Transactions in Real Estate

Paper-based systems vs blockchain

Many people do not realize that the essence of a real estate transaction and many other transactions is about changing the information in a system, not about moving a physical object. When you come to a coffee shop to buy a cup of coffee, you hand cash, pay with plastic or a store card, and in exchange get your cup of coffee. This is what happens with many other tangible goods, from foods to clothing to cars.

However, this is not what happens with real estate. First, the amount of money in the transaction is much greater, so the funds are usually exchanged in a different way. Second, the real estate itself does not move. Often, previous owners would make some repairs to a home or an apartment before selling it, so that it looks attractive to the buyers and buyers do not have to perform any repairs at all.

So, what does move in a real estate transaction, what does change hands? Up to this day what changes hands is paper. However, in this case paper is not the message. It is simply a conduit of information. When a seller transfers a deed to a buyer, he or she agrees to transfer the rights to the property to the buyer. It is not about the piece of paper, it is about information about who has the rights to the property. The transfer of the deed is valid not because it is on paper but because two parties have agreed that the transaction is valid. This is how the law works and this is why in a state like Illinois a transaction may not be a part of an official record but it may still be a valid transaction.

What this also means is that it would be beneficial to everyone to start thinking about transactions not as about paper documents but as about agreements that need some form on verification, with paper being one of such forms, but not the only one. For example, even today if someone loses a car title, they can go to the department of motor vehicles and request a duplicate. This means that the paper with the car title was a message about ownership, but the message was not the ownership. The message could be on paper, it could be in centralized government storage, or it could also be on a blockchain network.

Through the most of human history, paper was the most reliable way to convey information about ownership because the only other options were human memory and other materials such as bamboo. Neither of those options could compare to paper in terms of convenience and reliability, yet today, in the digital worlds with options for redundant backups, paper is nor the most secure nor the most efficient way of keeping public records. With paper, information about transaction is separated from the previous record about the ownership of a real estate property. With blockchain, it is possible to unify the information about transactions with the existing records, meaning that every time information about a new transaction enters a system, it automatically updates the existing record. In this scenario, there would be no need for real estate attorneys and other third parties to try and collect information about a piece of property from multiple offline disjointed sources and hope that there is no transaction certificate somewhere that, even though not on the record, is 100% legitimate and valid. With one blockchain, everything could be in one place and because of decentralization of blockchain networks, the security would be extremely high.

Many of the recorder’s offices around the United States do not view themselves as paper-based because when the information comes in, employees scan it and convert it into a digital format. The problem with this process is that paper is still a significant part of the process and the employees manually retype the information into searchable databased or manually check and correct information in digital files that they obtain by scanning paper originals. Anywhere there is manual work of this kind, there will be mistakes and incomplete information. Mistakes about real estate transactions can be very costly. For example, if a property index number has an error in it, unless a user of the system performs a grantor/grantee name search, the use may miss a claim that corresponds to the property, and not resolves the claim. This can lead to all kinds of problems once the transaction goes through and this inefficiency of the process is one of the reasons why parties in the process currently hire so many third-parties to be involved.

This is why one of the main goals of the pilot blockchain project in Cook County, Illinois, was to test a scenario in which a real estate transaction occurs without a paper deed as a part of the transaction. Because real estate transactions are about information, the goal was to check if a blockchain-based transaction could provide all the interested parties with necessary notices, especially the future prospective buyers of the property involved in the transaction.

In the state of Illinois, a transaction does not to be a part of the state record to be valid. For example, two parties may agree to enter into a real estate transaction and under certain conditions, the transaction will be valid even if the parties do not notify the Recorder’s Office. However, most parties today choose to notify the office because the county government records are the only available official records and in a case of dispute, a judge may decide that posting a note about a transaction in a local supermarket was not providing sufficient notice to the public. Without an official government record, even if the record is on a blockchain network, a transfer of real estate property is very similar to a transfer with a note on a bulletin board in a local supermarket.