Introduction – Blockchain Implementation Into Real Estate can Eliminate Archaic & Costly Processes
Have you ever tried to buy a house? If not, let me walk you through a typical closing process and the thoughts / questions that come to mind:
- I want to buy a house – how do I do that?
- You find a real estate agent – 3% seems like an awfully steep agent fee
- They find you a house – couldn’t I have used Zillow?
- Your agent sends an offer to the seller – why is the contract so long?
- The seller’s agent submits a counter, you agree, both you and the seller sign – Wait, the seller’s agent also gets 3%?
- You send a deposit payment to an escrow service – So, they just hold my money and make sure I don’t walk away? I pay them for this?
- You contact your mortgage company to get approved for a loan – I’ve banked with them for 30 years, they know more about me than my own mother, and this will take 30+ days to get approved? Didn’t Flow say 7 minutes or less, or was that the Emu, wait, that was insurance, still thought they said 7 minutes? Aren’t I paying them interest on the loan, why am I also paying a whole 1% now?
- You have an inspection and agree upon some repairs the seller will pay for – FINALLY! Something goes my way!
- You contact a title insurance company to verify the title is “clean” and if in the .01% chance someone comes forward claiming the title is not clean, they pay for the legal expenses and to remediate – It’s how much again?!?!
- The lending company performs an appraisal, and the appraised value is less than the purchase price - Why do I owe the difference?
- You come to the closing table where all parties are present – why are there 8+ people here, and why is the house that was originally $100k now $115k+?
- The deed is taken to the county clerk and registered in paper form, the process takes several days – What, do they take a horse and buggy and stop overnight somewhere because the big dipper is staring down at them menacingly?
12+ steps, several counterparties, and 30+ days complete the process for buying real estate in the US. The entire process is shrouded in mystery, buzzwords, and fees. Applying smart contracts to the pain points of a real estate transaction will eliminate 99% of the headache and 90%+ of the closing costs.
A few lines of code could create simple, efficient processes. In this blog post, we will introduce blockchain in real estate through: blockchain’s origin, the first blockchain based real estate project, and the future of blockchain in real estate.
Blockchain Origins – Who is Nick Szabo and Why Aren’t we Talking About Satoshi Nakomoto?
Before Satoshi Nakomoto published the Bitcoin Whitepaper in 2008, Nick Szabo published a paper titled “Secure Property Titles with Owner Authority” in 1998.
The paper went on to describe the ability to send the deed of a house from a seller to buyer through a cryptographically verified transaction – sound familiar to another technology from 2008? Szabo theorized, if we could send the deed using a few lines of code and the transaction was verified through a third-party, then, deed ownership would be immutable and clear of any “cloudiness”. The ownership would be recorded online and accessible to all.
However, the paper goes on to present a bad actor problem – one third-party institution could validate incorrect transactions and jeopardize the security of the system. Fast forward to 2008, Satoshi Nakomoto publishes the decentralized consensus mechanism where 51% of miners need to validate a transaction to complete the transaction; thereby, eliminating the third-party bad actor problem.
Nick Szabo had the foresight to envision an immutable ledger of transactions and ownership, and Satoshi solved the problem of trust in the system. With a few lines of code, lengthy and costly processes can become instantaneous and minimal in cost, lowering some of the barriers of home ownership.
First of its Kind – Aspen Coin
In 2018, Solidblock in partnership with Elevated Returns (“ER”) launched the first blockchain based real estate project, Aspen coin.
Elevated Returns was raising money to purchase the St. Regis Aspen resort. To efficiently raise a large sum of capital from a large number of investors, ER sold tokens on the blockchain tied to ownership rights in the resort. The use of tokens provided token holders with exposure to commercial real estate for low capital commitments, liquidity in the form of secondary sales of the tokens, and instant, low costing transactions.
The token offering was the first real estate tokenization in the US and provided a breakthrough for future projects. Since the launch, others have entered the space looking to tokenize real estate, sell fractional ownership rights, and implement blockchain where inefficiencies in real estate lie. Tokenization of real estate changes fractional ownership across all industries forever, and the implementation of blockchain is the first step of many to transform the real estate industry.
Looking to the Future – A Trustless System Providing Trust in the System
Blockchain’s trustless infrastructure and consensus mechanism mixed with smart contracts provides trust in an industry ripe with fraud. During the 2008 crisis, lack of transparency and profiting off risky mortgages led to unsustainable levels of leverage mixed with consumer distrust in banks. Currently, Airbnb owners fear raucous, destructive guests who can create a new account and wipe their slate clean. Trust in the system leads to fraud and losses.
During 2008, a decentralized, transparent system of information could have exposed the risky mortgages earlier and avoided a recession. Tracking the mortgage levels in the CDO’s and property values recorded on blockchain could have led to a softer blow and millions of people keeping their homes.
Currently, an Airbnb guest who destroys a house can continue to use the platform using other aliases or friends accounts. With a destructive visit recorded on blockchain, the user cannot simply create a new account; instead, the transaction follows them to the next visit. They can appeal the visit or discuss with future hosts the actions of their past, but no longer can a visitor simply move on with no repercussions.
Conclusion
A system with archaic processes creates more fraud as other processes around it advance. Historically, the real estate industry is the last to change. If we have anything to say about it, fraud, exorbitant costs, and time consuming processes (time being the most valuable asset of all) will become a rarity on par with Dr. Dre’s Detox.