Written By: Mike Ross – Corporate Finance
Common statistics reveal that one dollar out of six created in the world is linked to the real-estate sector. The sector is traditionally subjected to strong regulations relating to standards, aesthetic and energy constraints, securitization of transactions, guarantees, subsidies and tax incentives. Digitalization has led to the emergence of new services and tools on the real-estate market: real-estate sites (Airbnb, for instance), digitalized contracts, virtual tours and digital locations. Beyond the expectations of transparency and efficiency in the numerous real-estate processes, the costs of transactions could drastically decrease in years to come, thanks to new technologies.
The savings expected by technological innovation in real estate are enormous.
In its case study titled “Blockchain putting theory into practice”, Goldman Sachs estimated that an amount between $2 and $4 billion dollars could be saved along the title-insurance process that represents $11 billion dollars in premiums turnover in the United States. This savings would be brought through only considerable improvement of process efficiency, thanks to blockchain technology.
Even if title insurance has not spread into every country, and the Goldman Sachs study tackles mostly the US market, real-estate transaction processes are encompassing the same steps for legal registration of properties all over the world. And looking at the World Bank’s map of the countries’ efficiency index in the property-registration process, one can see that technology could improve most countries’ efficiency.
The World Bank’s land registration index reflects aggregate ranking of time, steps and costs involved in registering property. It is obvious that most of the countries in the world received a rating below 70 percent for their efficiency in this process.
What does blockchain mean when applied to real-estate transactions?
Historically, public organizations (for instance, land registers and public notaries) and private organizations (attorneys and real-estate agencies) contributing to real-estate processes used databases controlled by their sources’ owners, who entirely managed their access. The distribution of data was almost impossible to process, because of security or the technology used by their owners. But progress in software, communications and encryption now allows for a distributed database spanning all organizations. By aggregating property records and allowing easy distribution of them in a secure way, blockchain technology allows:
- less fraud and corruption,
- efficiency and transparency,
- cost reduction.
This new technology is particularly interesting in countries in which fraud and corruption are inducing significant risks in real-estate transactions.
In these countries, the primary condition for business development is to secure the ownership rights of investors. Blockchain technology can help exchange the right information quickly and securely. Latin American countries such as Honduras and Central European countries such as Georgia are leading projects employing blockchain bitcoin technologies (through contracts with Bitfury and Factom) to secure their land-registration processes.
But not only is the fight against real-estate corruption targeted by blockchain technologies; efficiency and reduction of costs in property transfers is motivating other countries.
A country may want to speed up owners’ land registrations or decrease the costs of all intermediaries (notary, brokers, tax authorities). For instance:
- Blockchain technologies may allow the automation of sales transactions so that the bill-of-sale contract is coded on the blockchain, and the payment by the buyer automatically triggers the delivery of the certificate of sale. Proof of sale is timestamped, immutable and cannot be disputed.
- Securing mortgage or other credit with real-estate collateral in a cheap and fast way is an opportunity that a country would not want to miss.
Many projects are underway in developed countries. For instance in Sweden, ChromaWay is a project set up last year by Sweden’s land-registry authority to propose a system in which buyer and seller view the workflow of the deal, and in which banks and land registries can enter useful information to process the deal. The European Union passed a directive in 2016 that puts more weight behind digital signatures and could facilitate the technological integration of real-estate transactions.
US startups in real estate were mentioned in the Forbes article “Real Estate Startups poised to disrupt the industry”. Among them, Bowery is taking a new approach to real-estate appraisals that utilizes the power of big data to make appraisals faster and more accurate than ever before.
In the future, technological innovations will no doubt bring much more benefit to the real-estate sector. Information from various sources (sensors, service providers, occupants, open data) will be exchanged in a secured and efficient way.
Photo Attribution: TPOphoto