Australians love property but the excitement of buying a new home can be sapped by a long, complex and expensive contractual process.
But the situation may be about to change as a new wave of fintech start-ups around the world begin disrupting the sector with blockchain (or distributed ledger) technology.
It has the potential to bring together the vast amount of property information currently stored in many private and government databases, including all legal and transaction history, via a single digital address stored on an immutable, public distributed ledger.
“You're very likely to see the adoption of blockchain technology in real estate to keep track of property in less developed or smaller countries to start with,” says Josias Dewey, a Partner with law firm Holland & Knight in Miami. “They’re primed for change because their existing systems are quite bad – they don't have much infrastructure.”
“My best guess is, within 10 years you will also have at least one or two States which will have adopted it in the US,” Dewey says.
That could revolutionise the industry by slashing legal, accounting and transaction costs, as well as reduce fraud and credit risk.
Removing the middlemen
Many intermediaries such as brokers, government property databases, title companies, escrow companies, inspectors and appraisers, and notary publics, would no longer be needed, according to the International Blockchain Real Estate Association
Without those traditional go-betweens, the way is paved for “smart contracts”: computer code which automatically executes certain actions when particular conditions are met.
A vending machine provides a simple example of a smart contract: it self-executes code to release a particular item (a drink) when a condition (payment) is met.
Real estate transactions – while far larger and more complex – have the potential to work in a similar fashion and a number of start-ups are already exploring various business models.
German start-up Slock.it
is using smart contracts to allow rooms to be rented – when payment is made the contract automatically unlocks the door.
, which was launched at the Citi Mobile Challenge, wants to create its own private real estate blockchain and implement smart contracts, allowing residential and commercial property transactions to occur and be tracked in real-time.
The point of using Bitcoin is that it removes the middleman, eliminates a central point of failure/control, and you don't need permission to use the network
However, IBREA President Ragnar Lifthrasir
points out that using a private blockchain has several drawbacks compared to using a public blockchain such as Bitcoin or Ethereum.
“The point of using Bitcoin is that it removes the middleman, eliminates a central point of failure/control, and you don't need permission to use the network,” he says.
Bitcoin’s functionality already allows for simple smart contracts.
Unlike the current system of recording property titles that rely on 17th century technology of paper documents and rubber stamps, Bitcoin uses 21st century technology of cryptography.
“A very simple smart contract that anyone can implement right now is using Bitcoin for secure escrow when renting an apartment,” says Lifthrasir.
It works via a multi-signature address feature
that allows the tenant, the landlord and an independent third party to create 2-of-3 signing address when funding a rental deposit. The smart contract can be structured to allow for the automatic release of the deposit under certain circumstances (for example, at the end of the lease within 30 days if a dispute is not lodged). If there is a dispute, the independent party needs to become involved to ultimately release funds.
While cryptocurrencies such as Bitcoin doesn’t need to be used for a real estate smart contract, it greatly reduces the friction by removing traditional middle-men, according to Lifthrasir.
“Bitcoin is a public, permissionless ledger that anyone in the world can read and write information, without permission, at the cost of a few cents. Unlike the current system of recording property titles that rely on 17th century technology of paper documents and rubber stamps, Bitcoin uses 21st century technology of cryptography.”
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