Most of a real estate closing revolves around trust and verification. Buyers and sellers use trusted intermediaries to verify that properties, funds, contractual obligations and insurance safety nets are all properly vetted before closing a sale.
That’s part of the reason a real estate transaction has so many participants. Agents, lenders, inspectors, title insurance providers, notaries and closers provide independent verifications of individual facets of a sale. An escrow company or an attorney is usually the organizing force that pulls these individual points of verification into one trusted transaction.
Security is lacking
The security of the current process is weak at best. Homebuyers are frequently being robbed of their purchase funds. By simply hacking an agent or closer’s email account, criminals have put themselves in control of the closing communication.
The hackers spoof the closer’s email, ask the buyer to change the wire instructions, and the funds roll into an unverified bank account. By the time the buyer realizes what has happened, the money has been laundered overseas through multiple wire transfers. It’s gone.
Software security to replace human fallibility?
This kind of real estate fraud is possible because of a reliance on unsecure, disjointed communication methods. The purchase process has no safety envelope. It lacks a seamless layer of overriding security that verifies each sale condition throughout the process.
What if software could replace the parts of the closing process that rely on human verification for security? Smart contracts aim to do just that.
Imagine a digital contract that independently verifies every step in a real estate sale including the identities of the buyer and seller, the funds sourcing, the lender sign-off, deposits, property title transfer and delivery of payoffs to sellers and lien holders.
Before getting into the technical details, let’s look at the roles of an escrow closer or an attorney in the closing process.
Closing functions that could potentially be replaced by secure software:
- Administration of transaction as a neutral third-party
- Control of earnest money funds
- Verification that proper paperwork is in place
- Examination of title for liens, judgments, mortgages, clouds
- Ordering of title insurance policy
- Pro-ration and transfer of property tax and utility bills
- Preparation of closing documents
- Administration of signing appointment
- Transfer of purchase funds to sellers and lien holders
- Recording of deeds with local government
Closing functions in which human input may trump intelligent software:
- Live verification of personal identity
- Explanation and recommendations for resolving title issues
- Review and explanation of contract items
- Guidance of clients during unexpected or unique circumstances
Clearly, there is a large portion of the closing process that could potentially be absorbed by secure software. This isn’t to say that the smart contract is ready to take over 90 percent of a closer’s role today.
The potential is real, though. Some of the world’s biggest banks are already developing software based on a technology concept called blockchain to create smart contracts for the financial world.
This is not bitcoin. Although many have only heard of blockchain technology as the foundation for the digital currency, its use as a software model can be applied to any number of reputable business processes.
The real estate concept, in an oversimplified explanation, is a digital contract embedded with smart money. Buyers, sellers, lenders and all other parties are identified by their personal information.
This data comes from decentralized databases that add to the verified blocks in the data chain — banking, credit reporting, employment, government or other information gathered from trusted sources.
After verifying individuals, the blockchain assigns them an encrypted ID, which allows the smart contract to approve their actions going forward.
You’ve been verified; you no longer need to be trusted
From here, a homebuyer can create smart money by uploading funds and programming them. The buyer’s programmed money goes into the contract with stipulations attached to it.
The seller cannot touch the funds until the buyer’s programming instructions have been met: inspection approved, title clears, lender releases funds, county records the deed and so on.
The lenders, title companies, government agencies and others can all become verified participants in the blockchain smart contract. These identified users in the transaction can make the sale move forward when they verify that certain steps have been accomplished. Only the verified sellers and lien holders will be allowed to receive the closing funds.
What does the smart contract mean for escrow and attorney closers?
Smart contracts could drastically alter the way real estate transactions are closed. With much of the verification process now handled by a network of databases instead of human interaction, there’s the potential to remove much of the labor that’s currently necessary. This is the way most technologies disrupt industries — through efficiency improvements.
Timelines for closings could be reduced. Software doesn’t take holidays, evenings or weekends off.
It’s clear that a smart contract with enough access to the right data could administer a large portion of a real estate closing. Any item that pertains to verification is ripe for delegation to the smart contract. The complexity of the human interaction in the transaction isn’t something to underestimate, however.
Barriers and holes in the process
Smart contracts can’t review and explain contract documents to a nervous seller or buyer the way a human closer can. It’s a stretch to believe they’d replace the closer completely.
It would also be foolish to ignore the most glaring hurdle to the full-fledged adoption of smart contracts in real estate. That is the decentralized and unharmonious makeup of the industry itself.
A typical transaction might have a buyer’s broker using Instanet software while a seller’s broker is using dotloop. Meanwhile, the escrow company and lender are trying to shoehorn everyone into their own custom software product.
Each individual wants the process to work smoothly, but no one wants to use the other’s solution. A consensus blockchain-style foundation could allow many different software products to access the same smart contract, but the industry’s track record of coalescing around a single solution is less than stellar.
Moreover, the cross-industry participants necessary to close a financed sale make for an uphill battle. A single contract needs every member of the transaction to adopt its platform to be effective.
Brokers, lenders, title companies and even government agencies that record transactions would have to sign on for a truly seamless, secure transaction. That will take significant time and influence.
Digital disruption through leadership or pragmatic paper?
Smart contracts have significant potential for increasing the security of transactions, improving the speed of sales and making the closing process more efficient. They could effect profound changes on the role of the real estate closer, but they don’t eliminate the closer’s role entirely.
The smartest software in the world can die in unfulfilled anonymity in this industry. Adoption of smart contract technology won’t happen from the ground up. It will require the kinds of voices that can convince government agencies, banks and big brokerages to sign on.
Whether it’s blockchain or another solution, consumers deserve industry leaders’ full attention on providing a safer way to buy and sell homes. If it happens to make transactions faster and more efficient in the process, everyone benefits.
Every buyer and seller should be warned of the current danger of digital fraud at the outset of a transaction. Of course, there’s a simple way for many of them to avoid it.
Drive to the bank. Get a paper cashier’s check. Drive it to the closing office. Sign the paper. Thank your closing agent in person. As archaic as it sounds, until there is a solution, it couldn’t hurt.
Sam DeBord is managing broker of Seattle Homes Group with Coldwell Banker Danforth and President-Elect of Seattle King County Realtors. You can find his team at SeattleHomes.com and BellevueHomes.com.
