The Impact of Smart Contracts on Real Estate Purchases

By Brandon Madden

November 26, 2019

The year is 2030 and we are in the 4th age of the internet. Our devices operate exclusively on distributed applications. Transactions are verified and secured by blockchain. Real estate, the wealth tool historically known for creating the most millionaires, now relies heavily on smart contracts and buyer/seller consensus to verify identities, authorize transactions and close on property.

Before we look too far into the future, let’s rewind to today, when everyone is discussing blockchain, but very few understand its true capabilities.

Blockchain technology maintains a record of transactions is maintained across several computers linked in a peer-to-peer network. This allows smart contracts to be self-executing, with the terms of the agreement between buyer and seller directly written into lines of code existing on a decentralized network.

This technology will impact the future real estate purchase process in many ways.

  1. Contracting Costs – Smart contracts should reduce the cost of real estate transactions because the attorney’s role during the review process would be altered slightly as contracts can now execute themselves. The buyer and the seller will establish their desired terms and the contract would fully execute once those terms were met.Contrary to popular belief, the attorney won’t be eliminated from the process because regulations currently require their presence. Attorneys will also still be responsible for drafting legal documents that protect their clients, as well as providing advice.
  2. Escrow Holdings – Under the current system, earnest money deposits (EMD) for down payments were held in a lawyer or real estate agent’s escrow account, with a picture sent to the seller as proof. A smart contract would allow the payment to be deposited directly to the seller’s account once the purchase agreement was signed.
  3. Loan Approval – Currently, a loan officer gathers a buyer’s personally identifiable information, runs it through a system and, depending on a list of factors, approves or denies a buyer a mortgage loan. With blockchain technology, a buyer’s information would be available via decentralized identity verification software. Instead of a real estate professional gathering tons of documents and waiting for a third party to verify that information, an individual’s identity and proof of funds could be vetted using verified identity data created by the true owner of the identity data. Companies such as Civic, ExistenceID, and BitNation are currently operating in this space. Once consensus is reached, and identities are verified, the smart contract would automatically grant the buyer a loan.

These three process implementations should help lower contracting costs and save time on closing real estate transactions. Real estate auditors and consultants should take this coming change as an opportunity to better understand their clients. For example, there may be a change to the controls tested based on the implementation of smart contracts, such as who created the smart contract, who has permission to exchange value/complete a transaction, and how to verify that controls and listed actions were completed once the smart contract executes.


Disclaimer of Liability

The information provided here is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

Mazars USA LLP is an independent member firm of Mazars Group.

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