Like the contracts used across the real estate industry for decades, the new, advanced contracts are just the smarter version of contracts. Smart contracts also clearly define the mandatory rules of an agreement that enforce obligations mutually set between two or more parties. In addition, today’s smart contracts are based on blockchain technology and refer to computer protocols, digitally facilitating the agreement’s review, verification, execution, and monitoring.
They are called smart because they reduce or eliminate the need for transaction intermediaries. While they transform the way contracts are handled in real estate, many firms use contract review services to ensure optimal preparation and effective implementation.
Three Key Components of a Smart Contract
- Signatories (parties involved)
- Subject of agreement
- Specific terms & conditions
5 Ways Smart Contracts Are Impacting the Real Estate Industry
Accurate Automated Payment Collection
A major part of a real estate agent’s time is spent dialing customers to collect or reminding them of payments. Many times, agents of real estate firms are left with very less time for other important tasks. However, smart contracts are based on a technology that creates a distributed ledger online, enabling contracts to be signed and paid for on the chain.
Ranging from lease, rent, security, and power fee, to maintenance charges; all the financial transactions can be automated via a unique, secure code in the contract.
Finance & Accounting
Finance management and accounting are integral to contract management for real estate businesses. When it comes to managing commercial or residential properties and collecting rent from tenants, they need to keep account of each cent collected. Not only that, if there’s a need for repairs, they need to record the transaction of money spent on repairs – quite a mundane thing to do.
Whereas with smart contracts, accounting can be made as a real-time automated data entry process. This will reduce the time it takes to prepare important documents like income statements, cash flow statements, balance sheets, etc.
Registration of Sales
Property titles are a crucial set of information that must be protected well because mismanagement of that information can lead to lengthy and costly legal proceedings to recover.
Using smart contracts, you can track and maintain changes in an immutable ledger (a highly secure) shared source based on blockchain technology. This has the potential to eliminate hefty paperwork as well as the risk of fraud and monetary loss.
Fast Loan & Mortgage Transactions
Smart contracts powered by blockchain allow you to simplify loan or mortgage transactions via verified information, data sharing with complete security, transactional monitoring, and fast payment in a single platform.
Real estate professionals can use these contracts to gain more trust in investors by showcasing their asset’s performance through real-time reports.
Identification Made Easier & Smoother
When realtors step into helping their clients make a deal as per the contract, they usually start with verifying identification papers, which could not be fully trusted. However, smart contracts can promote tech-based KYC procedures with decentralized identities safely in the hands of important parties, enabling fast background checks at comparatively lower costs.
With blockchain technology getting popular globally, the real estate industry is also seeing a radical shift in the way contracts are being generated and handled. Let’s now discuss some of the key advantages of using smart contracts in your real estate business.
Five Advantages of Smart Contracts for Real Estate Firms
Contract review and management is a time-taking process. Previously, it could have taken a few weeks and sometimes months to prepare a contract, verify and implement it. Today, with smart contracts, most lengthy processes have turned into automated operations, resulting in less time spent on them.
They use unique codes, which are designed to transfer cash as soon as the system detects a new registration in the database. This reduces the turnaround time and ensures no one forges the transactions.
Blockchain technology is excellent for increasing transparency. The entire contract is made on the blockchain, where they run a peer-to-peer network, and all the authorized peers can see transactions, resulting in fewer chances of corruption.
All the transactions, regardless of their size, will be done only once they are verified by all the systems, encouraging a superior level of transparency (probably never seen before).
It is next to impossible to alter or hack the data stored in the blocks of the blockchain. There are two algorithms used to confirm the authenticity of transactions when we add a new block – Proof of Work and Proof of Stake.
This ensures that the transaction is confidential and remains between the parties involved, reducing or eliminating the involvement of intermediaries.
Unbeatable Ledger Accessibility
Real estate transactions involve multiple phases of discussions, stages of review, and many other processes, especially when multiple parties are involved.
As all the transactions are clearly recorded in smart contracts, you can easily trace them using the blockchain’s distributed ledger shared only among stakeholders.
No Need for Intermediaries
Discussed this a few times now, blockchain technology streamlines the transactions, turning them from a redundant process into an effective one. As a result, there’s no need for intermediaries to keep a check on minor areas of contract management.
Even better, when implemented correctly after complete usage assessment, smart contracts bring a single, all-in-one platform into the function for reviewing, managing, and transferring.
Some Other Significant Benefits of Smart Contracts
Documents stored in the blocks are automatically backed up from time to time. In addition, smart contracts allow you to recover your documents and contract papers if you lose them for any possible reason.
Smart contracts use two technologies together – blockchain and automation. With the strong combination of both, contacts are managed using smart and fast computer protocols, increasing the speed of contract initiation, verification, and implementation.
Manually preparing contracts is always vulnerable to mistakes and errors. On the other hand, smart contracts eliminate this possibility. Additionally, if you change anything in a contract, it may notify you if the clauses are incorrectly written.
Smart contracts help you save the direct cost of paperwork. Besides, you need not involve brokers or escrow firms, saving your contract management costs.
What Could Be The Future of Smart Contracts?
Although blockchain technology is not being used heavily across industries, it has begun to be adopted fast in finance industries such as cryptocurrency. However, real estate firms and others in the industry have started utilizing it for the better preparation and management of contacts. Therefore, anticipating the future would not be difficult as blockchain increasingly gains popularity, spanning other industries, not just real estate.
It is the beginning of using smart contracts in the real estate industry, and firms are gradually moving toward them for the benefits they provide. However, there’s always room for continuous improvement. In the years to come, we may see smart contracts being utilized in industries like manufacturing, construction, automobile, and those that heavily depend upon contracts.
The reasons behind this shift could be the opportunities of reducing the complexities and costs of contract management. So, smart contracts are transforming how contracts are managed in the real estate industry, helping real estate businesses make the best out of their investment.
Cathrine Troyer is a thought leader in the fields of Legal Process Outsourcing, Technology, and Business Law. Her passion for writing persuades her to contribute toward inculcating knowledge amongst the avid readers from the legal fraternity. At Cogneesol, she regularly provides her expertise to clients, teaching them how to renew their strategies and leverage technology to achieve better results.