Blockchain Could Streamline Ownership Verification, But Title Companies Aren’t Going Anywhere
Buying property can be a messy business. The chain of ownership for a piece of land or building can span decades or even hundreds of years, and over that time, all sorts of convoluted issues can arise, including clerical errors, forged documents, illegal deeds or missing heirs.
Title companies offer some protection from those problems, performing extensive research to ensure the smooth transfer of ownership. However, blockchain technology could replace some core functions by creating an indisputable ledger of ownership that proponents say cannot be tampered with, eliminating opportunities for accidental errors or fraud in documentation.
Industry experts say that as blockchain becomes more readily used in the buying and selling of property, title companies will be less necessary. But the sluggish pace of digitizing public records, coupled with the complexities of actually evaluating legal ownership of a property, could keep title companies functioning as-is for at least another decade.
“I think they'll have plenty to do for a long time. But if we're moving in this direction of being more digital, then over time, what they'll be doing will be smaller and smaller, just because more of it will be digitized,” Redfin Chief Economist Daryl Fairweather said.
In the U.S., there is no universal system for government certification of title. Property records are managed at the county level in recorder offices, and historically, the system has relied on parties manually recording every property transfer, mortgage and encumbrance.
Unsurprisingly, this system is susceptible to fraud and mismanagement, which is where title companies come in: performing research, pulling public records and generally doing legal due diligence to ensure that transfer of ownership can occur without a hitch.
Title companies also offer title insurance, which protects the buyer from any undiscovered ownership issues that arise later. It’s a lucrative income stream — the title insurance industry was valued at $16.6B in 2021, according to market research company IBISWorld.
Blockchain has the potential to streamline the documentation side of the ownership verification process. It functions as a decentralized digital database, where no single person or group has control. Once data enters the blockchain, it updates in real time, and historical data cannot be deleted or modified.
Advocates say that using blockchain for ownership verification is both faster and cheaper than using a title company. Fairweather noted that as it gains traction, blockchain could also bring title insurance premiums down because of falling transactional risk and higher trust in the recorded chain of ownership.
“It takes a title professional a very long time to do underwriting to validate ownership, and it's costly. If blockchain was able to validate that, then the cost will come down, the insurance will come down, there'd be fewer people working in the offices and more that would be automated,” Fairweather said.
But for all the potential positives, blockchain still hasn’t been adopted at scale to record real estate transactions. American Land Title Association General Counsel Steve Gottheim said that while the technology is getting better all the time, there haven’t been many practical examples yet in real estate where blockchain is improving efficiency and reducing costs.
Gottheim noted that successful use cases, such as Cook County, Illinois’ pilot program in 2017, are only looking at how to use the technology to record transactions from today — they are not addressing how to handle the backlog of historical records that need to be digitized and verified.
“If you're only starting to digitize stuff from today, you've already basically created a long headwind of time before that technology is really able to replace the current process,” Gottheim said.
Similarly, Fairweather said that because the digitization of historical records poses such a big hurdle, it makes more sense to focus on blockchain verification of transactions happening right now, rather than trying to digitize and convert older transactions on their own.
“It's really hard to go back in time and get everything that previously was done on paper on the blockchain. It might actually be impossible, but we could theoretically start today recording everything into the blockchain,” Fairweather said.
In practice, title companies are still needed to research and verify properties when they are initially placed on the blockchain, RedSwan CEO Ed Nwokedi said. He founded RedSwan as a platform for commercial real estate tokenization, where investors can purchase a fractional ownership stake of digitalized assets.
“Every deal that goes from being a wholly owned asset in analog form to an asset in a digital form, it does need a title company to provide that proof of ownership initially,” Nwokedi said.
When researching ownership, title companies have to look at a wide range of public records to check for conflicts, including deeds, court records, divorce filings, bankruptcies, taxes and wills. In many cases, there are unrecorded interests that only become evident during the title research process.
Gottheim said that ideally, digitization and blockchain technology will mature to the point where it will make it easier to merge all of those datasets into one stream for a title company to utilize, speeding up the assessment process and reducing knowledge gaps in the future.
“The more of those [that] can be connected, pulled together into one, the faster and easier [it] is to analyze the data that we're looking to analyze, to make those decisions about who owns the property,” Gottheim said.
The adoption of blockchain technology by counties could go a long way toward speeding the process up. Linking public records to a blockchain system should be a core step in allowing the technology to make any real sense in the U.S. real estate space, according to Gottheim.
Fairweather said that allowing each county to decide for itself whether to adopt blockchain technology is actually an advantage, because if it is successful, other counties will be inspired to follow suit.
“I think it would [be] harder, if you had to convince the whole nation to change at once. It would be better to go at it county by county,” Fairweather said.
The speedy adoption of blockchain for public property records is unlikely, but title companies should be thinking ahead and preparing for a digitalized future, when trillions of dollars of real estate are ultimately recorded and trading on the blockchain, according to Nwokedi.
As traditional processes get replaced, title companies could extend their services to other types of electronic verification. Nwokedi said he could also envision some title companies opening up databases of the properties they have already verified and charge access fees to the public.
“It's got to be the future for the title companies, because people just aren't walking into business doors anymore and asking for things. They're going online, and trying to use the services online to have faster access to data and faster solutions to their problems,” Nwokedi said.
The timeline for widespread adoption of blockchain for title purposes is hazy. Though the technology exists and is already being used, the slow-moving nature of the sector will likely push that adoption out for years.
“I would expect some progress in under a decade, but I don't think we'll be fully there for decades,” Fairweather said.
But some digitalization over the last 20 years has already helped the title industry to evolve, according to Gottheim.
“We've seen the evolution of the industry, from one that spent much more time researching and grabbing data, to one that is spending much more time focused on analyzing data. And that's really where I think the continued evolution will go with the title companies,” Gottheim said.
Title companies provide a level of customer service that ordinary blockchain transactions lack. But in light of other sectors embracing the speed and efficiency of the internet, just like retail and online shopping during the coronavirus pandemic, that paradigm is changing.
“The personal touch factor is good. But people have learned to live without it for the past almost two years, and I think that it is becoming less of a requirement,” Nwokedi said.