Completing a real estate transaction in the modern era remains glacially slow and notoriously expensive. The process necessitates coordination amongst a wide range of participants including buyers and sellers and their agents, listing services and portals, registars and notaries, third-party financiers, title companies, escrow services, insurance providers and more. Antiquated record keeping - where land registries and associated property titles may go back hundreds of years - combines with complex legal requirements to make each step of the process doubly painstaking.
While the march of technology is slowly breaking down barriers in the real estate transaction process, there has yet to emerge a solution offering the order-of-magnitude-level improvement needed. Could “blockchain-supported decentralization” be that solution?
This white paper, in seeking to answer that question, outlines the challenges in the status quo, discusses the viability of this novel solution, and explores some of its current and potential applications.
Part I: Challenges in the status quo
Listing information is siloed
Property listings are the starting point for most real estate transactions. The status quo in this regard is a collection of fragmented data silos that are structured in the best interests of their owners rather than the buyers and sellers of property, and their agents. The immediate consequence of this fragmentation is high listing costs, inaccurate listing information, and wasted time for all participants. In the long term, by giving up ownership of property data to centralized entities, stakeholders empower such entities to take a greater share of the margin in real estate transactions.
Buyers and sellers, through their agents and brokers, typically use a combination of multiple listing services (MLS) and real estate portals to list and access property-level data such as location, features, and price. MLS are private databases of for-sale properties in a limited geographical region to which typically only licensed agents and brokers have access. Real estate portals, meanwhile, are public databases of property listings that aggregate listings from MLS and other sources.
Multiple listing services
As the primary source of property listing information and with (relatively) enforced standards in place, the property information contained in an MLS is considered more accurate than real estate portals, which aggregate the data but do less to maintain it. Nevertheless, the accuracy and detail of data across MLS are inconsistent due to a lack of standardized processes, and may not be entirely accurate.
From the perspective of buyers and sellers and their agents, the key drawbacks of reliance on MLS are inconvenience of search and high costs for database access.
Each MLS contains a relatively small set of entries as it typically covers only the limited geographical area of the local realtor association that typically owns and manages it. In the US, for instance, there are more than 600 separate MLSs . This makes it next to impossible to conduct a nationwide search of property listings. Further, since MLS are subscription services, the cost of searching for properties through them quickly becomes unsustainable. Brokers and agents must pay annual fees ranging from $100 to $500 for access to a single MLS database, with membership in two to five databases required for access to all properties across their region. Meanwhile homeowners looking to list their property
Real estate portals
Real estate portals have risen as an alternative and supplement to MLS. In recent years, some MLS have struck syndication agreements with real estate portals in order to provide their customers (real estate agents) with national listing exposure. Basic listing and accessing of properties on real estate portals is done typically at or near zero cost, with the portal earning revenue primarily from a combination of advertising and paywalls for advanced functionality. By aggregating regional property listing data and making it available to the public at a large scale, real estate portals have carved out a rapidly growing and profitable niche in the real estate industry. For instance, Zillow Group, which is the largest real estate portal in the US with over 195 million unique users , earned $1.3 billion in revenue in 2018 and currently trades on the NASDAQ with a market cap of nearly $10 billion.
From the perspective of buyers and sellers and their agents, the key drawbacks of the status quo real estate portals are, in the short term, lack of reliability of data and, in the long term, wider problems associated with surrendering data ownership to a centralized entity.
The lack of reliability of property listing data on real estate portals stems from the lack of user incentive to input accurate data and the inability of real estate portals to sufficiently vet the information given its overwhelming volume (Zillow, for instance, has over 100 million listings ). As an example of misaligned incentives, agents have been known to intentionally leave sold listings online in order to attract new leads and funnel them to other listings . Even where listings are updated in earnest, inconsistencies across portals inevitably emerge due to lack of communication across portals. For instance, when a small change such as price is made to a listing on one portal, that change won’t immediately be updated on other portals (and may never be updated). A search through competing real estate portals thus often reveals the same property listed under different names and with different features and prices.
The reliance on real estate portals also has important data ownership implications. By listing on a real estate portal, homeowners and agents alike agree to terms and conditions in which they surrender their ownership of the data. As these portals grow larger, their ability to dictate the terms of usage also increases. Ultimately, leveraging their ownership of the data, the real estate portals could extract all margin from the property transaction process, including real estate commissions.
The process of closing a property sale, which can take months, typically consumes two to five percent of the purchase price of the home, although in some regions – including the US - it can rise as high as 10% . A survey from the US National Association of Realtors found that nearly a third of all real estate transactions encounter some type of delay to closing . In many cases, a closing can break down entirely, resulting in a failed sale. The time and cost required to successfully close a sale is due to the difficulty of coordinating at various stages in the process amongst disparate intermediaries, which may include brokers, government property databases, title companies, escrow companies, attorneys, inspectors, appraisers, and notaries.
A core part of the real estate transaction is the transferring of title from seller to buyer. The need to verify the authenticity and accuracy of title documents is complicated by the presence of liens, easements, and other information attached to the title. The status quo in most regions still consists of paper-based property titles but, even where a digital database exists, titles must be updated with information that comes from disparate sources. Critically, there is rarely a consistent method for validating the filed paperwork. The result is a high incidence of title defects. The American Title Insurance Industry (which as the US title industry’s primary trade group is admittedly biased) claims that “title companies find and fix problems with the title in 25 percent of transactions.” Since any defect on the title makes property transfer illegal, owners incur high legal fees to ensure the authenticity and accuracy of their property titles. The lack of clarity on property titles has given rise to the title insurance industry which, in the US, generates annual revenue estimated at $16 billion . Buyers and sellers alike now routinely purchase title insurance to cover the cost of litigation in the event there is a dispute on the title.
The wide-ranging intermediaries and the lack of a secure platform for conducting transactions not only increases costs and delays closing, it also increases the possibility of fraud in the transaction process itself. The closing process for a real estate transaction typically includes the opening of an escrow account managed by a neutral third party. In the final stage of closing, closing costs are wired to the escrow company then distributed to stakeholders who may include brokers, agents, and solicitors, in addition to the buyer and seller. Hackers have increasingly exploited weakness in this process by getting between one or more of the transaction participants. The most common technique, which is known as phishing, is to impersonate, for example, the escrow officer, then trick the buyer into transferring closing funds to the hacker’s account. The FBI reports losses of nearly $150 million to such “real estate scams” in the US in 2018, a more than ten-fold increase since 2015 . One analyst claims that, with the inclusion of unreported cases, real estate fraud in the US amounts to annual losses of $10 billion.
Once an offer is accepted, the transaction goes into a “due diligence” period. This period allows the buyer to do a home inspection, get an appraisal and research the title. The high rates of title defects and the growing potential for fraud means stakeholders in the process must conduct repetitive, costly and time-consuming due diligence. In addition to verifying the authenticity of the title, a buyer’s agent or solicitor may need to conduct checks on aspects of the property such as how the property is connected to utilities and environmental hazards like flood risks. These checks, many of which entail inquires with local authorities, can take three to six weeks to complete. Finally, where the buyer is ﬁnancing the purchase of the property with a mortgage or other third-party ﬁnancing service, due diligence steps and documentation must be repeated by both the buyer and the lender, contributing to delays in closing. This leads to the status quo in which mortgage approval for residential properties takes on average around 30-60 days to complete.
Part II: The decentralized solution
At outlined in Part I, most of the problems in the status quo of property ownership transfer and real estate transactions revolve around the difficulty stakeholders encounter in:
- sharing the documents critical to the process
- verifying the authenticity of the documents critical to the process
- verifying the identity of participants critical to the process.
The status quo method for solving these difficulties is to rely on centralized authorities - such as land title registries, government ministries, and MLSs - to issue documents, verify the truth, and authenticate participants. Unfortunately, centralized authorities cannot always be relied upon to get it right. The reasons, as outlined above, include incompetence given the large number of inputs involved, lack of incentives to the get the information right, and explicit fraud or corruption at or near the source. Further, where important documents move through intermediaries – as is very much the case in any real estate transaction - the level of certainty as to the veracity of the information originally contained in them is additionally diminished. Finally, and particularly relevant in the digital world, the challenges associated with verifying the identity of all participants slows down the transaction process and exposes it to fraud.
Decentralization offers an alternative model for solving the above difficulties. At a first principles level, decentralization in the context of real estate seeks to improve the credibility and authenticity of information and identity by making it transparently verifiable across a larger number of participants. To achieve this, rather than having a single trusted authority issue the source of truth regarding a document or a participant’s identity, a decentralized approach instead engages a larger number of authorities by establishing a protocol that allows them to agree by consensus on the truth.
In theory, a sufficiently decentralized (and technologically enabled) real estate ecosystem – where everything from land registries, to property listings and transfer of ownership are transparent, verifiable, and easily shared and updated – could vastly improve the ability of participants to safely interact, thereby driving down the cost of transactions and reducing the time to complete them.
How could decentralization be achieved?
The matter of achieving a higher level of decentralization comes down to the ability to coordinate across a large number of participants such that all participants have the information they need and can agree on its veracity. For the real estate industry, a key challenge here is to ensure that only correctly permissioned participants can access or change information. Further, in order to make an improvement over the status quo in terms of speed of transactions, it is critical that agreed upon information and corresponding updates to documents are broadcast across the network in a timely manner. How might this look in practice?
Verifiable digital identities
At a practical level, to enjoy the benefits of decentralization in the world of property ownership, we need verifiable digital identities for both the documents in question and the parties who interact with them. As a thought experiment outlining the perfect solution in this regard, imagine a single document that represents a property. At a basic level, this “perfect” document contains all the information needed to, in theory, complete a transfer of the property it represents. For example, it contains:
- Basic details of the property such as location, dimensions, and structures
- Up to date, title details such as the presence of liens, easements, and mortgages
- Construction and renovation details
- Inspection reports.
Now, imagine this document has the following properties:
- It can exist in more than one place at the same time
- Only people with the correct permissions can view it at all
- People with certain permissions can view sensitive details of the document while others can only view the basics
- A person with the correct permission can make a change to a specific part of the document
- All (permissioned) changes to the document are instantly visible to everyone with permission to see them
- The document contains a complete history of the changes made to it, including who made the changes and when they were made
- Anyone viewing the document can easily verify its authenticity beyond doubt.
Such a document, when combined with the accompanying ability to verify the identity of and permissions for people accessing it, could form the core of a vastly superior real estate transaction process.
Self-executing “smart” contracts
To finalize a property transaction, there is typically a need for the notarized offer and its acceptance, the down payment for the property, and a contract outlining disbursement of commissions to brokers and other intermediaries. In the status quo, this is where escrow companies take their place in the transaction process but, as we’ve seen, not only is there a risk of fraud due to the potential for phishing, but this additional step – which introduces yet another intermediary - further complicates and lengthens the transaction process. Continuing the thought experiment that outlines our perfect solution, imagine a contract that is amended to the abovementioned “perfect” property document. This contract has similar properties to the document, namely:
- Its authenticity is instantly verifiable
- It has varying levels of read and write permissions for each person viewing it
- Changes made to it are updated instantly and transparently.
Additionally (and critically), this contract has the power to make changes to the property document once the conditions spelled out in the contract have been met. For example, once the buyer has made the correct deposit and all required parties have signed, ownership on the property document is updated and funds are released according to the instructions in the contract.
How it works technically
In the digital world, the above described “perfect” document for property can in theory be achieved through a consensus protocol and a combination of supporting technologies that have collectively come to be known as “blockchain.” At a high level, this can be thought of as a dynamically updating database where permissioned participants follow agreed-upon rules for viewing and updating it. As information is broadcast across a network of authenticators (called nodes), consensus on the truth of it is arrived at through the previously established protocol. At specific time intervals, which are built in the architecture of the protocol, updates are added to the database. Each update adds another “block” to the list of amendments, forming a chain that goes back all the way to the original state of the database. Since the only way to update the database is to add a new block, the data contained in the previous blocks going all the way back to genesis, provides a practically immutable record of all changes ever made to the database.
Application and benefits
All stages of property ownership and related transactions could be streamlined and improved by decentralized systems that, as described above, leverage blockchain and other technologies to achieve verifiable authenticity among participants.
Goldman Sachs posits that a blockchain-based real estate ecosystem “could make paper-based property records obsolete, as all present and past real estate transactions would be meticulously stored on an immutable and decentralized ledger.” The global investment bank goes on to estimate that in the US title insurance industry alone, $2 - $4 billion annually could be saved as a result of reductions in headcount and actuarial risk, equating to a 30% reduction in premiums for consumers .
Efficiencies can be achieved across a wide range of activities in the real estate sector. A report from Moody’s Investor Service, for instance, estimates that the US mortgage loan industry could save up 20% in expenses.
In the final stages of a real estate transaction, where in the status quo escrow companies take their place as an intermediary between the disparate parties who need to interact, a permissioned blockchain could drastically speed up the process by making each event visible to all participants in real time.
In the longer-term, where smart contracts are empowered to interact with blockchain-based property records, peer-to-peer asset transfers could be enabled. As outlined in a 2018 report for the World Bank Conference on Land and Poverty, this has the potential to reduce transaction times “from months or weeks to minutes”, and transaction costs from “thousands of dollars per sale to a modest service fee.”
The benefits provided by the increased level of trust enabled by blockchain-supported decentralization extend beyond improvements in efficiency and reductions in transaction times. Particularly where trust in authorities is low, the creation of a decentralized blockchain land registry, for instance, could empower a much greater portion of the population to participate in real-estate markets and the economy in general. Just as countries which lacked landline infrastructure leapfrogged to mobile, in places where land registration is currently low and a large portion of the population lack the documentation needed to prove land ownership, there is an opportunity to leapfrog the developed world’s old-fashioned databases to a more secure, distributed system. The increased participation could, writes International Growth Center economist Sebastian Kriticos, “instigate productive redevelopment of land by reducing expropriation risks, facilitating market transactions, and unlocking access to finance.” Further, the geographic decentralization of records stored in a blockchain-based ledger makes them more resilient to natural disasters such as the 2010 earthquake that destroyed “an untold number of title deeds and land registry records” in Haiti .
Part III: Criticisms and response
Garbage in, garbage out
It’s important to emphasize that blockchain-based decentralization doesn’t necessarily address the accuracy of property information. As the Vermont legislature, in its position paper on blockchain use, correctly points out, “blockchain technology offers no assistance in terms of the reliability or accuracy of the records contained in the blockchain; if bad data is used as an input, as long as the correct protocols are utilized, it will be accepted by the network and added to the blockchain.”
Impossible and undesirable
Some argue that decentralization is either ineffective, undesirable, or both. Notable criticism comes from a 2017 report written by a group of European surveyors and notaries for the World Bank. The group posits that, given a seismic political event like a coup, decentralized validators would prove unable to stand up to the new regime’s reorganization of property rights, thereby negating the supposed immutable nature of the records and eliminating the proposed utility of the system. Further, the group makes the argument that a decentralized system isn’t desirable in the first place because it threatens to erode the trust put into democratically empowered public organizations, thrusting it instead into the hands of an “interest-group” coalition that is outside the bounds of democracy. The report concludes that “the well-established interplay between cadaster, land register and notaries provides more benefit to a functioning economy than blockchain.”
Acknowledging the garbage in, garbage out principle, blockchain-supported decentralization nevertheless has potential in helping to clarify if not the accuracy, then the authenticity of information. With information more transparently shared through a decentralized protocol, it is at least possible to verify that everyone is seeing the same version of the truth. That alone has powerful applications for facilitating transactions, and it may even make it easier to correct errors when they appear.
As for the effectiveness and desirability of blockchain-based decentralization, despite the criticisms, applications of the technology are moving beyond pilots, gaining momentum at both the governmental and B2B level. Graglia and Mellon, in their 2018 report for the World Bank Conference on Land and Poverty, referring to the use of public blockchains to record key real estate documents argue that, even at this early stage, the technology has applications and the incentives for its adoption are sound. They write, “in jurisdictions where corruption is a concern, introducing a public record of hashes can make it significantly harder to falsify records. On the other end of the spectrum, in countries where there are strong open data movements (Sweden, Estonia) or high degrees of transparency (the Netherlands), a public document registry may also be welcomed.”
Part IV: Barriers to adoption
Significant barriers stand in the way of realizing the potential benefits of a blockchain-based, decentralized real estate ecosystem. Issues include:
1. The difficulty of getting key participants to opt in
Fragmentation in the real estate industry makes it difficult to establish industry-wide standards. Wide adoption will depend on the willingness of key players to opt in. Goldman Sach’s report on the US title insurance industry, for instance, concluded that “the lack of uniformity among various title insurance parties could impede the adoption of an industry-wide blockchain standard.”
2. Regulation and legislation
Comparing the results of blockchain-based land title registry pilot projects conducted in Georgia, Sweden and The Netherlands, independently conducted research concluded that having a friendly legislative framework in place is one of the crucial aspects for successful integration of the technology. In the case of Georgia, one researcher concluded that the “success of the project was greatly determined by the flexibility of the respective regulations that didn’t hinder authorities from saving citizens’ data on the blockchain, whilst in case of other countries such as Sweden or The Netherlands, for administering the technology into the public service, some regulatory changes are needed.”
3. The capacity of professionals and end-users alike to safely interact with the technology
The management of public-private encryption keys is an issue that continues to plague blockchain-based decentralized networks. In the context of real estate, encryption keys would be needed to prove identity in order to access, register, or transfer a property – but what happens if the key is lost or coercively obtained by bad actors? Graglia and Mellon identify the use of multiple signature wallets, which require more than one party to sign-off on transactions, as one of several prerequisites needed for the adoption of blockchain in real estate.
Part V: Real estate professionals leveraging blockchain-supported decentralization today
Despite the challenges, real-world adoption of blockchain-supported decentralization in the real estate sector is already underway in a growing number of use-cases. Businesses currently leveraging blockchain in real estate emphasize that, with truly peer-to-peer transactions remaining a distant possibility contingent on many external factors, the focus on displacing intermediaries is premature. Instead, the experience of professionals in the real estate sector so far has been that the technology, rather than replacing intermediaries, makes them more effective, empowering them to prosper in their niche.
Real-world adoption is thus far seen primarily in the following use-cases:
1. Decentralized listings portals
Imbrex, founded by a real estate agents frustrated with the status quo of property listing, is a real estate tech startup that leverages the Ethereum public blockchain in its creation of a decentralized listings portal that allows users to retain control over their listings and transaction data. Barely a year old but with more than 35,000 listings, 52 brokerage firms and thousands of users, Imbrex is proving that with correctly aligned incentives, an alternative to the centralized listing status quo with its high costs and fragmented structure, is possible.
2. Blockchain-supported escrow commons
Propy, like Imbrex, was founded by real estate professionals. In this case, CEO Natalia Karayaneva was frustrated with the time-consuming real estate transaction process, particularly for international transactions, and so was driven to create a blockchain-supported decentralized commons for real-estate transactions. Propy’s online transaction tool enables all parties including brokers, agents, title companies, escrow and transaction coordinators to complete the deal online. Evidence that established intermediaries find value in the system comes in the form of escrow agents and title companies opting-in to Propy’s platform . Founder of Sequoia Real Estate Kelvin Kam, for instance, is featured on Propy’s website declaring the platform “allows agents to focus on their clients.”
These early success stories show that, rather than displacing existing intermediaries entirely, the technology empowers intermediaries to provide a better experience for their clients by enabling them to focus on value-added services rather than remain bogged down with redundant tasks.
Though still very much a nascent movement, it is apparent that blockchain-supported decentralization presents abundant opportunities. For large real estate focused entities, there is the potential to create or be an early adopter of a platform that promises to offer significant competitive advantages. For brokers, agents, and notaries, there is the opportunity to provide better customer service by leveraging tools that reduce the redundancies in the status quo. For registrars and government offices, there is the potential to increase public trust and stimulate economic activity by empowering more citizens to efficiently leverage the value of their property.