Smart Contracts - what they are and how they will affect your rent roll

Blockchain is the latest technology buzzword. While many associate it with Bitcoin and cryptocurrency, the potential of the blockchain and smart contracts is being realised across many different industries from finance to the food-chain.

For the real estate industry, the concept of a smart-contract, could be revolutionary, and for those opposed to change, not in a good way.

Smart Contracts 101

The majority of contracts are paper based and filled in by hand or on a computer. The information is either stored in a filing cabinet or on a central database that belongs to a single organisation. Both the information and the identity of the individuals are vulnerable and manipulatable.

A ‘smart contract’ is any agreement that has been digitised and codified. The code used is based on boolean logic which uses ‘if this, then that’ to execute the contract.

Smart contracts live on the blockchain.  This is an online ledger with multiple instances of the contract stored in multiple locations. With this technology, all transactions are verified multiple times and the integrity of the information is much more reliable. It also means the information is not held (or owned) by a single entity. The information is public while the identity of the individuals remains private.

Some of the big benefits of the blockchain and smart contracts are

    The ability to reduce human error

    The inability to manipulate the record or contract

    The speed of transactions

    The elimination of the middle-man

This is how it will work

Contracts are coded to automatically execute if and when pre-set criteria are met.

In very simple terms, a soft drink vending machine is an example of a smart contract:

IF is true, and button is on, THEN release x 1.

When the pre-set criteria was met, the contract was executed.

Now imagine the details of that transaction were sent to all the other vending machines, who verified that the criteria was met and the contract executed. They all now have a record of the transaction. But they don’t have any personal information about the person who put the $2 in and pressed the Fanta button.

The beauty of the blockchain and smart contracts is the fact that any transactions can happen in close to real time, human error is greatly reduced and the record of the transaction is stored forever on the ledger.

In terms of property management, compare this to the number of phone calls, forms filled out multiple times, information misplaced, verification times, and the 3 -5 business days  to transfer money through the current banking system, it takes to conduct even simple tasks.

As technology continues to develop and the IoT (internet of things) is fast connecting just about everything to everything else, there is a  wave of change coming to the process driven aspect of real estate and in particular, property management - where a large portion of time is spent passing essential information from one point of contact to another in order to get things done.

How many property managers does it take to change a lightbulb?

Here’s another example which breaks down smart contract technology:

Tenant: The light is broken

PM: I’ll come check it out

PM: Yes, the light is broken. I’ll call the electrician

Electrician: The bulb needs replacing, it will cost $150.

PM: I’ll get the landlord to approve the invoice

PM: The work has been approved.

Electrician: The bulb has been fixed, here is the invoice.

Electrician: The invoice is overdue

PM: Sorry mate… I’ll get onto it.

Tenant: ...the light is broken again.

With LoT and smart contracts, this scenario would play out very differently:

Light: I’m broken, I need a new bulb.

Electrician: It will cost $150 to fix

Landlord: Approved, payment made, please fix.

Electrician: payment received, bulb changed

Light: I’m fixed.

Not only does the process not require input from any intermediaries, ie, the property manager, it also excludes the tenant from the process - they may receive notifications via an app so they are aware of the process, however simple transactions can be executed seamlessly.

German start-up have streamlined the sharing economy for transactions such as AirBnB, car sharing, and lending items. It’s not difficult to extrapolate this into commercial and residential real estate transactions.

Of course the danger is everything becomes dehumanised and we are at the mercy of intelligent machines and processes which don’t take into account personal situations or ‘in real life’ events.

Drawing on the example above, right now, very few lightbulbs are equipped to communicate with the electrician. So as both the technologies adapt to the way people work, and people adapt to how the technology might work - there is a transition period which allows both sides of the equation to adjust to the disruption.

These are always very real dangers when new technologies are being developed. Early adopters try to implement while the stalwarts resist. Incompatibilities and mistakes occur and there is often a period of disillusionment until a breakthrough company releases the technology that makes it so easy, it’s impossible for it not to succeed.

In the grand scheme of things, blockchain and smart contracts are only at the very beginning of the evolution of the technology which gives real estate businesses the opportunity to learn, and adapt to the inevitable changes that are on their way.

BDH Solutions have been buying and selling rent rolls for over 30 years. Keep up with our latest listings here.