Blockchain Technology Is Changing Real Estate Transactions

Bay Area, CREW, Bitcoin Pizza Day, Blockchain, Rental Properties, Smart Contracts, Business & Beyond, Ross Stores, San Francisco

This article also appears in The VIEW, the quarterly publication jointly curated by the three Bay Area chapters of Commercial Real Estate Women (CREW)—CREW San Francisco, CREW East Bay, and CREW Silicon Valley. CREW is a nationwide business networking organization dedicated to the advancement of women in commercial real estate. For chapter news, events, and membership information, visit the Bay Area member organization websites at crewsf.org, creweastbay.org, and crewsv.org.

By Morgan Mills Suttich, Ross Stores, Inc.

At the end of 2017, the bitcoin frenzy was at its peak: each coin was valued at almost $20,000. In comparison, the first bitcoin transaction was in 2009 for a pizza that cost 10,000 bitcoins, so at the time each coin was worth just $0.008. So well known is this pizza that it has its own day: May 22, known in the cryptocurrency community as Bitcoin Pizza Day.

Today, at that bitcoin price, it would be the most expensive pizza—or food for that matter—in history, costing over $69,4200,000 (but down from a peak of nearly $192,000,000 late last year).

By now most people have heard the terms “bitcoin” and “cryptocurrency.” But it is the underlying technology called “the blockchain” that is less known but has the potential to impact every industry: birth and death certificates, licenses, deeds and titles of ownership—the possibilities are nearly endless.

Blockchain Technology
The core purpose of blockchain technology is to record transactions to a decentralized database, also referred to as a secure public ledger, and share that information. This type of database combines those transactions, forming a “block” of data that is time stamped.

No one party has control of the data. The database isn’t saved on a file somewhere; it runs on computers around the world. Anyone can view it anytime, because it sits on a network where no one party has control of the data.

Every few minutes all of the transactions are verified and a block is created, which links to the previous block and creates a chain, forming the blockchain. Since each block is time-stamped and chained to previous blocks, if someone wanted to steal or alter the information stored on the chain, they would have to change the entire history of the chain.

Now imagine a real estate system built and run on the blockchain. It starts with a person having a digital key with which everything they do is recorded on the blockchain.

Smart Contracts
In real estate, this type of public ledger and trust protocol has the potential to change the entire business model in a key way: smart contracts.

Smart contracts were first invented in 1996 by Nick Szabo, who described them as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”¹ They are executed on the blockchain, which digitally verifies the transactions without other parties’ involvement.

Compare this to how today’s contracts are written for standard sale or rental agreements. Processing paperwork, background checks, loans, escrow, security deposits all requiring administrative and personnel expenses to operate.

Rental Properties
Using the blockchain, there would be no need to have personnel on-site to show a property. Instead they could access it with their digital key.

The property owner could also have predesigned smart contracts, which a renter could sign with their digital key. This contract would then activate the transfer of the upfront funds and all future payments to the landlord.

In this contract landlords would also be able to write specific terms for electricity, water and other utilities. If the tenant used more than their allotted water for the month, the contract would automatically execute additional payments—no need to send letters and solicit the funds.

If the tenant moved out prematurely or violated the rental agreement, there would be no need to seek compensation, as the contract would execute the final payments. It could also contact a local cleaning business to come by after the tenant has moved out, then have a third-party inspector sign off on all the work and use their digital key to execute the payment to the cleaners and renter. The contract would then be terminated.

Buying a House
You are shopping around, looking at properties that you access using your digital key. When you find your dream house, you would be able to pull historical data on the property, such as taxes, utility usage and work done on the house. You would then activate a smart contract to start the buying process with the owner. You can bid back and forth directly with the owner—with no third-party involvement. There would be standard contracts on the blockchain that you could use to execute terms and verify due diligence on the property and title.

You would also execute the payment on the blockchain. Once both parties agreed to the terms, payment would be verified instantly or through a payment plan, such as holding back 10 percent of the payment for a one-year term to ensure that there are no unforeseen or underlying issues with the house.

While it is hard to image purchasing a piece of property today without a notary or land register, with the potentially endless ways smart contracts could be negotiated, programmed and executed using blockchain technology, there could very well come a day where the only people involved in the transfer of ownership are the two parties involved.

¹ “Smart Contracts: 12 Use Cases for Business & Beyond,” Chamber of Digital Commerce and Deloitte, December 2016.

About the Author
Morgan Mills Suttich currently works in store operations for Ross Stores. He has spent the majority of his career working with companies to onboard technological efficiencies and improve decision-making through behavioral design and analytical thinking. He lives in San Francisco but continues to travel the world with his best friend and love Christy.