Throughout the past decade, blockchain technology has evolved from an upstart concept to early adoption in banking and a host of other industries. Many people are eager to learn about blockchain and how it can change the way we do business.
What, we might wonder, can the blockchain do to remedy the hurdles and risks that pervade the real estate industry?
The question is now ripe. Today, we can review early examples of blockchain technology in action, modernizing property conveyance. Specifically, blockchain applied to real estate has obvious potential for improving the deed recording process.
How will blockchain make things better?
The blockchain is entirely electronic. Thus, implementing it could reduce or end the need for scanned papers, printed mailings, and files full of hard copies in county recording offices. The results could offer substantial savings.
Even more important is security. Once an accurate title enters the blockchain, the chain of title updates in real time in each transaction and is continuously protected. Thus, a process once vulnerable to mistakes and scammers now becomes error-free and fraud-proof.
Another security feature is the blockchain’s storage of data on nodes. (Nodes are the computer points that store and preserve the information on the blockchain.) This enables industries to put the era of lost, stolen, or damaged documents in the past.
Why Disrupt the Status Quo? Seeking a Fraud-Proof System
Today, a typical property sale entails two steps: the conveyance from seller to buyer, and the recording of the deed.
Some counties now allow electronic submissions of deeds for recordation. But many county recording offices require a paper deed to scan into the county’s central recording system.
To track the sequence of ownership, each conveyance of a piece of property gets manually reconciled with a public index. A purchaser can then check the public record to make sure the seller is actually the last recorded owner, that the history of the property shows no gaps, and that no one has laid claim to the property since its last known sale.
That history of all the property’s conveyances from owner to owner is known as the chain of title. Entering it onto a public record makes it possible for all to know that a property belongs to its buyer, free and clear.
Or so we hope. But the only way today’s buyer really knows the title is clean is to frequently check the chain of title. It’s “buyer beware” when it comes to scammers filing fraudulent claims on top of deeds after closing.
Scary? Yes.
But the intersection of real estate and fraudsters is nothing new. Mortgage fraud and deed scams make up a big portion of white-collar crime.
Why Are Deeds So Vulnerable to Fraud?
For one thing, county real estate deed recorders are not actually verifying the legally significant claims made in the documents they record. A county recorder’s duty under the law is to record submissions that simply conform to the legal procedures.
As Cook County Recorder of Deeds Karen Yarbrough has explained, referring to scams in Illinois, “Most fraudulent recordings happen as an abuse of our open recording system.”
A parallel problem is enabling a spate of deed forgery in Philadelphia.
In an effort to stop the abuse in Illinois, Rep. Michael J. Zalewski has introduced House Bill 5594. The bill would require the recording of all claims against a real estate deed.
To protect buyers, sellers, and everyone else involved in a transaction, states must impose this kind of recording requirement at the time of a transaction. Required recording is a commitment to modernization and security. It’s also a prerequisite to moving from legacy to blockchain-backed systems.
With blockchain in place, states will finally have a document recording system that prevents fake claims to properties — even by government officials themselves. In 2016, a Cook County employee pleaded guilty to taking a $200 bribe to insert an additional person’s name into a deed to a Chicago suburban home whose other owners had passed away.
How Does Blockchain Stop Fraud and Remove Risk?
Blockchain removes the need for a third party to clear a real estate transaction between buyer and seller. That’s because the structure of blockchain is cryptographically protected. As Cook County deed recorder Edward M. Moody observes, this structure “makes changing records or inserting false records almost impossible.”
Each transaction carries its own digital fingerprint. This encrypted fingerprint carries over from one block to the next block in the chain.
Because the conveyance is verified across the blockchain network, it would not be possible for a scammer to slip into the chain and sell the property to someone else.
Blockchain could also store a unified file in which everyone who’s involved in the transaction to give consent to the blockchain’s recording of their information. Their consent creates an agreement that the information is valid and correct. Blockchain algorithms can make sure the right people can check the block, and can tell who added information. And title checks would take minutes rather than days.
Voilà! A secure way to declutter the whole process of selling and buying. We can organize the messy events of moving information around from the credit companies to lenders, mortgage specialists to underwriters, title services to buyers, and so forth.
Borrowers will have valid and comprehensive information stored for refinancing, or future deals. Their credit scores and tax forms can also exist right in the block. So could inspections and appraisals. All the home’s permits, related loans, and even the construction projects that improved the property could be etched into the block.
Blockchain is built to keep key facts about a transaction together. The value of this feature can hardly be overstated. In some states, the owner of a parcel faces no requirement to report key facts such as legitimate liens against it. Here again, it’s buyer beware. A whole industry segment is built on this risk: title insurance.
Cook County’s deputy recorder John Mirkovic spoke with the Chicago Tribune on how blockchain can streamline real property transactions. It promises a workaround that avoids those players who add no value within a flawed system. Title insurance arose, after all, because the system failed to ensure its own integrity.
Getting to Blockchain: How the Law Would Accommodate Mainstream Adoption
A real estate deal is essentially a direct transaction between two parties. Getting to blockchain should not be complex — at least in theory. When a seller and a buyer agree to handle their transaction on a blockchain platform, they take the first step to handling real property as a liquid asset. By taking this step, they also restrict the need to disclose personal financial information to other parties, thereby reducing their exposure to fraud.
Granted, law reform is essential for the real estate industry, for reasons stated above. But real estate law is ripe for reform, and that reform should take blockchain into account.
In 2018, Vermont took that step, mandating the consideration of blockchain use for deed recording. The state is adopting new software for blockchain-based title management. The software protects information by using a decentralized key and storage system.
At this point, what else should we address so digital conveyances can progress from the test and early adoption stages into widespread implementation? Teams working on the issue need to know:
- Who is authorized to submit deed recording data to the blockchain? Can conveyances be made purely peer-to-peer?
- How will lenders, underwriters, and other third parties mesh into the transaction?
- Disputes might arise, especially during the transition time, when deeds move from porous recording systems to secure data chains. What remedies will be available in courts? Will we see remedies including hard forks in the chain, ordered by courts?
Given these and other questions, blockchain title transfers will take time to put into place. Yet they are already beginning to transform the way society thinks about real estate transactions. And legal, paperless transactions on the Bitcoin blockchain platform are already working in a manner suitable for any county, in any state.
A Leading Case Study: Cook County, IL
In Illinois, officials at the Cook County recorder’s office are looking to transform the complex, record-intensive work of home buying into a streamlined, security-focused process. What might be gained by trying out blockchain-based property recording? Blockchain implementation could be expected to:
- Increase the transparency of real estate deals.
- Streamline the procedures involved in validating information.
- Remove vectors for fraud.
So, the county Recorder of Deeds partnered with startup velox.RE to run a test. And for eight months, real estate titles moved via blockchain.
The test used Bitcoin’s scripting language to store data on the blockchain as the property owners transferred the deeds. For a conveyance from person to person, parties do not have to seek permission from the county officials. Nevertheless, the county’s Recorder of Deeds accepted and approved the digital method that publicly recorded each conveyance.
Blockchain had already meshed each conveyance and recording as a one-step process, simultaneously occurring, through just one technology. This technology etches the deed transfer instantly onto a public record — the Bitcoin blockchain. And it keeps it there for good.
Through the pilot program, the Recorder of Deeds developed an informative property information website, with a page dedicated to each individual property. These pages, says Edward Moody, “help people see the benefits of consolidating important property information.” And they’re pretty exciting to behold.
Cook County’s land records software comes from Conduent — the corporation formerly known as Xerox. Conduent will incorporate blockchain data integrity technology into a new recording system for Cook County.
Taking a Peek at the Digital Mechanics in a Peer-to-Peer Asset Conveyance
The term colored coins refers to encoding agreements and managing assets on top of the Bitcoin blockchain.
Using a wallet with the right equipment to handle the transaction one person can transfer bitcoin to another, delivering with it an amount certain of a given asset from one bitcoin address to the other.
These digital tokens are stores of value. They hold the issuer’s promise that they are redeemable for specific goods or services. They may represent the title to a specific property, and may be used to transfer ownership from the seller’s to the buyer’s digital wallet, through a digital currency transaction.
And with the deed data imposed on a fraction of a bitcoin instead of paper, it’s practically impossible to counterfeit.
Looking Ahead: Is Bitcoin the Conveyance Method of the Future?
Bitcoin’s robust network gives it an edge for property conveyances. Yet Cook County’s deed recorder rightly notes that the “proof of work” verification used in the Bitcoin blockchain is energy-intensive. Thus, a distributed ledger system may ultimately prove to be the best direction for deed recording.
California has seen success with a blend. Using Ethereum smart contracts, parties effected a bitcoin-to-bitcoin transaction, resulting in California’s milestone blockchain-recorded property deal. The parties conveyed 10 acres of land in 2018 using smart contracts. Ethereum can record contracts, removing the need for a local government recording office.
California and various jurisdictions running early recording systems will shed light on the pathways ahead. Vermont’s leading-edge statute will doubtless be a model for the use of transformative technology. And we’ll see carbon-conscious innovations moving into this area, as green tech meets blockchain.
Meanwhile, adoption will advance, cautiously but surely.