Blockchain to Reduce Real Estate Fraud: How Technology is Changing the Real Estate Market
If you’re involved in the real estate industry, it’s important to be aware of the various forms of fraud that have evolved over the years. From mortgage fraud to sellers not disclosing information as required by law, real estate transactions have always been a target for fraudulent activity due to the large sums of money involved. While technology has made the process more convenient, it has also made it more susceptible to fraud. Recently, the buzzword “blockchain” has emerged as a potential solution to combat fraud in real estate. While it may not be a cure-all, certain applications of blockchain technology have the potential to add an extra layer of protection for all parties involved.
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.
Blockchain technology can be used in the mortgage process to create a shared ledger of all the necessary data and documents involved. This helps increase the security of the mortgage process, as all information is encrypted within the blockchain. In addition, utilizing blockchain can also speed up the process. Coordinating the recording of property transactions using blockchain can achieve a higher level of security than was previously possible.
Although blockchain is still relatively new, it has proven to be a valuable asset in various applications and industries. Its ability to provide indisputable data origin can increase confidence for those involved in real estate transactions. However, it is important to exercise due diligence in each step of the process and double validate each transaction. You should not blindly follow email instructions and you should also conduct personal or phone call verification.
A wide variety of industries will implement blockchain-based solutions, and only time will tell how and when. 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.
