Jul 1, 2015
Recently in technology circles there have been a lot of discussion and articles concerning other applications of The Blockchain besides virtual cryptocurrency like Bitcoin. These discussions point to the fact that Satoshi Nakamoto, when creating Bitcoin, effectively created a much larger concept: a completely open source, disruptive, free, and decentralized system for organizing and exchanging all types of information.
Fringes of the real estate world for over a year have embraced The Blockchain through its acceptance of Bitcoin. In 2013, home and apartment sellers for the first time started accepting virtual currency in exchange for their properties. There was even an offer made for a midtown apartment in Bitcoin on Million Dollar Listing. In fact, certain websites in 2014 (much to my excitement) started to accept virtual currency as part of its crowd funded debt and equity investments. The benefits of Bitcoin for buyers and sellers of property is obvious: international buyers want exposure to US real estate without having to transfer their currency into dollars and pay extra fees, set up bank accounts, etc. They can pay with Bitcoin and close immediately without these hassles.
Now, switching gears for a moment, let's examine the way the current transaction process occurs provided someone wants to purchase property: first you make an offer on a site and tie it up and then you begin the diligence process. The diligence process consists of environmental testing, surveying, inspections, and an examination of a title report. There is obviously more nuance than that but let's stick to those things for now.
In the current system, your attorney will contact a title company who will provide you with the title report. This usually takes a significant amount of time to pull and receive. The report will tell you if there is a lien on the property, easements, etc. Each time the property changes hands this process repeats itself. The same thing happens with environmental testing, surveys, and inspection reports. Each time they have to be done anew as things change on the property between different owners. Sites over time can become contaminated and home infrastructure can deteriorate.
After examining all these factors with a fine-toothed comb you, as a developer, take the risk of going forward and not backing out of the contract. You have to weigh the pros and cons of what you discovered in the diligence process to decide whether the deal is right for you and your risk profile. If you decide to go ahead and close on the property, you will often receive a deed that serves as legal proof you own the property. The deed shows that you have successfully taken title to the land. Deeds need to be recorded at the municipal and county level. This often takes weeks.
That's where The Blockchain comes in. What if instead of having a paper deed that gets "recorded" you had a digital deed that was secure, encrypted, and unique, just like a Bitcoin? In addition, this crypto deed can take on many different and advantageous attributes compared to a paper deed. For example, it can be cloud hosted in a software wallet solution similar to Coinbase. This will ensure that the passage of title to the buyer is clean and documented indisputably forever. This provides the buyer additional security in case of geo-political upheaval (e.g. local government coup) or in case it just takes awhile for the specific city or county to record the paper deed. For example, my wife and I just purchased a piece of property in upstate New York and it took over three weeks for the county to record the deed. Without the deed recording, I could not refinance the property.
Another advantage of this crypto deed is that it can be attached to other documentation that is valuable for the diligence process. Instead of the title company having to “order” the title report, the title company can release the title report instantly to the digital location of the virtual deed, providing the potential buyer with valuable diligence information instantly. The same can be done for previous inspections, environmental tests, and surveys.
This way, everyone saves time. The potential buyer will still need to do traditional diligence (if they are smart) but they will know instantly if they want to push forward or back out. Different real estate investors have different risk profiles. As ground-up condo developers, my firm has a higher risk tolerance than a firm that buys and upgrades multi family residential housing or office space. We may have an appetite to clean-up title and environmental issues when others do not. Therefore, the buyer saves time, the seller saves time, the lawyers save time, and the title company saves time. This system can ensure that everyone in the value chain works on more deals and makes more money. Also, purchasers better align potential risks and rewards with sellers.