Blockchain: Real Estate Purchase Process

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This is a first of a series of Blockchain related articles using real world use cases that we are developing at V Studios. Blockchain Technology is one of the most exciting areas we are working currently. A technology that is easy to setup, design, implement and deploy to the world.

This article dips the readers’ toes into the use of Blockchain in a real estate use case in the residential property market. At V Studios, we are developing a simple application using the Ethereum Blockchain that can reduce cost and time and enhance trust during the property buying process. The real value related operand in using Blockchain technology is not cost or time but trust (without the need of a “trusted” third party). Cost and time are effects of the trust operand.

Introduction

In New Zealand, buying your first home is fundamental to the Kiwi culture. Every young couple seeks this and saves up considerably to put in their first deposit. The government has also created a scheme where it aids buyers using their Kiwisaver (similar to Superannuation in other countries) funds to purchase their first home.

As part of the process of buying, one of the most common and repetitive aspects of this search is the Sales and Purchase Agreement (S&P). Every time a potential buyer is interested in putting an offer, they use the document to negotiate and settle on the price and the settlement date. This article goes into briefly a common purchase process with the assumption that it is a simple and straight forward transaction.

Current Purchase Process

Keeping it simple and assuming all conditions and parameters are nominal, a typical purchase process is outlined below.

Figure 1 Typical/Current Purchase Process for Residential Property

 

The current process involves dealing with a real estate agent (red) constantly during the process. When you contact the vendor, you contact the agent. When you’re sending over the S&P — it’s through the agent. When you’re going through counter-offers — it’s through the agent. After, performing due diligence and all the way down through to final settlement (move in day) — you’re always in constant contact with the real estate agent. This process takes time, the vendor incurs costs to the agent and the aspect of trust on the agent. Other external parties are also involved especially during the due diligence process (lawyers from vendor and buyer sides; accountants; building inspectors only to name a few). The whole process involves the aspect of trust with third parties. This indirectly incurs cost and time to the vendor and buyer. Now let’s discuss a use case scenario of this current purchase process but, using Blockchain Technology.

Ethereum-based Purchase Process

Figure 2 Blockchain based Purchase Process of Residential Property

Using the Ethereum Blockchain, the purchase process would be revolutionized. The figure above, shows a glimpse into what Blockchain Technology could do for every day vendors and buyers in the common real estate purchase process and; this would only be the beginning. In the figure above, the green box depicts the application that performs this purchase process. The application will only need two counterparties communicating to each other — the buyer and the vendor. Counters are time-stamped on the Blockchain until the vendor accepts. Once the vendor is happy, the buyer goes unconditional and executes the smart contract. The smart contract interacts with external parties through an API thereby promising the integrity of the value related operand trust.  

Motivation for Change

Discrepancies in Land Titles

One of the reasons for the motivation for a change in this process in New Zealand, is the existence of Land Title discrepancies between Land Information New Zealand (LINZ) and local councils that also hold land titles in their registries. These can lead to unnecessary court cases that dig into buyer and vendor costs which was very evident in New Zealand history.

Benefits of Blockchain Timestamping

The Blockchain has the unique ability to timestamp a transaction. A segment of the transaction structure (known as lock time) records the transaction based on Unix Epoch Time. Benefits of timestamping using this decentralized approach:

  • The system is decentralized and there is integrity in the timestamping method via some strong cryptography
  • Minimal effort is needed from the users (e.g. local councils, LINZ, etc.)
  • The cost of operation is low and the service can be charged either free or at no cost.
  • Having a centralized timestamping process is weak because the integrity of the timestamping process is bound to the integrity of the timestamping authority.

Affects to the economy

Property markets have cycles: busts and booms. These cycles are inevitable and will always occur. But, with the existence of speculators and hype agents, this over-exaggerates cycles, leads to media created panic and eventually unsettling (first) home buyers. This is the trickle-down effect of consumer confidence in the property market. Ian Kar of Quartz, mentions this in his article, with the example of China’s economy. He mentions how China’s central banks are exploring the idea of a currency tied to the Blockchain. To summarize his argument, he mentions how it could be easier to perform central bank decisions (manage monetary policy, interest rates and money supply) that affect the economy via a Blockchain pegged currency. As decisions made are represented on the Blockchain in real-time as value moves through the system whilst the current system involves relying on random samples from murky and lagging indicators that cannot be observed in real time. So, imagine a Blockchain specifically made for the property market in New Zealand where all property transactions, titles, the whole ecosystem lived. This would give economists a better notion, in real time, the effects of decisions made by the Reserve Bank or any other related authority (or) entity tied to the property market.

Conclusion

In conclusion, we’ve explored some aspects of how Blockchain technology can be an asset of high value to the real estate space in New Zealand. In the next article we’ll explore the Sales and Purchase Agreement and how the current S&P can be improved upon using the Blockchain platform.

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Comments

  1. Dodu

    14 March, 2017

    HI Vikas

    NIce article and website.

    Do you know how I can buy Ether in NZ?

    Also which wallets would you recommend to hold the coins – bit or ether.

    Thanks

    Dodu

  2. Paul Vermaak

    3 July, 2017

    Hi Vikas,

    I’m interested in Blockchain and how it can impact the property industry and the property market, and in particular how it can simplify S&P agreements. I think your article misses the key reasons people use agents, and I think once you understand that then the application could be more applicable.

    Most sellers are too nervous to deal directly with buyers; they have no idea how to attract buyers from everywhere, and sellers can’t coordinate to get buyers through as many of their properties in one day as possible. Most sellers don’t have economies of scale for advertising or marketing, photography, branding etc, and most parties to the transaction prefer not to be in direct contact with the other party- it keeps emotions out of the discussions (if the seller is an elderly couple with not much money, the purchaser may walk away from the deal rather than paying top $. On the other hand, some sellers are so difficult that they would chase away many purchasers.

    I do think that Blockchain has a vital role to play in the real estate industry but the real role needs to be addressed.

    regards

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