Blockchain and Real Estate - Ideal REI

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Blockchain and Real Estate

You may have heard the word Blockchain mentioned once or twice by now. After all, it was not long ago that everyone was talking about BitCoin (whatever happened to that?).

It's OK if you're not entirely familiar with Blockchain technology, which is the foundation of BitCoin and other cryptos. 

Blockchain technology is often associated with Bitcoin, which is a quasi-currency that is used through the web, especially for less-than-legal activities, because it's untraceable.

But BitCoin is is only the beginning - it goes a lot deeper than that.

Some people even think that Blockchain will transform many different industries, not only of those within real estate within the finance industry but possibly in just about every industry, including real estate.

Now, it's crazy to think about that because of how little the real estate industry changes decade to decade. But, there is plenty of opportunity for change!

But in order for you to be able to wrap your head around what this all means, it's important that you break down the information into the appropriate categories so that you are able to understand.

So let's dive into it a bit more whether you're merely looking to buy some Bitcoin or Ethereum, or you're intrigued about what Blockchain really is and how it could change the real estate industry.

The Blockchain Isn’t Only For Bitcoin

The basic, simplified version of Blockchain technology doesn't have to be too detailed to understand.

Essentially, it's a database that is able to be validated over a wide ranged community, as opposed to a central authority figure like a bank.

The database is called the 'ledger' and it is validated by any number of entities around the world. As someone ads to the ledger, others validate it. It leaves a perfect record that is validated continually by others, meaning that it's virtually impossible for the record to be inaccurate.

The word itself is split up into two factors. "Block" is what represents all the various numbers of transactional records. The "Chain" stands for all the composing links that connect them all together.

Every time a record is created, they are confirmed and examined by networks of computers that then link it up with the previous entry, which then makes the Blockchain.

The whole thing is then retained on the vast network.

Because it's a community where each user is equal, So no single person is able to have control over it.

That's very important because it means that once a chain has been made, you can't go back and change it.

It is so powerful because it can not be altered or tampered with. These layers of protection go way above and beyond any normal database.

This is different than having one entity record and track each transaction, such as a bank or government. When only one entity controls the record, there is room for error or fraud.

So, blockchain, at its core, is to bring trust to a system that may lack trust or accuracy. It brings reliability when there may not be a reliable entity.

Where did Blockchain originate from?

Although you may have only heard about the likes of Blockchain recently, it has actually been around for the past decade.

Believe it or not, it can be traced back to 1976, as a paper was once discussing the idea of whether a mutual distribution ledger could ever work effectively.

And this was well before we had the technology that we have today that makes it possible. It is continually being improved and built upon.

The next time it was mentioned was around the 1990s. It was found in a paper spoke about how we could put a time stamp on digital documents. It would take another decade or two to pair up those ideas with the power of modern day computers.

Then cryptocurrencies (like Bitcoin)were born. Bitcoin only made its first-ever appearance in the year 2009 by bringing together the original idea of a mutual distributed ledger.

Blockchain was actually a completely different digital currency that wasn't controlled by either an individual or an organization. It was actually developed by the anonymous “Satoshi Nakamoto." He allowed his method of dealing with transactions while protecting them from interference to be shared by the likes of Bitcoin.

Cryptocurrencies vs Blockchain

Blockchain is a method to record transactions. A cryptocurrency is a digital way to store some sort of value. Exchanging the crypto will be recorded on the blockchain.

So, there is a difference between crypto and blockchain, and it's important to understand the difference

Bitcoin is the most well-known cryptocurrency for sure, but it is not synonymous with blockchain.

There are a lot of applications for blockchain other than for use as a supposed currency or quasi-currency. Basically, anything that has a transaction could be recorded using some sort of ledger/blockchain.

a Cryptocurrency is itself an item that can be exchanged for something of value. A "coin" could be exchanged for something in your day to day life such as a pizza. It could also be exchanged for something specific, such as for renting an online movie.

Blockchain and Real Estate

Real estate is a perfect industry for blockchain.

There is little trust in exchanging real estate, that's why multiple attorneys are involved in every transaction.

Ownership can change hands and it's hard to track down everyone who has a right to the property. That's why there is a title search.

Even with all the attorneys and title searches, there is still a lot of risk, so title insurance was invented to protect from that risk.

Even if everything is perfect on the backend, there are still a ton of things that need to happen on the front end. Real estate agents, mortgage brokers, and more all drive up the cost of real estate transactions.

There are startup companies out there that are trying to fix some of these problems.

Imagine if blockchain existed to record and track title. So, every time there is a transaction is 100% positive who owns the rights to it. It would eliminate (or reduce) the need for title insurance, which is a multi-billion dollar industry.

Imagine if blockchain was used instead of attorneys to sign and execute agreements. control escrow money, etc. It would reduce litigation and smooth each transaction.

The opportunities are endless.

Blockchain's Impacts on Title Insurance

 The Wall Street Journal reported that Sweden might be the first country to adopt a national blockchain title registry.

That's crazy if you think about it.

Other countries are pursuing it as well.

Vermont is experimenting with it as well.

One of the big reasons is blockchain's impact on both fraud and on errors.

The wall street journal noted that blockchain is:

practically bulletproof when it comes to fraudulent transactions

...and each time some friction is reduced, the costs are reduced. As costs go down, the cost of ownership goes down and more people can own homes.

Challenges With Blockchain and Real Estate Title

One of the biggest issues with blockchain and real estate transactions in the United States is the sheer number of people involved. 

Over 3,600 towns, counties, etc are involved in maintaining local land title records. To make it worse, not all are even digitized which requires someone to physically go view at the towns registry of deeds or clerk's office.

So, to a different system is unbelievably expensive, complicated, and difficult.

Not Everyone Thinks Blockchain Will Help Real Estate

Others are more practical and take a different position.

Title searches are there to detect problems with title, obviously. So, title could be recorded properly, but life events happen that wouldn't be recorded in the registry. 

This includes divorce, marriage, having children, death, and more. The rights of the individual, their family, or their estate are not all recorded into the registry.

About 70% of title searches come up clean, and most of the 30% are easily curable, but require manual verification.

Most of those 30% would never show up on the ledger. So, problems would just compound over time if someone wasn't manually reviewing them.

So, title companies roles will  never be eliminated, even if blockchain does help reduce their role.

What do you think? Do you think real estate will ever adapt and adopt some form of blockchain?

About the Author James Davis

James is a real estate investor, real estate agent, and is dreaming about financial independence. His focus is residential (1-4) unit rental property, house flipping, and everything real estate.

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