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By Zev Friedus, President, ZFC Real Estate
Imagine this nightmare: You’re sleeping peacefully at home on a Saturday morning. You’re awakened by the obnoxious beep of a moving truck backing into your driveway. You see a man peering through the window, shouting, “Hi, it’s Bryan – I’m the one who bought this house. We spoke on the phone about moving in today. Sorry we’re a few minutes early!”
You pinch yourself because 1) you’ve never heard of Bryan and, more importantly, 2) you never sold your house. Imagine a similar nightmare: You’re sitting on the porch of the paid-off home you’ve lived in for 30 years when a stranger stops by and hands you a paper. You’re shocked to discover you’ve been served a foreclosure notice.
You learn someone you’ve never met defaulted on a $100,000 mortgage taken out on your property. Not only are these horrific scenarios entirely within the realm of possibility, but they are becoming more common as criminals become savvier.
The culprit: title fraud
Title fraud is when a criminal defrauds you of your property by falsifying public records. When you purchase a property, you receive “title” – meaning you become the legal owner of that property. Property titles – along with the details of sales – are recorded in public records.
The idea of selling a house fraudulently may feel far-fetched; after all, in a typical home sale, a buyer would want to tour a property first. But in the world of real estate investing, where it is the norm for investors to purchase sight-unseen distressed homes at deep discounts, or unoccupied homes (like vacation homes), the potential for title fraud is very real.
With so much information publicly available online, fraudsters are finding it easier to create legitimate-looking documentation to commit crimes – like cashing out home equity lines or even selling your property from underneath you. Years ago, one would need to take a physical trip down to the county courthouse and go through file cabinets to find the necessary information. Today, a criminal could be in pajamas on the other side of the world and go through a property appraiser’s website to view recorded deeds, piecing together the information needed to commit a previously-unthinkable heist.
With the exponential growth of online fraud and identity theft, it’s no stretch to envision the potential for widespread real estate disaster.
The big question: Doesn’t title insurance cover title fraud?
No. Title insurance was designed to protect rightful ownership only up to the date of a sales transaction. Manual searches first piece together the history of a property – including liens and satisfactions – to ensure a clean title. The title insurance company assumes the risk if they missed something during that search – which is highly unlikely given the relative simplicity of searching for property liens. Title insurance companies rarely ever pay a claim – and provide no protection against future fraud.
In reality, title insurance is a ludicrous money grab with a huge margin. Property owners pay thousands for a title insurance policy, and a whopping 50% of that money goes directly into the title agent’s pocket. In the unfortunate event you fall prey to a nightmare similar to those outlined above, it’s possible that you will find recourse through the courts – and the bank will get stuck holding the bag. But it’s also probable that such recourse could take months, or years, if at all.
The blockchain solution
The current title insurance process is obsolete and should be replaced by blockchain technology – specifically, non-fungible token (NFT) technology. NFTs, which moved past the proof-of-concept stage in the world of GIFs, digitally record the transfer of ownership for unique items with a level of encryption so high it would take millions of years to crack. Used practically in real estate transactions, NFTs would be a secure system, providing the authenticity and safety buyers and banks need while making real estate fraud far less tempting for criminals.
The blockchain would instantly show the history of a property, eliminating the need to play detective while piecing together (possibly erroneous) information. Searches could be completed in minutes instead of days, reducing the cost of title insurance by at least 90%.
Just like with any new system, enough people would need to use the technology to make it practical and valuable. To get the ball rolling in making blockchain technology viable for the real estate industry, it would need to be adopted by a large entity; a reasonable place to start would be within government – perhaps at the county level. Governments certainly have a vested interest in protecting the property of the people – and the banks.
A county could set a date when property transactions would start being recorded on the blockchain. Title insurance would only exist up to that date. As the years go by, title insurance would gradually phase out, and blockchain would cover all real estate in that particular county.
Of course, this would require an upfront investment by governments, but it would remove a great deal of manual labor and save money in the long run. And we recognize that adopting blockchain technology would represent a major shift that could threaten the title insurance business as a whole. But it would put some criminals out of business, too. And that’s worth every penny.
About the author:
Zev Freidus began his real estate career in Boca Raton, Florida over 20 years ago. Long before the mass migration from the northeast, in the mid 90’s Zev had the vision to begin investing in residential properties in Boca. In 2005 Zev founded Boca Executive Realty with the mission of combining innovative technology with superior agents to become Florida’s most respected and trusted residential real estate brokerage. Over the coming 10 years he led the company through a period of hyper growth, which culminated in 2014 by selling a controlling interest in the company to a private equity group and rebranding as BEX Realty. In 2021 Zev launched ZFC as a full service boutique residential and commercial brokerage.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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