Smart Contracts and Real Estate: The Past, Present, and the Future

Very little has changed the last couple of decades when it comes to real estate practices. Buying and selling a home today is much like what it was fifty years ago. It's more or less the same process as when our grandparents' generations purchased and sold homes.

In a world where we're bombarded with new technology and solutions, the real estate industry feels strangely old. This is, most likely, part of why trust scores in the industry have tanked. In data from Sweden, we see staggering numbers.

Only 6 percent (Fastighetsbyrån, 2015) of the participants in a survey claimed to have high confidence in real estate agents. Only 4 out of 10 (SKI, 2017) say that they trust their agent. As little as 16% would recommend their agent to friends and relatives.

The real estate agent is one of the occupations with the lowest trust scores. The feeling that they're only working in their own interest prevails. One comes to think of the cliche of the shady used car dealer. The kind of experience that you only want to forget once the dealing and wheeling is over.

Why is nobody fixing real estate?

Profitable industries can’t reinvent themselves from within. Something has to come from the outside to drive a positive change. After all, who kills a money printing machine? Incumbents strive to maintain the status quo rather than drive change.

They often portrait themselves as open to innovation. Yet, in reality, very little happens. It’s business as usual. But, there is hope.

New engaging solutions attract new ways of thinking. A healthy dose of new fitting technology comes to the rescue to speed up the paradigm shift. 

The rise of new technology

Every time a dramatic change happens in technology, new types of applications emerge. This is a phenomenon repeatedly seen in software. For example, smartphones put mobile computers with built-in sensors in peoples’ hands.

Hardware like GPS and great cameras changed the playing field. Apps like Instagram, Snapchat, and Uber/Lyft all leveraged from these unique capabilities. These are apps that would never have taken off on desktop computers. The unique capabilities of a new platform created, over time, a foundation for change.

When such a change happens, a completely new infrastructure for new opportunities opens up. Blockchain is such a new paradigm-shifting technology. It has a set of unique abilities that don’t exist elsewhere. For the real estate industry, the Blockchain technology works as an accelerator. It could be the shake up the industry needs to push it forward. Let’s have a look at why.

Real estate transactions today

Buying and selling a home is a process that involves many stakeholders. When it was designed, this system probably was effective. But it has, over time, developed skewed and misaligned incentives. Sellers and buyers stress over reasons like divorce, double housing costs, and just having somewhere to live.

Real estate agents stress over closing deals to reach KPIs connected to compensation. Banks stress over compliance, risk, and credit scoring. House inspectors can get stressed about discovering and presenting deal-breaking issues. CO-OPs can get stressed about just finding a pen to sign the right paper with.

It’s not unusual that stress factors and misaligned incentives turn into a drama exercise. A conflict with edgy attitudes, suspicion, and anxiety. People of today don't have time to follow up on a manual process with the same rigor as 50 years ago. They expect a system to be in place to assist them with the right information at the right time.

The figure below depicts the typical scenario of today. In it, the agent is in the center coordinating all events. In this model, the agent acts as the trusted transaction facilitator. All involved parties need to rely on the agent throughout all stages of the process.

Why real estate and Blockchain?

The core idea of Blockchain is to transfer assets without needing intermediaries. Changing the role of mediators is especially appealing to the real estate business.

In real estate, these businesses have grown accustomed to taking out hefty fees. Often as much as a couple of percent of the final amount is paid in commissions. These sums can amount to months’ worth of salary for the average person.

For what?

Besides, high stakes and many stakeholders give a lengthy bureaucratic process. Intermediaries work as gatekeepers for the sake of the system. They’re there for the system rather than for buyers and sellers. Introducing automation removes friction, which makes a lot of sense. It would give the end-users a much more pleasant experience. Still, these middlemen have a critical role to fill.

Somebody has to set up contracts, verify, and enforce them. Using a technical solution to transfer trust like the Blockchain dramatically changes things.

In such a system, the real estate agent no longer sits in the middle. The change relieves the real estate agent of the burden of orchestrating the whole transfer.

Instead, the agent can now have a more passive, overseeing role. This hybrid approach can help restore trust in the process, as you can reduce the individual broker's influence over the transaction. In it, the agent becomes an unbiased part.

Blockchain, the road to smart contracts

A smart contract is a concept that lets you set up agreements and the rules that govern transactions. Not only can you decide what amount goes from one stakeholder to another.

You can also set up the conditions for when and how to transfer the money. An example of such a situation in real estate is the down-payment. The down-payment is one condition, in a chain of events, that the buyer needs to fulfill.

With smart contracts, there is a neutral central coordinator. This is a system that people cannot manipulate. In it, all interactions and conditions are transparently shared.

For instance, all parties would know the instant the buyer completes the down-payment. The smart contract furthermore regulates what happens if things fall through. Should something down the line go wrong, e.g., an inspection, the system returns the money.

In the future, as this system evolves, we might not even need the real estate agent. At least not for the transaction. Below is a possible future scenario where sellers and buyers can facilitate the home transfer on their own.

The contract is, in essence, a computer program. It comes with all the rules, the stakeholders need to fulfill. These are the obligations to move the deal forward.

When all conditions are met, the transaction completes. All automated. No lawyers, paper contracts or amendments. Above all, each transfer needs no upfront work. It’s 100% reuse with no waste. Once the system is in place, it works over and over again.

Transferring a home will go from weeks to minutes. In the best case, even seconds, if everybody has already fulfilled their parts and are ready to sign. Due to the trust protocol, parties need not meet face to face to sign documents.

The stakeholders can effectively be anywhere and sign at any time. Whatever time they find convenient. They don’t need to meet in person at all. Looking at the biggest challenges in the real estate business, this is a match made in heaven.

Creating a realistic scenario

How do we go about making smart contracts work in today’s world? There are a couple of things to consider. To meet regulations, one needs to take the middle-road.

The real estate sector is in most countries, mostly out of historical reasons, a heavily regulated industry. The first step is to change the transaction between the banks involved. Unlike people, banks are more used to dealing with cryptocurrencies.

Initially, banks will be able to switch over to Blockchain transactions to support smart contracts. Over time, when the technology is more widely adopted, buyers and sellers can perform transactions without the banks as facilitators.

Loans and mortgages can be programmed into the smart contracts with many distributed loan providers that don’t need to be coordinated. The Blockchain does not only work as a trust protocol, but it also has a networking effect. The system of smart contracts can easily be expanded to include other services and kinds of stakeholders.

The figure below shows a possible transition to using smart contracts. As a first step, banks start supporting smart contracts by switching over to crypto transactions. Once the banks are comfortable using smart contracts, the process can be opened up to buyers and sellers.

Closing thoughts

”A lack of transparency results in distrust and a deep sense of insecurity.” - Dalai lama 

Transparency is at the core of Norban’s vision. We try, as much as possible, to incorporate it in everything we do. To us, the old, obscured way of buying and selling homes is a thing of the past. Blockchain is, of course, not the answer to all the problems in the Real Estate business. But, with the Blockchain, we now have a system that:

▶ Increases trust - Reduces real estate broker dependency

▶ Improves efficiency - Speeds up transfers of homes

▶ Reduces cost - Reduces cost for buyers and sellers

▶ Opens up for networking - creates a digital platform other services can tie into

At Norban Labs, we imagine a better future for the real estate industry through technology. We're part of Norban, a Swedish tech-enabled real estate agency creating a better buying and selling experience for home owners.

Appendix - Technology

As proof of concept, we built a prototype, a so-called dapp. The idea behind this prototype was to simulate and roleplay transferring a home with a smart contract.

In software, working code is always the best proof. It makes it possible to see and feel, first hand, what the experience could look like.

Adding the character d to the word app signals that it’s a decentralized app. It is a popular term for a new family of apps. The common denominator for these apps is communication through decentralized networks.

The app speaks with, instead of one main centralized backend, many distributed servers. In this family of apps, we also find the apps that run on the Blockchain. Another popular term is web 3.0, which is a broader term for the decentralized internet. 

Ethereum - programmable money

For the dapp itself, we chose to build it on the Ethereum cryptocurrency platform. Ethereum is well suited for this exploration because of its programmable smart contracts.

These together, with its reliable test networks, for instance, Rinkeby or Ropsten, make testing easy. One can quickly test transactions in these sandboxed environments without transferring real funds. Perfect for prototyping.

Solidity - the smart contracts programming language 

Ethereum facilitates smart contracts through the Solidity programming language. Solidity is an object-oriented, high-level programming language for implementing smart contracts.

With Solidity, one can set up conditions, different stakeholders, amounts, and other rules governing the agreement. All these rules are coded into the program. Once compiled, the executable can run the on the Ethereum network. That could be either a test network or the real actual Ethereum platform.

Below is an extract from the Solidity code where the people and the state of the contract are enforced. With specific roles and with a state machine, the system makes sure that the right person signs at the right time.

function sellerSignContract() public payable {
    require(seller == msg.sender, "Only seller can sign contract");
    require(contractState == ContractState.WaitingSellerSignature, "Wrong contract state");
    contractState = ContractState.WaitingBuyerSignature;
}

Monitoring the prototype

When doing prototyping, you always want to have quick feedback loops and to cut corners. Metamask is an excellent tool to overview and to verify the transactions.

It’s a so-called digital wallet that runs as a Chrome extension. It stores Ethereum assets and shows transactions.

Metamask allowed us to track the steps while roleplaying the whole process. In the roleplay, we all took on different roles. One acted as the seller, another as the buyer, and so on. 

The user experience

To build a useful app or dapp for that matter, one needs a user interface. A place where the user can interact and complete steps to fulfill the conditions in the contract.

As always, you want the platform with the broadest reach. The web is that platform. Building the dapp as a web app makes it virtually available to everybody. With the JavaScript bindings in web3.js, one can connect Solidity with any Frontend. We built the dapp prototype, using React as a UI framework.

The source

https://github.com/NorbanDev/RealEstate2.0

Reference list

Fastighetsbyrån. (2015). https://www.mynewsdesk.com/se/fastighetsbyran/pressreleases/sjunkande-foertroende-foer-fastighetsmaeklare-1114206

SKI. (2017). Svenskt Kvalitetsindex om Fastighetsmäklare 2017 https://www.mynewsdesk.com/se/kvalitetsindex/pressreleases/svenskt-kvalitetsindex-om-fastighetsmaeklare-2017-2010897

This is an article by Mikael Ainalem and Fredrik Silfver from Norban Labs. We built a working prototype to sell and transfer homes on the Blockchain with Smart Contracts. The author is the CTO at Norbal Labs