The Decade’s Digital Dystopia In Real Estate. What Is Next?

Changes that result from technological breakthroughs are not always positive. A couple of months ago, reading the article “Digital dystopia: how algorithms punish the poor,” which outlines technology’s ability to negatively impact the most vulnerable, made me reflect on the impact of technological innovations on the real estate industry.

With new accomplishments, there is often a wave of new problems that follow. Evolution gave humans morality as a default setting, but some individuals may display traits like greed and unethical behavior and engage in unique and creative fraud activities. When it comes to real estate, the risk of digital misbehavior becomes very real. For example, someone can steal your current property ownership; or, when you buy a house, your down payment can disappear. Everyone thinks that it will never happen to them until it does.

The Bright Side Of Tech Progress

Innovation involves new ideas or creative thoughts, and the ultimate goal is an improvement. When entrepreneurs take steps of more considerable uncertainty, out-of-the-box thinking, and experimentation, the world gets introduced to outstanding products.

According to an article featuring an interview with tech investor Ramy Adeeb, real estate was previously largely ignored by entrepreneurs and investors, as it was one of the “more antiquated” and “unsexy” industries. However, Adeeb states that companies using technology to improve real estate might be part of the “third wave” of exits. Even though the innovation in real estate has been historically slow, certain changes have happened to the industry in the last decade.

For example, Gary Gold (Hilton & Hyland’s Executive Vice President, who participated in many interesting transactions, including the nation’s most expensive mansion), remarked that the real estate transaction process involved 3-4 pages just a decade ago; now, the transaction involves 3-4 inches of paperwork, most of which homebuyers do not even read. Gary Gold believes that the most significant breakthrough of the decade for real estate was DocuSign, as the e-signature solution allowed transaction parties to execute enormous amounts of paperwork more quickly. E-signature solutions like DocuSign are supported by the NAR (National Association of REALTORS), and these products have been adopted by industry participants (including brokers and agents) for electronic purchase agreements.

Digital signature technology has freed homebuyers from wasting precious time, paper, and energy on the completion of transaction documents. The U.S. is fortunate in this sense, as other countries such as Japan and Dubai still have not adopted e-signatures for completing real estate transactions.

Other Internet innovations have brought apparent advantages to the real estate industry. Platforms that allow people to browse for properties online, such as MLSs, Zillow in the U.S., Zoopla in the U.K., and SeLoger in France, have introduced more transparency to the local marketplace.

Has Digitalization Brought Increased Liquidity Or Housing Affordability To The Homebuyer?

A while ago, I discussed the potential market recession with Gino Blefari, who is the CEO of HomeServices of America and the Chairman of Berkshire Hathaway HomeServices. During the discussion, Gino asked me, “Do you know how many homes were sold in 1998? It’s almost the same number as today, even though we added 20 million more homes in the last decade.” Thus, the volume of annual sales has been steady (at around 5 million homes), with a moderate increase due to population increase. Digitalization and innovation have not brought significant changes to the liquidity of the real estate asset class. The affordability of real estate has not increased, either. Currently, about 10% of a property’s price is still spent on transaction fees and the preparation of the home for sale (excluding renovation costs).

While digitalization has not positively affected the liquidity of real estate, it has offered hackers the ability to steal property ownership and payments more easily. For hackers, the $280 trillion real estate market has a lot of opportunities. The transparency of listings on MLSs and platforms like Zillow allows hackers to find the information that they need to target unsuspecting victims. The digitalization of transaction documents (including the utilization of e-signatures, Google Drive, and emails) has led to the opportunity for hacks and fraud, with millions of dollars lost.

Real Estate Scams, Fraud, And Bribery

Cyberfraud is, perhaps, the biggest issue in the modern digital world. According to the FBI's Internet Crime Complaint Center, cybercrime is a billion-dollar problem that heavily impacts the real estate marketplace. Email wire fraud cost companies and homebuyers $26 billion since 2016. Additionally, this is just the tip of the iceberg, as the FBI estimates that only 12-15% of all wire fraud cases are reported.  A 1,100% increase in real estate scams from 2015 to 2017 shows us the extent of the vulnerability of real estate professionals and homebuyers.

A typical wire fraud scheme involves a hacker who gets ahold of a property’s agent email information from MLSs or Zillow. The bad actor monitors the progress of the transaction from the email communication or by browsing for public links of transaction data on Google Drive, Dropbox, and the like to get other details. Many people suspect that there are internal people in the industry feeding the data to hackers. On the day of the sale, the con artist mimics the closing agent or title company and uses a fake email address to send an email with wrong payment instructions. Sometimes, the hackers send the instructions to agents, and agents send these instructions to their customers. The money gets wired somewhere else. 

Another case is title fraud, which is not covered by title insurance in 99% of the cases. Real estate is becoming a digital asset where proof of ownership is evidenced in the form of a database record instead of a physical document or a physical occupancy of a dwelling. Thus, the current framework provides an opportunity for hackers to get access to property ownership digitally. Some cases even involve the illegal transfer of ownership on a title registry level. In the U.S., if a hacker aims for a change of property ownership for an individual who is deceased and does not have heirs, then the change will typically be unnoticed. In developing countries, one can bribe an IT specialist and obtain full access to property registries. From there, property ownership can be transferred. For example, the Bulgarian registry stopped working in 2019; as per the official sources, some data was presumably altered, and there were no backups. Unfortunately, cases like the ones mentioned are hard to detect and fight in court. Although some individuals manage to obtain justice, the majority of these cases, especially those involving deceased individuals, are often left undetected.

Furthermore, attacks on the U.S. counties’ operation systems, which store sensitive data, are becoming a new norm. The recent Baltimore ransomware attack is just one example that highlights imperfections in the modern digital framework. 

In 2019, I asked a number of tech-driven brokerages in the U.S. on whether they feel worried about cyberattacks. Unsurprisingly, the majority of them responded, “Yes.”

Privacy Issue In Real Estate

The abuse of consumer data by corporations is nothing new. In real estate, both realtors and consumers complain about the issue. Some real estate agents criticize data ownership by companies like Zillow. There are homeowners whose information is publicly traded on sites such as infoUSA.

It is frightening that anyone in the U.S. can find information such as your name, your phone number, and your email address by merely looking up your home address on some websites. While such search algorithms can be useful for realtors for lead generation, publicly exposing private information is a privacy violation.

Hopefully, with the California Consumer Privacy Act, consumers will have more control over their data. If so, the market dynamics will change. In one of my previous articles, I shared some thoughts on how data can be controlled and how data verification and storage can become additional income sources for real estate professionals in the future.

What’s Next?

Due to the risk of fraud, the NAR strongly recommends that its 1.4 million members choose very secure technological solutions and avoid using emails for closing transactions. In fact, the organization’s website directs readers to “never trust wiring instructions sent via email.”

The situation with cyber risk might improve. An increasing number of market participants, including the U.S. NAR, are starting to understand that new protocols are needed to address the digital dystopia that the current real estate industry faces. NAR’s CEO Bob Goldberg stated, ”NAR has a strong commitment to furthering technology that ensures the security of the real estate transaction, protecting all parties.”

Technological advancements such as blockchain and decentralized governance, AI-powered tools, object and voice recognition tech, VR, and AR will give rise to the next generation of changes in real estate. 

New decentralized methods of managing the Internet, online communities, and transactions will evolve. In the context of property ownership frameworks, distributed ledgers are proving their efficiency, as they are immutable records that are recognized in the courts of many U.S. states. Immutability is achieved with the decentralized nature of blockchain. According to Kuba Jewgieniew, the CEO of tech-driven brokerage Realty One Group, “Blockchain will provide a more streamlined and secure process to our industry, especially with title and settlement services.”

Despite all of the skepticism revolving around blockchain, no one can overlook the real use and real application of this technology in the real estate field. If you follow tech topics, a decentralized Internet was the topic of the last two seasons of HBO’s Silicon Valley. Additionally, decentralized governance is part of Mark Zuckerberg’s long-term focuses for 2020 and the following decade. During my conversation with proptech-focused venture capitalist Arnie Sriskandarajah at Round Hill Ventures based in the U.K., Sriskandarajah said, “Blockchain is still nascent, but we see the potential that it has on the industry, especially on how real estate is traded. It can advance leasing and sales transactions.”

Many real estate market participants believe that blockchain tech is one solution that can help the industry fill the cyber trust gap. The key to building something “trustable” is to use blockchain as a part of the algorithms and programming languages.

In addition to immutable records and automation using blockchain-based smart contracts, AI can add a level of automation to transactions. For example, machine learning can help with quickly finding errors in non-compliant documents in one transaction. Image recognition is used by some startups to evaluate homes’ prices. AI can determine what is inside a house, and algorithms can analyze property prices instantly; in fact, the tech-driven brokerage Compass is working on AI tools. Kuba Jewgieniew admits, “AI is a must-have.”

Whether these new advancements in emerging technology will bring new cyber problems to the real estate industry is questionable. On the positive side, as per Gino Blefari, “We are getting to a point where property buying will not be as stressful for homebuyers.” Ultimately, a home purchase is one of the most important transactions in an individual’s life, and there are plenty of tech-driven innovators that are eager to deliver a better consumer experience.