Blockchain-Based Smart Contracts Can Cut Escrow Costs, Prevent Mortgage Fraud

When talking about crypto’s use in real estate, most people think about buying and selling property with bitcoins or tokenizing and fractionalizing property titles via digital assets or NFTs. But there’s another big part of the business where it fits a need: Escrow accounts in the home buying process.

It is, after all, one of core functions of the smart contracts pioneered by Ethereum. Two people agree on a sale of some kind, the buyer locks ether into a smart contract that pays off automatically when certain conditions are met. They can also be set to return the funds if the conditions are not met in a set period.

Which is what homebuyers pay on average 1% to 2% of the purchase price of the home. So buying a $250,000 home could cost $2,500 to $5,000 for a middleman who basically holds onto the buyer’s down payment until the terms of the sale are met.

Crypto’s main use in finance is disintermediation of financial middlemen, so escrow — and not just for real estate — is an important enough use case that the Blockchain Council lists “replacing escrow” as one of the 10 best use cases of smart contracts.

That is, along with speed, security, and transactional integrity of the contract terms, one of the top benefits of a blockchain-based solution in the title and settlement industry according to Nasdaq-listed Altisource, a real estate and mortgage industry services provider.

“Since blockchain records are immutable and secure, they can be trusted, the company said in a blog post. “There is no longer a need to use transactional intermediaries such as bankers, brokers, and title agents.”

A growing number of crypto firms are offering title and escrow services — which do go beyond holding money to things like collecting all closing documents.

A smart contract that held a payment of 212.5 ETH — then worth $60,000 — was used in the first reported purchase of a home entirely online. That was by TechCrunch publisher Michael Arrington, who used Propy — in which he was an investor — to buy the apartment in Ukraine in 2017, The Wall Street Journal reported.

Why Go Smart?

Smart contracts have a number of advantages, notably that they cannot be changed or cancelled once set, and transactions — although not the details or identities — are publicly recorded on a blockchain like Ethereum.

That makes them “trustless” — meaning parties don’t need a trusted third party like a bank or escrow service. At least for the money handling part, although there are other legal requirements in the process.

Smart contracts also generally pass the good funds requirement that funds are immediately available to the title company on deposit. Because those rules allow a waiting period, smart contracts fit the bill because they are immutable so the buyer cannot take the funds back or prevent the seller from taking possession.

Mortgage Fraud

One of the biggest benefits of smart contract-based escrow is in helping fight mortgage fraud. It’s a big problem: The U.S. Sentencing Commission said there were more than 52,000 reports of mortgage fraud in 2021, with the median loss more than $370,000.

The scams are often simply phishing — albeit very good phishing — for wire transfers. That’s what happened to veterinary technician Carly Andreatos, who wired almost $23,000 for a down payment and closing costs to an address specified in an email she believed was from her attorney’s paralegal, Money reported in July. It was a scam that cost Andreatos her life savings.

In a blockchain-based purchase, the funds would have been locked into the smart contract at the beginning of the sale process.

Which does lead to one important caveat about smart contracts — mistakes are unfixable. Having a professional experienced in the technology is key.