In traditional real estate, the settlement or closing process is a complex activity that requires much time, effort, and attention. For decades, the property transfer process remained the same. However, Propy offered a change and a solution.
Two years ago, Michael Arrington, the American founder of TechCrunch, became the first person to use Propy’s property settlement solution. Through the company’s Transaction Platform, Arrington purchased an apartment in Ukraine via smart contracts.
What Is Settlement in Real Estate?
The settlement stage is the final stage in the real estate transaction process. The parties that are involved in the transaction process sign a pile of documents. Then, the buyer issues a check to the seller, the deed gets signed, and the title agency files the new deed with the government.
The trust between a buyer and a seller is generally established with the help of a third-party Escrow company that “guarantees” trust between the buyer and the seller. However, this trust is often limited and can be corrupted in traditional situations.
Why Is Automation in Real Estate Important?
We all know that automation comes with great benefits such as increased productivity, greater resource efficiency, and higher quality of products or services. From e-commerce to electronics manufacturing, many industries have already reaped the benefits of automation. However, real estate has remained the exception. Why is that the case?
If you delve deeper into the subject, you will find that the property purchase process is based on three pillars, which include paperwork (the signing of documents), payment transfer, and ownership transfer. Currently, too many parties must participate in the property closing process, and each of these parties uses its own software.
For the real estate process to be automated, there should be one place where the buyer, the seller, the agents, and the title company can meet. Additionally, the trust should be guaranteed between a buyer and a seller in a transaction.
As mentioned earlier, in traditional real estate transactions, Escrow companies help establish trust between buyers and sellers. However, Escrow agencies come with a price, and they are still susceptible to human behaviors (such as error and greed).
How Can Escrow Services Be Improved?
Escrow agencies are currently being challenged by smart contracts, which are agreements that are put into computer code and stored on the blockchain. Computer protocols that execute automatically, without any need for a middleman, contribute to settlement systems.When both parties fulfill their duties and digitally sign the agreement, the smart contract automatically releases the deed to the buyer and the money to the seller. Thus, the Escrow fee is virtually eliminated, with the whole process costing just a few dollars.
It is not merely a conceptual theory, either. The process of replacing Escrow companies with smart contracts is well underway. The automation of property purchases via settlement protocols is a reality that has been backed by successful cases.
The First Real Estate Purchase on the Blockchain Proves That Smart Contracts Work
Two years ago, the first real estate purchase on the blockchain was officially recorded. The apartment in Kiev, Ukraine, was purchased by TechCrunch founder Michael Arrington while he resided overseas in his American home. The payment for the property was completed with Ethereum’s Ether (ETH) and paid to a smart contract. The seller in the above transaction was crypto enthusiast Mark Ginsburg, who is a well-known real estate developer in Ukraine.
The buyer, Arrington, signed a purchase agreement, sent ETH to a given address, and waited for the seller to sign the final document with the notary. Then, the smart contract executed the rest of the deal, sending both ETH and the deed to the appropriate parties.
All details of the deal are now permanently stored on the blockchain. If any claims occur in the future, these documents are publicly visible and can be used as legal evidence.
No Escrow company was used for this transaction. Of course, for Propy, it was quite challenging to find a developer to agree to accept payment in crypto and process the purchase via Propy’s smart contract system. The historic event proved that smart contracts are fully capable of handling the intermediary role that Escrow companies provide.
Fiat Smart Contracts Could Make Blockchain Technology Mainstream
While the Ukraine property transaction happened to use cryptocurrency, there are more stable alternatives that can attract more mainstream real estate agencies. Smart contracts using fiat money are entirely possible and gaining traction due to fiat’s relative stability (at least for now).
The current problem with completing any transaction in cryptocurrency is the issue of volatility. Since Bitcoin, Ethereum, and other top coins can easily swing 15% in one day, many are uncomfortable with taking risks on large transactions such as real estate purchases.
How Can Escrow Services Be Improved?
Imagine a world in which real estate properties can be purchased online in an instant, safe, and secure way. With computer protocols replacing unpleasant and repetitive labor, real estate professionals can free up their time to take on more qualified work opportunities.
Automation in the property transaction process is no longer a dream. It is a working concept that is being used, tested, and continuously improved by startups such as Propy. Developed by Propy and recognized by the NAR, settlement protocols that are backed by smart contracts are gradually reaching widespread adoption.