documents is carried out within the platform. Relevant state authorities can authorize on it using electronic signatures. The new platform has changed the Swedish procedures for the real estate acquisition as follows:
- The risk of falsification of documents is excluded. There is no need to send out individual paper copies of various inquiries and contracts. Electronic copies of all required documents are available for all parties in the application. Officials and other users verify documents’ authenticity with electronic signatures.
- No need to send numerous requests to government agencies. Application contains all available information about real estate properties. Registration of a transaction begins automatically after a smart contract conclusion.
- Banks can receive all the necessary information about real estate and a borrower through the application. So a lending procedure was greatly simplified, and a time for obtaining credits was accelerated.
How technology changes life of ordinary citizen.
People usually do not buy or sell real estate frequently. In many countries such event can be perceived by people as a real challenge, not just a deal. It seems that the blockchain platform will simplify the situation.
Firstly, fewer documents need to be collected and verified. This fact decreases a risk that the deal may fail due to bureaucracy delays. Secondly, additional payments to notaries, real estate brokers and other intermediaries may disappear. Thirdly, mortgage loans may become more affordable. And most importantly feature is that a property transaction and ownership registration may become intuitive, even for an ordinary person.
Where is the button to transfer everything to the blockchain, eh?