Blockchain technology first gained attention as the digital ledger that makes Bitcoin transactions possible. Today, it has migrated to other areas that could benefit from a distributed, unalterable ledger.
The technology is a logical fit for real estate transactions, which can be riddled with inaccuracies. It is gaining a foothold in residential real estate and commercial real estate (CRE) transactions will not be far behind. Here’s some valuable information for commercial property investors who are unfamiliar with how blockchain can benefit them.
What is blockchain?
Blockchain technology generally refers to a digitized distributed ledger or database that permanently records and shares information. The information is stored in blocks, and each block includes a timestamp and a link to a previous block. The blockchain provides a public, verifiable history of transactions.
Parties to a transaction can see every block, whether it contains documents, analysis, contracts or inspections. No single person controls access, so parties can transact with each other directly, without the need for a trusted third party.
How does it work in CRE?
Real estate transactions are a prime candidate for blockchain. Why? CRE transactions tend to be cumbersome, costly and time consuming, in part because vital information is kept in disparate systems that require the use of middlemen — including brokers, inspectors and appraisers, title companies, escrow companies, county recorders and notary publics — to gain access. These layers lead to a lack of transparency and the potential for mistakes and fraud.
Blockchain eliminates the need for many middlemen because anyone can record or view the information. For example, it would allow every property to have a digital address with occupancy, financial, legal and physical information, as well as a history of transactions and repairs. All of the data would be available immediately in a central location. Parties could verify property records themselves and transfer digital titles with a click. The risk of forged documents or fake listings would decrease significantly.
Smart contracts that use blockchain technology to automate performance based on agreed-upon rules also remove the risk of breach and fraud. Imagine a condo sale where the seller agrees to transfer the title when the buyer pays $300,000 in cryptocurrency. The transfer of the cryptocurrency to the seller would trigger the automatic transmittal of a digital certificate (token) that represents the title to the buyer, with the title transfer immediately recorded in a block.
Block to the future
Once upon a time, CRE participants were unconvinced about the merits of listing services. Now that technology is commonplace, blockchain has the potential to play a significant role in CRE transactions as a way to help reduce costs, minimize errors and improve efficiency.