The development of the blockchain technology that undergirds bitcoin is expected to impact major sectors of the economy, few more important than real estate.
Blockchain’s potential for reducing friction in transactions and automating record-keeping tasks has major implications for the brokers and agents, local governments, investors and attorneys involved in both commercial and residential real estate. The technology could make for easier and more accurate deed transfers, improved ease and transparency in investing, even more accurate and up-to-the-minute MLS (multiple listing service) listings.
“There’s a lot of hype surrounding that particular asset type,” says Dan Nossa, an attorney with Steptoe & Johnson PLLC’s Houston office, who works extensively with blockchain technology companies.
Nossa and Kristian White, managing member of the firm’s Southpointe office in Canonsburg, Pennsylvania, focused on energy, real estate, banking and commercial transactions, discussed the potential impact of blockchain technology on the real estate industry. Here are highlights from that conversation.
Asset-based tokens and real estate
Simply put, blockchain technology amounts to a ledger in which every transaction is immediately, automatically, and permanently recorded and can be seen by other users of that blockchain.
So far, its most prominent use has been to record the movements of bitcoin and other cryptocurrency tokens from one person to another in cyberspace. But proponents see applications that go far beyond cryptocurrency, and into the real world.
The impact of blockchain will be similar to the impact of the Internet “in that it will revolutionize how business is transacted,” says White. “It’s something we must monitor and be ready for.”
One major use development in blockchain technology is the idea that tokens can represent physical assets or even shares in a company, rather than just items that have no existence offline, such as bitcoin, says Nossa. Perhaps one of the most important real-world assets that could be represented in this way is real estate.
“Many companies are working on developing asset-backed tokens for a whole host of different assets,” Nossa says. “Real estate is getting a lot of attention, probably because it’s one of the most widely-held asset types and also because of the size of the market.”
A blockchain recording real estate transactions could have several business benefits, including the reduction of litigation and fraud, and friction in transactions due to paperwork. “Since they are transparent and everybody that has access to the blockchain can actually see what transpired in that transaction, it has the potential to reduce disputes and litigation and also reduce the instance of fraud because it’s difficult to hide where money went to,” he says.
“Also, depending upon what type of blockchain you’re using, you also know who is buying what and where the money is moving to or coming from. Those are benefits for a number of use cases. But for real estate it’s really obvious.”
Nossa says there have been projects around the world testing the efficacy of using a blockchain to record property ownership.
“The technology is there to do it,” he says. “However, it requires buy-in by governmental entities. Here in the United States, that’s at the county level. So that’s one of the challenges there. Even though it could provide tremendous transparency, there’s the potential for political or local government inertia.”
But this is one area in which blockchain technology could really benefit the real estate business. Nossa points out that the transparency and immutability of blockchain records would make such issues as title investigations simpler. “You would know who owns the property,” he says. “There will be a lot more clarity with respect to the chain of title.”
Using the blockchain to record deeds could speed up the closing process while reducing the risk of errors in the public record, says White. “The records at the county level could be instantaneously updated, so you don’t have a lag in time for the delivery of the deed to the courthouse and then the recorder taking time to scan it into the system and indexing it,” he says. “A second benefit would be removing a layer of data entry at the recorder’s office …so there would be less opportunity for error in the indices at the county level.”
REITS and real estate investing
Nossa says one important focus for startups applying the blockchain to real estate is on real estate investment trusts and other avenues for investment. Application of the technology to REITs and other real estate-based investments may take time, though.
“The traditional investors in real estate investment trusts may be hesitant to adopt this technology without more proof,” Nossa says.
Nossa adds, though, that he can see the blockchain being used in real estate investing on a small scale to begin with. Such cases could include one-off transactions of various types. Already, there are examples of individuals buying homes using bitcoin.
Beyond such transactions, Nossa says he can envision cases in which tenancy in common, a vehicle in which investors take fractional ownership of a commercial building, could be recorded on the blockchain. “A lot of times, the ownership in that property is represented by an LLC ownership interest,” Nossa says. “That could be done right now.”
Tokenization of ownership is, in fact, the first area he expects to see blockchain use in real estate.
White says he also sees tokenization of ownership as a likely early entrant to blockchain influence on the real estate business and adds that he expects another area where the blockchain could soon have an impact.
“Another place where I can see the technology being incorporated sooner rather than later would be with the MLS or the Multiple Listing Service,” he says. “That service could be updated much more quickly and (blockchain) could bring uniformity to the MLS system nationwide.”
As promising as blockchain technology in real estate is, there are major challenges. In addition to the local politics of such issues as putting titles on a blockchain, there are other issues having to do with the vagaries of life, says White.
“It will be interesting to see how the technology will work in instances where you have a life estate. That’s where someone has an interest in real property until the passing of one’s life,” he says. “It’s easy to trigger changes with smart contracts when there’s a date certain. But when you have a life estate where that date is not certain, how will that be addressed?”
Likewise, he added, it’s unclear how blockchain technology will update titles in cases of divorce in which property is ordered to one spouse or another involved.
“I’m very interested to see how these issues will be addressed,” White says.
To learn how blockchain technology can affect your business, contact Daniel Nossa.
Steptoe & Johnson PLLC is a U.S. law firm with core strengths in energy, labor and employment, litigation and transactional law, serving clients from its 13 strategic locations across the nation.
Reprint from Houston Business Journal