Real estate transactions carry the reputation of conservative practices involving a lot of paperwork, making it difficult for lawyers to review large piles of documents. However, contract management tools, e-signatures, smart contracts, etc. are currently reshaping the way real estate transactions are processed. Investment in proptech has grown exponentially from $186 million in 2011 to $12.7 billion in 2017. According to CREtech’s 2019 End-Year Report, 31.6 billion USD were invested from Venture Capital in Proptech, making 2019 the sector’s breakout year.
The Real Estate Industry offers a wide range of PropTech opportunities to investors. One such emerging technology is that of Smart Contracts.
Forces Driving PropTech Forward
In simplest terms, PropTech (Property + Technology) is the use of Information Technology in the real estate industry in order to help people buy, sell, and manage real estate efficiently. Emerging technologies and digital innovations are used to address and resolve deal closure timelines and high costs for due diligence of players of this industry.
James Dearsley, a global keynote speaker about the future of real estate is of the view that “Proptech is one small part of a wider digital transformation in the property industry that involves both the technological and the mental change of the real estate industry, and the consumers’ attitudes, movements, and transactions involving both buildings and cities.”
Artificial Intelligence, cloud computing, reality modelling, and digital transformations are the forces driving PropTech forward. The primary goal is minimizing cost and resources associated with property transactions, and maximizing efficiency at the same time. It also saves time and provides an experience of personalized property management. The Blockchain technology plays a crucial role in creating a secure infrastructure with smart contracts.
Uses of the Blockchain in Real Estate
A Smart Contract is a program in the form of a computer code that executes automatically upon fulfillment of certain predetermined terms and conditions. The code follows the simple “if/then” statements which automate the execution whenever a condition is met. Since it is stored on a Blockchain, the code is replicated across multiple nodes of a Blockchain and thus becomes secure and immutable.
But what exactly is a Blockchain? Blockchain is a decentralized, distributed digital ledger that records transactions in the form of “blocks” and links them together to form a chain providing the entire history of transactions across a peer-to-peer network. Blockchain is considered secure as the records it stores are unalterable.
Smart contracts are best suited to execute automatically two types of “transactions” found in many contracts: (1) ensuring the payment of funds upon certain triggering events and (2) imposing financial penalties if certain objective conditions are not satisfied. In each case, human intervention, through a trusted escrow holder or even the judicial system, is not required once the smart contract has been deployed and is operational, thereby reducing the execution and enforcement costs of the contracting process.
The best way to understand how Smart Contracts work is through an illustration. Suppose person A wishes to buy a property but he can’t pay for it outright. So he decides to obtain financing. This requires him to fill out several forms for a credit check. She has to interact with several intermediaries like a lender, finance broker, and even compensates them.
Smart Contracts will help streamline this process. Person A’s identity can be stored on a Blockchain so that lenders can quickly evaluate A’s credit and provide financing for the deal. A smart contract would be created between the bank, the real estate agent and person A. Once the credit is approved, funds are released, and subsequently, the transfer of ownership is automated.
In this snippet, the smart contract dictates that (1) the buyer’s bank must sign-off (with its private key) that it received the purchase sum and (2) the buyer’s bank must also sign the contract that is sent to the land registry and (3) The land registry, in turn, must sign that it approves the purchase contract received from the Buyers Bank. In this way, the smart contract defines and orchestrates the parties to the contract and enforces the actions they must take to advance the contract and associated processes towards completion.
Some of the benefits of Smart Contracts
- Trust and Security- The records stored on the Blockchain are encrypted and shared across the network, thus eliminating the question of information being altered by any intermediary. Any alteration or addition to the record will not affect the original record, but instead, it will get attached to the previous record in the chain.
- Speed and Accuracy- Since the contract is automated through the code, it saves the time otherwise spent in manual contract reviewing and processing. It also reduces potential disputes arising out of varied interpretations given to legal jargons used in manual contracts.
- Cost saving- The intermediaries get eliminated as there is no need for them to validate the contractual obligations, thus saving a few expenses.
To identify the impact of Smart Contracts on Real Estate, SavoyStewart, a group of commercial estate agents, surveyed 544 Commercial Real Estate (CRE) professionals. 71% of the professionals held increased speed to be the biggest benefit of utilizing smart contracts in real estate transactions. 66% of the respondents believe that the biggest benefit is the elimination of the middlemen leading to cost saving and efficient buyer-seller relationships.
However, 58% raised the concern about data privacy compliance as the information stored in a Smart Contract will stay forever.
Smart Contracts can play a large role in Real Estate transactions, both commercial and residential. Right from the property search process to cash flow management, the entire process can be made more transparent and efficient by the implementation of Smart Contracts. In the future of Proptech, as Blockchain technology evolves, the need for agents and other intermediaries will be reduced, thus decreasing the overhead costs. Buyers and sellers will be able to facilitate a real estate transaction on their own. Additionally, the long duration over which such a transaction is carried out would also be reduced to a time span of just a few minutes.
That being said, a decentralized system does not guarantee a system without traditional institutions. Forward-thinking institutions embracing Blockchain technology will be the ones that will survive and become the new leaders in the market.