How can Blockchain change the current Real Estate market panorama?

By Tatiana Revoredo e Guilherme Furlaneto

Introduction

The real estate market is, through services and industry, the third greater generator of foreign currency to the country, according to IBGE (the Brazilian Institute of Geography and Statistics). Around 10% of all the wealth generated in Brazil comes from the ecosystem of the real estate market, which contemplates the whole labor force employed in construction, raw materials and all its production and distribution network, the registry system for documentation of the real estates, and the financing system and consulting for acquisition of real estate properties.

In each of these cases, Blockchain may bring cost reduction, raise transparency and agility of processes, promote leasing, as well as buying and selling transactions of real estate, and increment the financing options for real estate construction and sales.

Challenges of the real estate market

It is a common practice for the real estate industry to keep secret regarding several aspects of its operations, such as information about comparable rental fees, prices, and evaluations of properties, to create a possible competitive advantage.

Some of this information, however, has become public, [1] due to the disintermediation of startups and the increasing demand for more transparency in this more hyperconnected world.

Although more and more information regarding real estate property is digitally available, such fact has not resulted in more transparency and effectiveness. As a meaningful part of this digitally registered information are kept in different systems that not interact with each other, the real estate ecosystem still suffers from the incidence of imprecisions and potential frauds [2].

Thus, how to obtain the interoperability among the technological systems used by the different players of real estate transactions, and bring more transparency to this market?

Blockchain Solutions in the Real Estate Leasing Processes and Buying and Selling Transactions: what to observe before deciding

Being a public or private Blockchain, open or closed, permissioned, not permissioned or hybrid, as such architecture is still in its first steps, its protocols must be carefully analyzed by entrepreneurs and administrators, who must understand them deeply enough before any practical implementation takes place. Knowing where one intends to go and how close this architecture is from reproducing the desired degrees of functionality is paramount [3].

In this Picture, it is necessary to observe some conditions [4] before deciding for the Blockchain implementation, for instance, in the real estate leasing processes and buying and selling transactions.

1) The database

The shared databases are essential for the leasing and buying and selling transactions (a shared database.) One of the primary examples is a multiple listing service that gathers databases with information of property of the agents.

2) Multiple responsible entities for the data collection

Transacting and managing real estate properties involves several entities, such as owners, tenants, operators, financiers, investors, and service providers that supply, access and modify a variety of information.

3) Lack of confidence

Many times, the players in leasing and buying and selling operations are new to each other and may be careful in the due diligence. They may even be worried about the integrity of the data. However, Blockchain may help to reduce the risk through digital identities and systems of maintenance of registers more transparent for the real estate titles, rights, liens, financing, and lease.

4) An opportunity of disintermediation

Trusted intermediates, like title companies, maybe disintermediated through blockchain, due to more security and transparency in the title management, and auto confirmation through national land registers.

5) Conditional Transactions

Many real estate transactions have their conditional clauses and may be executed through intelligent agreements. For instance, the conclusion of a buying and selling operation could depend on loan approvals or title authorizations.

Advantages of using Blockchains in Real Estate

Allow smarter decision-making

The real estate property title is long and with many details regarding footage, foreign currency, proportions among the owners, mortgages, leasing, legal registrations. The legal and financing situation of the real estate owner must also be analyzed in a real estate transaction, generating consultation of certification for analysis of the situation.

Blockchain allows instant access to this information, transforming the real estate negotiation act into a fast transaction with a high level of trust.

Relative transparency in the intelligent management of property and cash flow

The automatic release via smart contract of registering debt on property registration with the mortgage settlement is just one example of how Blockchain technology can make everyone’s lives more comfortable and generate wealth. We can program endless situations that were never imagined with the use of Blockchain.

We can make the payment of a property from the issuing of the certificate of occupancy, showing that the real estate is released by the public power to use, this in an automatized way.

This automatization of processes and reduction of terms generate economy in scale, reducing the costs with paperwork and the financial costs of the properties.

More efficient financing and payments processing

The financing of real estate traditionally depends on banks and private organizations of access to credit. The act of digitalizing the trust in properties brings as reflex a countless number of financing and payment opportunities, turning the property into a tangible asset anywhere in the world.

The collective financing of real estate grows worldwide and shows itself to the Blockchain community as one of the main areas to be exploited by this technology. As the transaction is straight between those who lend the financial resource and the ones who borrow the fund, the fees are fewer and the interest charged is lower than that practiced in the current system.

The shortcomings are from high costs per transaction to the difficulty of registering and automating payment flows and proving them for subsequent processes.

Improve property searching process

Besides the advantages such as the easiness of issuance of documents, discharges, and information about the property and its owner, Blockchain serves to give confidence and transparency about real estate transactions.

In a world where informality grows along with demand, Blockchain enables the creation of a reliable database for governments and investors, providing transparency to the transactions of buying and selling real estate, both concerning taxation and concerning financing release. In addition to these examples, we can mention the most significant benefit for the industry, the growth of real estate financing in Blockchain database due to the profitability transparency and proof of the potential of the segment. Hence, more funds and investors can rely on the proposal because of the native audit of the Blockchain system, increasing the capital stream.

The current model of property registration

Inconveniences of the centralized real estate registry model

The registration currently carried out via physical means (paper), centralized in a public or private institution, is subject to all sorts of events such as destruction by fire, flood, sabotage, that is, it is subject to corruption or destruction by natural means or by human action.

An example of this is what happened in Haiti in 2010, where a major earthquake destroyed municipal buildings where land tenure documents of small farmers were stored.

In Indonesia, a tsunami in 2004 also destroyed all available documentation of property and real estate ownership.

Now, the destruction or damage of a document proving real estate property creates excellent inconvenience for homeowners and the community.

For instance, the destruction of a property registry may be an obstacle to the fulfillment of the social function of the property, as well as to the solution of domain disputes.

It may also make it unfeasible to use the property as collateral for loans and business that use the property as “ballast.” Without a document, there is no security.

Real Estate registration in Brazil

Land registration information suffers from the same woes in several countries, including Brazil, Russia, India, Honduras, Georgia, and Rwanda. They are data that are centralized in the land registry offices. In Brazil alone, there are around 3,400 notaries (registry offices).

Such registry offices do not have a shared database, and often the registration data don’t even have the correct geographical coordinates of the property.

Besides all sorts of problems arising from the geographical overlapping of ownership of the same property, this situation is an open door for corruption of malicious agents.

A clear example of this is the squatting of lands in the northern region of Brazil, especially in the Amazon Rainforest. With several titles of overlapping areas, “ghost” owners irregularly deforest strips of land without any legal penalties. Furthermore, corrupt public officials validate false and duplicate ownership documents, thus contributing to the increase of mistrust in the system, as well as to the perpetuation of corruption in the country.

On the other hand, families who have the ownership of a particular property lack the respective supporting documentation, being prevented of obtaining financing and the consequent land regularization which contributes to the maintenance of these families in poverty and social vulnerability.

This situation recurs all over the world, even in more developed countries with more reliable systems. The lack of a transparent database hinders the implementation of businesses with the necessary speed and efficiency for the evolution of the real estate market.

Facing this scenario…

How can Blockchain help solve the problems of the traditional property registration model?

Blockchains store information in containers called blocks that are chronologically linked to form a continuous line, a block chain. That is, for a change in the information already registered in a block to occur, it is not rewritten. Instead, any data alteration is stored in a new block, showing that X has changed to Y at a specific date and time [5]. Rather than having several conflicting documents regarding the ownership of a real estate, we will have a clear record of the information history, showing who altered the information and when that happened.

Several institutions are rendering property registration services in Blockchain for the needy population. They are non-profit organizations that aim to assist landowners in proving their ownership. Bitland is an example of an institution that performs land registry work based in Blockchain with the description of each parcel of land, as well as the coordinates of the borders and satellite pictures of the area.

Besides the clear advantages of holding a reliable and secure to consult and validate land registration, another advantage is the reduced cost for recording that information. Recording the deed and filing of a property in a blockchain would cost around US$ 3.00 (price without considering the value of the provision of the service).

It is clear that the current system of information registration in register offices and by the government cannot be simply discontinued. Today, the possession and safekeeping of the data are entirely dependent on the current model that, even with its deficiencies, organizes the registry housing in several countries.

The great challenge is to promote the migration from the current system, that due to the available technology until now was the possible solution, to the next level of security and transparency that presents itself in the face of the advent of Blockchain.

There must be still a clear transition rule providing attendance to the interests of the current “owners” of the information, without the register offices, governments, and other beneficiaries of the custody, and ownership of these data being harmed in that transition at the same time that there is reduction of costs, bureaucracy, and increase of efficiency in the management of the ownership information of real estate.

Dealing with these so conflicting interests and promoting the transition between the current (centralized, dark and costly) model to the next model (decentralized, transparent and economic) is one of the missions for Blockchain supporters.

Concluding Remarks

Drawn from the above is that the Blockchain architecture, still in its early stage, will not be the solution to all the inefficiencies of the processes existing in the real estate market, even because it is not possible to completely automatize all the transactions.

The first wave of blockchain products for real estate markets must begin compiling that information, currently centralized, for availability on decentralized platforms. The full and free access to that information is another challenge, once their holders, today, monetizes the provision of that information (registry offices and public agents).

All these interferences must be analyzed on a case-by-case basis, ensuring the assistance to the interests of all the players to make possible a gradual migration of information to Blockchain, with all the benefits of safety, transparency, and agility that this technology can provide.

It is worth noticing that there would be no complete disintermediation for some trust validators (intermediate) would still be, for instance, obliged to comply with the contractual obligations, such as an evaluation of the real estate to fulfill the renewal requirements [6].

As such, identifying what the companies expect to achieve when deploying blockchain solutions may be a challenging approach for, like the Internet in the 90s, the market still does not know how to identify the use of such a potent tool ultimately.

Thus, although Blockchain infrastructures bear the potential of generating transparency, effectiveness, and costs reduction in the real estate market, removing many of the existing inefficiency in the main processes, it is paramount that companies and players of the real estate industry urgently reevaluate their skills, qualities, and inefficiencies, as well as review their current systems and seek to understand how applications in Blockchain can add significant value to the industry.

Images credits: Shutterstock

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References

[1] Sheth, Surabhi. In: “Commercial Real Estate Redefined: How the Nexus of Technology Advancements and Consumer Behavior Will Disrupt the Industry” Deloitte Center for Financial Services, 2016.

[2] Kejriwal, Surabhi; Mahajan, Saurabh. In: “Blockchain in commercial real estate: The future is here!”, Delloitte Center for Financial Services, 2017.

[3] Idem note 2.

[4] Greenspan, Gideon. In: “Avoiding the pointless blockchain project”, Linkedin, 2015.

[5] Revoredo, Tatiana, In: “Blockchain e seu potencial de impactar a sociedade e criar modelos de negócio ainda inimagináveis”, Criptomoedas Fácil, 2018.

[6] Sofia, “Blockchain-Enabled Smart Contracts: Applications and Challenges”, Let’s Talk Payments, March 8, 2016.

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