In the process of buying and selling real estate, one essential task that must be accomplished is the transfer of a clean property title. That means, the property that is associated with the title must also be free of any liens or encumbrances. The property must also be clear of any claims of ownership by parties other than the seller, In order to ensure the buyer is receiving property that is unencumbered by debt or a property with a claim on it, a title search must always be conducted. This is not only costly, it takes time. However, with the right technology it can be done far cheaper and in less time. That technology is called the ‘blockchain’.
Introduction to Blockchains and Smart Contracts
Simply put, a blockchain is a decentralized public ledger secured by encryption. The Blockchain serves as an immutable, permanent record of all the transactions conducted within an ecosystem.
Currently, all title records are held at local centralized county offices. If a buyer in New York is interested in buying a piece real estate in California, then they will be doing research to make sure the property is free of any title problems. Currently, the process for performing due diligence on the title of such a property can be a really cumbersome experience. This process requires pulling information from a centralized database of title records which stores a large number of uploaded documents.
If title records were accessible through a distributed ledger instead, it would totally eliminate a lot of the frustration and the time consuming parts of researching a title. Using the blockchain can make storage and download of this information seamless and accessible from anywhere. Utilizing what are known as ‘smart contracts’ can make the process of title exchange also go much more smoothly and efficiently.
Currently there are several blockchains. The one that is most helpful for title contract exchanges is called Ethereum. One of the features of Ethereum is its smart contract application- whereby a contract can be exchanged over any number of decentralized ledgers.
A smart contract is a contract that is programmed into existence. It is a unique type of contract, that because of it’s digital format, allows parties to stipulate the terms and actually build them into the application of the contract itself. Automatic triggers are coded that will activate the terms of the contract when specific events occur or services are conducted. This type of contract could be heavily utilized within the realm of real estate titles. After a title has been deemed clear and free of liens and encumbrances, the property transaction can then be initiated. Now, an escrow account would instantaneously be able transfer the buyer’s consideration to the seller. Legally, without this consideration—something of value given in good faith that the buyer is actually going to purchase the real estate—there is no contract.
Historically, once real estate titles are cleared, buyers had to write a check or electronically transfer the funds into the seller’s bank account.The first step was initially notifying the buyer that the title was clear. Now, the blockchain and smart contract protocol could help to eliminate these steps from the process completely.
Making Title Contract Exchanges Simple
First American Financial reports that 30 percent of all title claims are due to liens, while the other 15 percent are caused by encumbrances. When these situations arise, someone with the proper expertise must perform a fair amount of research to determine who has the proper legal claim to the real estate (associated with the title). Once that is accomplished, lien holders must be located and verified, in order for the property to be sold.
In the case of encumbrances, titles can still be cleared for real estate to exchange hands, but buyers and sellers would end up renegotiating the terms based on the nature of the encumbrance. This can be quite a timely and costly process for all parties involved.
If real estate titles were recorded on a decentralized, distributed public ledger—such as a blockchain—liens and encumbrances would be readily apparent and accessible with way less research. Smart contracts would spell out the terms of a real estate purchase and all transactional obligations for each party would be automatically conducted when specific scenarios defined within the contract emerge.
For instance, if a lien appears which shows that a building contractor is owed $5,000 for work never compensated for, then that could be written into the contract. The contractor would have to be paid from the proceeds of the sale. Likewise, an encumbrance could be dealt with using a similar function via smart contracts. The property price could be reduced automatically upon detection of the encumbrance.