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The Blockchain-based Smart Contract: Single Biggest Game Changer In Real Estate To Date?

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In the information age in which we now live, virtually every industry has undergone a major transformation in recent years due to the advent of new technologies. Automation has revolutionised the manufacturing industry, artificial intelligence has disrupted the customer service and experience industry, and the Internet of Things (IoT) is set to completely transform the healthcare industry, presenting not only a $163 billion opportunity but also bringing much-needed and long-awaited improvements in the way patients access and receive medical services around the world. The distributed ledger technology that is blockchain, however, has arguably impacted the most industries and people to date. From banking to politics to video and education, blockchain as an emerging technology has disrupted the way business transactions are conducted right across the globe. Not least of all, it is disrupting the way the real estate industry operates.

‘Smart Contract’ through blockchain technology

Perhaps the most exciting concept embedded in blockchain technology is that of ‘smart contract’, namely the Ethereum blockchain. What few people appreciate is that Ethereum is in fact the second largest cryptocurrency platform by market capitalisation, after Bitcoin. Just like other cryptocurrencies, Ethereum is a decentralised open source ledger that offers smart contract features; in other words, pieces of software that run on the blockchain network without the need for centralized servers. These ‘smart contracts’ are capable of facilitating the digital transfer of assets, under predefined conditions. In short, this means that no external action is required to execute the terms of the contract.

It requires little explanation as to why the concept is a complete game changer for the real estate industry; an industry typically associated with archaic, cumbersome transactions processes based on mountains of paperwork. To be able to conduct high value transactions such as real estate sales via digital, automated processes is nothing short of a miracle - just consider the headaches that could be avoided in this way. Theoretically, blockchain-based smart contracts could entirely replace the need for third, expensive parties typically involved in real estate transactions, and reduce costs including rental agreements; service agreements involving multiple activities, complex levels of service or service credits; and commission agreements where certainty of payment is required.

Commercial real estate (CRE) industry professionals are beyond excited about the opportunity this presents the industry. At last, blockchain technology has delivered the potential to transform core CRE operations including property transactions like purchase, sale, financing, leasing, and management transactions.

In particular, the benefits of using blockchain-based smart contracts in real estate can be seen in the transferral of property title. Usually, to transfer a property title upon payment by the buyer to the seller, an oracle is required to communicate between banking systems and a property registry. Now, thanks to blockchain, property registries have been digitised and the transaction can be completed via smart contracts, saving property investors significant fees and time. The tamper-proof and highly encrypted nature of blockchain is also likely to make it extremely difficult for anyone to commit fraud related to titles or transfers.

Benefits of smart contracts

“This increased security and transparency may mitigate title-fraud risk and reduce costs by simplifying the title check process,” Mr. Massey, partner and blockchain thought leader at Deloitte Tax LLP, told Wall Street Journal. “A more digitised and transparent process could also speed up title transfer execution, use of title as a collateral and reduce overall transaction time. In fact, a few governments across the world are planning to use the blockchain platform for broader social impact as land title registries have the potential to reduce corruption and improve transparency about land ownership.”

The benefits of smart contracts in real estate go well beyond this, however. Blockchain and smart contracts could most definitely expedite the pre-lease/due diligence and financial evaluation process, improve leasing and subsequent property and cash flow management processes, improve the property search process, and enable more efficient payment and financing processes.

Among the most significant benefits of blockchain-based smart contracts is the opportunity it offers overseas buyers. Usually, to make a large international transfer (via PayPal, or bank transfer) it requires a large minimum fee. With blockchain technology, transactions can be completed instantaneously, at very little cost to the buyer. Not only that, but utilising smart contracts for the transfer of payment eliminates the need for intermediaries and this additional fees.

There are already several leaders in the blockchain-based real estate space - Leaxcoin, Deedcoin, Reasi and New York’s ‘PropertyClub’ - a real estate platform that uses blockchain to improve the way people market, search for, buy, sell and invest in properties.

Leaxcoin touts itself as the ‘grand solution’ to all problems typically associated with the rent, lease, purchase processes of the industry, using smart contracts on a platform with full integration with notary, registry and government institutions. Encrypted with blockchain technology, it is untouchable and fully protected.