The real estate brokerage process
According to Nitin Gaur, the former Director of IBM Blockchain Labs, “we live in the age of
disintermediation,” or the removal of middlemen. On a worldwide basis, individuals appear to be wary
of intermediaries and prefer to engage directly with one another. Currently, most purchasers and
sellers of real estate use escrow and title firms for third-party verification, which serves as a safety net
to ensure that both parties maintain their end of the bargain and reduces the danger of fraud.
However, the real estate brokerage model has many inefficiencies.
Among these are a requirement for a great deal of paperwork, a need for face-to-face interaction among the parties
to most transactions, and a lack of technological capability to legally bind property purchase with complete
documentation and security (Cheng-Shorland & Alishahi, 2019). Furthermore, the present real estate brokerage
process is not transparent or verifiable. These problems are also closely related to
the non-transparency of its data (Deloitte Centre for Financial Services, 2017). The information
asymmetry relating to real estate assets contributes to the real estate market’s transaction costs. In
addition, a complicated structure of interrelationships between participants also accounts for a large
portion of the transaction costs in the price of real estate (Kalyuzhnova, 2018).
Blockchain technology could potentially improve some of the current shortcomings in the real
estate brokerage process. The blockchain is a peer-to-peer network that does not require any
centralized authority or trusted third party. It only adds information to the database after it has
collectively verified the accuracy of the data (Tapscott, 2016). If the assets are digital, they can
contain any sort of value.
Blockchain
The innovative power of this technology makes it possible for companies to use a computer network to do business
with other companies they do not trust. A ‘smart contract’ powers the blockchain. The smart contract’s
programmability allows registered peers to validate transactions automatically and anonymously and
decide whether a new block can be added to the chain in chronological sequence (Baliga, 2017).
Moreover, any valuta, any contract, any tangible or intangible good can be traded using a system like
blockchain. Transactions are not the only thing that can be used for blockchain. Blockchain can also play
a role in the system of record and inventory to record, track, monitor, and trade assets. Hence,
blockchain could be applied for any form of recording, inventorying, and exchanging assets, including
all areas of finance, economics and currency, tangible assets, and intangible assets. According to
Spielman (2016), blockchain technology provides greater security and makes fraud impossible
because blockchain is immutable. Aside from security, another significant feature of blockchain
technology is transparency, as all parties involved have access to the data. So, the four primary
characteristics of blockchain are transparency, immutability, programmability, and decentralization.
The change
Blockchain represents a total shift away from the traditional ways of doing things, even
for industries that have already seen the significant transformation from digital technologies. It places
trust and authority in a decentralized network rather than in a powerful central institution. And for
most, this loss of control can be deeply unsettling (Deloitte, 2018). According to the theory, the blockchain digital
ledger’s transparency and traceability will dramatically lower the cost of verifying trading partners (Catalini and
Gans, 2016). Blockchain technology and a smart contract can overcome the problems associated with the real
estate sector. A decentralized system can allow buying as well as selling properties without a third party. The
document is also verified and validated digitally. All the documents are stored in a digital ledger
distributed database where everyone can see them (Mohanta, Panda & Jena, 2018). As a result, the
amount of time and money it takes to collect the information needed for a transaction will be lowered.
Real estate agents currently gather the information manually in multiple databases and verify the
stakeholders through slow protocols. Many of these documents must be bought. In addition, a real
estate agent charges fees for services such as enhancing reliability and reducing the risk of trading
with unknown partners. The transaction costs would be reduced if this procedure was carried out using
smart contracts. Furthermore, if the majority of this transaction were handled via smart contracts, most
of the labor of real estate agents would be eliminated, resulting in the brokerage fee being eliminated
or significantly reduced. The primary reason blockchain is not being utilized in this procedure is
because it is not yet legal. Public authorities have rules and standards regarding privacy when people
conduct a real estate transaction, that prohibit blockchain real estate transactions and registrations.
As long as human factors play a prominent role in the process of buying or selling real estate
objects, information asymmetry, goal incongruence, and high transaction costs will not disappear. In
the future, there should be blockchain alternatives to support or completely provide this process for the
involved parties in a real estate transaction.
References
Baliga, A. (2017). Understanding Blockchain Consensus Models.
Catalini, C., & Gans, J. (2016). Some Simple Economics of the Blockchain.
CHENG-SHORLAND, C., & ALISHAHI, A. (2019). BLOCKCHAIN-POWERED REAL ESTATE
SALES AND RENTAL SYSTEM.
Deloitte Centre for Financial Services. (2017). Blockchain in commercial real estate – The future is
here!
Kalyuzhnova, N. (2018). Transformation of the real estate market on the basis of use of the blockchain
technologies: opportunities and problems.
Mohanta, B.K., Panda, S.S., and Jena, D., (2018), “An Overview of Smart Contract and Use Cases in
Blockchain Technology.”
Spielman, A. (2016). Digitally rebuilding the real estate industry.
Tapscott, D., & Tapscott, A. (2016). Blockchain revolution : how the technology behind bitcoin is
changing money, business, and the world .
Thank you for the article Thijn. Very interesting to find out what the current problems the real estate sector is facing at this moment are. Blockchain indeed would seem to be a viable solution to reduce the cost of middlemen. I work in the real estate sector myself. From my experience, many steps in the verification and legal processes could indeed be a lot more efficient and less costly. However, in my opinion, the human factor in real estate will always be extant. So I wonder how eventually there is going to be a good mix between human- and automated tasks within the process, and to what extent the middle men will become unnecessary.
Regards, Beau
A truly interesting read Thijn, thank you very much for your article. Your analysis on the potential combination of blockchain and the real estate industry is novel for me, and your article grounded In theory has provided me with a lot of insight on the topic. Your further development into the legal aspect that surrounds blockchain and the real estate industry really highlights the impediments that blockchain still faces today. A very nice read !