Understanding Blockchain and How it Could Reduce Fraud in Real Estate

blockchain

Anyone involved in real estate should be aware of the varying forms of real estate fraud that taken place and evolved throughout the years. Fraud has ranged from mortgage fraud to sellers not providing full disclosure as required by federal and state laws. Because of the large amount of money and the number of vendors and individuals involved, real estate transactions have always been a prime target for the unscrupulous. 

Today, technology has made real estate transactions easier and more convenient than ever. The entire process has been made less cumbersome in the digital era but, unfortunately, it has not made it less susceptible to fraud in many regards. In fact, some would argue that digital fraud in real estate is one of the industry’s biggest concerns.

However, one relatively-recent development stands to combat fraud in a number of ways. “Blockchain” may be a bit of a buzzword these days, but some truth lies behind the hype. It may not be a cure-all to real estate fraud, certain applications of blockchain have the potential to help add a layer of protection for buyers, sellers, and vendors alike.

Forms of Real Estate Fraud in the Digital Era

Most of us have become so comfortable with our digital devices and conducting business digitally, that we may let our guards down when it comes to online fraud. In the real estate industry, fraud can lead to more than some lost data or inconvenience. It can end in the complete loss of a property or the loss of tens if not hundreds of thousands of dollars.

The most common types of fraud involve:

  • Property fraud where property information or value is misrepresented.
  • Fraud in disclosing or representing income.
  • Identity fraud where the buyer could misrepresent their credit history or identity.
  • Transaction fraud that may include non-arm’s length deals or straw buyers.
  • Occupancy fraud where property secondary or primary occupancy may be misrepresented.
  • Real estate debt fraud where a previous foreclosure or additional real property debt is undisclosed.

While these forms of fraud aren’t necessarily new, they have been aggravated and joined in the digital era by a variety of online real estate fraud tactics. These include phishing and malware attacks, escrow fraud and more.

Phishing, in particular, has become problematic in real estate. Phishing is where a hacker appears to be legitimate, posing as a valid vendor in the real estate process. This too frequently leads to their gaining access to confidential information which can lead to fraud and even unauthorized transfer of funds. Before the activity is discovered, the data has been compromised and the money often lost without recourse.

Understanding Blockchain

Many real estate professionals see blockchain as the key solution to real estate fraud in the digital era. Blockchain technology is, in essence, a decentralized ledger. The “blocks” contain the information and the “chain” is the network.

Each of the information containing blocks contains data about a transaction, who the participants in the transaction are and unique identifying codes. Blocks can be added to the chain when a new transaction is made and verified by other users. Once verified it is stored in the block and given an identifying code called a hash and added to the chain.

This means for a hacker to “cheat the system” he would need to access every block along the chain, involving tens of thousands of computers. The goal of blockchain is not to allow blocks to be edited, but to validate the transaction within the block. This provides its secure nature.

How Can Blockchain Reduce Real Estate Fraud?

Since much of the information involved in real estate transactions are centralized, it can be ripe for fraud. Blockchain decentralizes this information. Its unique structure creates transparency while building security. The security that has made it a niche platform for currency also makes it an intriguing platform for real estate. In the process, it can even remove some of the costly financial intermediaries along the way. 

In the mortgage process, for example, blockchain can serve as a shared ledger to create the various pieces of a mortgage. Because the data and documents involved in the mortgage are each encrypted in the blockchain, they are much more secure. The process can also be accelerated. When those involved in a property transaction agree to record the pieces of that transaction permanently in blockchain security, this coordination creates a higher sense of security not previously available.

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Blockchain has the ability to provide indisputable real estate data provenance, providing increasing confidence for those involved. While blockchain is still in its relative infancy, it has made its way through various applications and industries. Each step of the way, product origination is documented and validated. It doesn’t take much to realize the value and security this can bring to the real estate process. In the meantime, due diligence needs to be taken through each step and each transaction should be double validated. Do not take email instructions at face value as they should be validated through personal or at minimum, phone call verification.

Only time will tell how and when blockchain-based solutions will be implemented across a wide variety of industries. One thing is certain, though: If the reality of this technology is even just a fraction of the hype, its impact will be significant to say the least.

Shawn Clayton is the owner and broker of Clayton & Clayton REALTORS®.

www.realestateexpress.com/real-estate-agent-salary-guide

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