Blockchain Part 2: How The Hell Can We Use It?
In the first part of this blog post, I explained as best I could how exactly blockchain works and why it’s basically fraud-proof. Almost all technology is centered around the use and delivery of data. Blockchain is a significantly secure and improved method of maintaining and storing data over a centralized database system that’s currently used everywhere else.
If I could scrap the current system for maintaining real estate records and transactions and create a new way to do it with no limitations, blockchain might be the way.
Fraud problems solved! Ugly public records end! Title insurance over! Whooo hoooo!!!
Not so fast. It’s going to take a lot of cooperation from some very uncooperative and disparate parties, some who exist specifically to not cooperate.
In early October, I spent a day of NYC’s real estate tech week at the IBREA (International Blockchain in Real Estate Association) conference. There were maybe 150 people and I got the sense that these were the very early days of something that would grow and grow. I also got some clarity on some of the places in the world that really need this database technology and where the soft spots are.
I’m skeptical that those soft spots are going to show up in the US in a way that’s actually usable anytime soon. Let me explain.
The ‘title’ industry really baffles me. It’s something that people just don’t know about or understand. To the general public, and even to some very smart and savvy real estaters, the transaction is oversimplified.
Verifying the chain of title (Sally sells to Ben who sells to Matt who sells to Amy) is the easy part. It’s not ideal that this data is kept at the county level but no matter the county, it’s all kept in a single place within that county. Also many counties (definitely the most populated ones) have moved these types of records online and have made them much more accessible. Blockchain would be a more secure way to store and track this information, but there’s no huge pain or problem here.
The Bottleneck In Transacting Real Estate
Two things are the true causes of a slow and complex real estate transaction:
- Clearing the way of liens, judgments, mortgages new and old, utility bills and anything else that may attach to real estate by way of law. If you buy it and the law allows it to have attached to a prior owner, you just bought someone else’s debt.
- Financing. Regulations surrounding conventional financing meant for residential owner-occupants has gotten beyond arduous and complex.
Clearing the way for a real estate transaction starts with getting the data. A ‘title search’. This can be complicated and time-consuming but is still the ‘easy’ part. The industry has invested some resources to work around the mess that is public record kept independently in each county.
Clearing the path is the real bottleneck. Virtually every real estate parcel has work to do, items to clear.
- Mortgages get paid off and lenders rarely make that known, we have to investigate that.
- Utility bills are often lienable against a property by way of law and we have to work with the utility companies to get the updated amounts owed and pay them.
- A judgment for someone with the same name as the property owner is filed with no other identifying information and we have to figure out how to confirm whether it’s on the subject property or not.
While a blockchain database makes the most logical sense to track the chronological transactions of real estate, in order for it to really solve the pain of public record data keeping, everyone would have to cooperate. This includes not only municipalities in adopting the new record system, but lawyers would have to agree to never file a judgment or lawsuit without more identifying information than simply a name. Since making social security numbers and birth dates public in records is a violation of many privacy laws and just anti-common sense, I’m not even sure how this identification system would work.
Financing is one way I could see blockchain being successfully adopted in the US. Lenders did something sort of similar years ago with MERS (Mortgage Electronic Registration System). It didn’t work very well, largely because MERS was operated by a central group that was simply negligent and inefficient at managing the records. It’s in the best interest of mortgage lenders to keep track of a mortgage throughout its life from birth, through assignments to other servicers, to it finally getting paid off. These are private entities and there really aren’t that many of them – most of the conventional mortgages in the US are serviced by four or five companies.
Moving mortgage tracking to a blockchain system wouldn’t solve nearly all of our problems, but it would solve one big bottleneck in transacting real estate. A huge time savings that would trickle down to everyone involved. And it seems feasible to get mortgage servicers on board.