Buyer and Seller Pain Points in the Residential Real Estate Transaction. Can Technology Curb the Suffering?
With all the new technology, and talk of even newer technology, in the residential real estate transaction, it’s even more important to keep the consumer in mind. Change should not be implemented just to try out something that sounds innovative or to protect a party’s turf, but should address the real problems in the everyday transaction.
I’ve compiled a list of my residential real estate pain points from my experience as a real estate attorney and title underwriter and added some comments on the promise of new, and even newer technology.
- Setting the price for the seller and budget for the buyer. With all the available listing websites, buyers and sellers can become confused about pricing and budgeting unsure how to compare their home or dream home to the listings. They may feel empowered with the information, but not fully understand the local market or how to find true comparables. In this case, technology can be more the problem than solution, and sometimes it’s better to rely on the experts, or use both. Study the websites, then consult your realtor professional.
- Lately, for buyers, the problem has been lack of inventory. They may have the money, but little from which to choose, or they’ve been priced out of the market in some desirable areas. Are new homes too luxurious for the true market? Are new developments too complex and difficult to get local building department approval? Has construction become too risky? Seeing hard money lenders taking over the construction lending market makes me wonder. Technology to improve this problem? Pre-fab homes? That’s old, but how about 3d printed materials? Digital payments to contractors with automatic lien waiver? Uploaded plans, materials lists, etc.?
- Choosing a broker. There are a lot of brokers out there. Some are great because they know their local market well. Others are great because they put in the research, and know how to find properties that might get lost in the crowd for a buyer trying to search online. There are, unfortunately, also some brokers who care only about closing and making the commission. It’s embarrassing as real estate is my industry, but I encountered one such broker when I was in the market for my current home not that long ago. I got out of a deal quickly when I discovered that my buyer’s broker appeared to be working with the seller’s broker to hide a significant problem with the plumbing that the association was refusing to fix. Technology brings us more information and reviews of various real estate professionals, but it doesn’t eliminate the need for the parties to do their homework and scrutinize the people and the properties.
- Surviving and Winning the bidding war. For sellers, the stress of a bidding war is in the fear of making the wrong decision. Which potential buyer has the promised funds and financing? Which potential buyer is going to pick at every defect in the home? For buyers, the stress is in making just the right offer somewhere in between not being outbid or insulting the seller and not overpaying. The bidding war is more of an art than a science as it involves human psychology as much as economics. Technology available? Online auctions? Cost/benefit analysis programs?
- Negotiating the contract. This can be excruciating beyond the purchase price, and as an attorney, I’ve seen far less controversy over purchase price than the particulars of timing, possession, and repairs. Some brokers will argue the attorneys are the problem — giving their clients too many recommendations for changing the contract, and some attorneys argue the opposite — that brokers don’t understand that some of the basic contract terms don’t fit the situation. International clients have told me that the parties are the problem, demanding too much from each other in the guise of fairness or getting a good deal. Maybe we’ve over-complicated negotiations by expecting too much from each other and the property, but I doubt anything, including technology can change that. Contract standardization has helped the parties limit expectations to what’s on the form, but that really means they’ve given up specific, personalized legal representation for their transaction. That sound bad, but has its benefits as it brings down costs for things that might not be all that important in the first place. Priorities should be set. Do you really have to go nine rounds with your contracting counterpart over every needed repair?
- The mortgage contingency. Both buyers and sellers delve into the unknown when the contract calls for financing. Will the buyer be approved? Will the home appraise high enough to match the purchase price and loan amount? Will the timing change? Technology has helped with this problem allowing buyers to get approved more quickly, but it’s not cheap. According to Consumer Reports, buyers using quick approval websites are trading cost of the loan for speed, and quick approvals might not be available for buyers with less than stellar credit scores. Further, online quick approval lenders may have made the process too easy, like buying that Instant Pot from Amazon or shoes from DSW warehouse. The speed and ease may lull some buyers into signing on without shopping loan costs.
- Title and Escrow Closing Fees Part 1. Title and escrow fees have become expensive in the US. Obtaining title and closing the transaction can cost thousands of dollars, so the idea of who pays, the buyer or seller has become more important. In most US markets, the buyer pays because arguably the buyer and the buyer’s lender obtain the most benefits from title and closing. I worked in a market where the seller pays, giving the seller the right to choose the insurer, and causing a lot of controversy in the market — even turf wars among the title underwriters, realtors, and the attorney title agents. Title is still pretty cheap in Canada, often under $500 for homes under $1M, but why can they do it cheaper in Canada? For starters, title insurance is relatively new in Canadian where the provinces maintain government operated land registries, offices where deeds and other land transfers are registered, searchable only by licensed professionals. Title companies and title attorneys work from the government records, and not private title plants. Blockchain could provide something of a solution for Americans. Blockchain is a different way to close transactions, trade the money for title, and verify and store the data. Blockchain’s use for the closing is undeniable as it provides its own currency and currency transfers, but this new technology can arguably replace current real estate document recording procedures and create a digital, if not completely tangible “title” for each property that need not be re-examined for every sale or mortgage transaction. Unknown at this point is how blockchain will operate with title interests other than ownership and mortgage interests such as easements, leases, judgment liens, or how blockchain will handle transfers by operation of law such as after the death of the record owner when the heirs own the land. Also unknown is how blockchain technology can be used to implement the terms of a buy/sell contract or escrow agreement. Smart contracts are simple, self-executing digital contracts, but do not handle complex or long term transactions well. At their best, smart contracts are immutable, which means they may be too inflexible to fix the typical problems and mistakes that occur in many real estate transactions.
- Title and Escrow Closing Fees Part 2. As I mentioned above, in my local Chicago area market, increased title and escrow closing costs have been attributed to a turf war among the large national title underwriters, realtor-owned title companies, and title attorney agents. The state regulator has alleged that increased title and escrow costs are attributable to lower attorneys’ fees. In other markets, attorneys have been driven out of real estate transactions leaving realtors and title companies to negotiate and prepare legal documents. It remains to be sorted what services and representation are beneficial to buyers and sellers, but in the mean time, consumers are paying, either in increased professional fees or the cost of being under -represented or unrepresented. Blockchain technology and smart contracts streamline the process by simplifying, standardizing and digitizing closing documents, but it remains to be seen how simplifying what has traditionally been a rather complex transaction will shake out in terms of real life liability and loss. I have my ideas on how to improve the process, including something I’ve written about before, the creation of a land-fax similar to a Carfax for each property. If everything about a property is electronically available to consumers, from title information to taxation to building violations and repairs and construction or remodeling plans, materials, costs and lien waivers, maybe the parties can eliminate common closing complications early on, and enter into a self-executing, immutable blockchain smart contract for the ultimate title verification and closing.
- Unexpected title problems at closing. It happens all the time: a survey comes in with an unexpected easement or encroachment, a lien on the title commitment was ignored and no payoff letter was obtained, a party completes a possible judgment affidavit and a direct hit judgment lien is found in a long name search, available funds are inadequate to pay off all liens, or the seller died two years ago, but no one told the title company. Early preparation can help, but is not always possible. Surveys come in late because parties don’t want to order them until the closing is confirmed. Sometimes title has been done on the fly as well. Perhaps technology can speed up title exam and survey preparation. There are some products out there that transfer title data into a commitment faster, but maybe not better. However, until someone knowledgeable looks at the title commitment, the information lies dormant until the closing when the rubber meets the road on lender requirements and title exception waivers.
- Theft of Proceeds. It’s been an ongoing problem for a few years now, emails of closing information and funds transfer instructions are intercepted by hackers, spoofed with new information and funds disappear. One technology to curb the problem already exists, secure portals for electronic communication instead of email. Many title companies, escrow companies and lenders have them. The problem is that no one buys into the other parties’ portal, so multiple portals go under-used or unused and the parties go back to using their insecure email. Blockchain and smart contracts offer a solution with funds transfers secured through consensus among decentralized nodes. Consensus among multiple computer nodes is required to confirm a funds transfer, and each node is invested in its decision through costly “proof of work” requirements. Proof of work costs each node in bitcoins or ether to spin through various mathematical puzzles, and the payoff only comes after the transaction is verified, so each node is supposed to have an incentive to pick the correct transaction that the majority of nodes will agree upon, and ignore bad, unpopular transactions. In an oversimplified nutshell, potential issues with blockchain proof of work and decentralized security include too small a number of individual nodes working on each transaction, and too large power requirements to run the complex puzzles for proof of work.
Technology is available to alleviate many of the real estate buying and selling pain points, but it’s not going to be perfect, and we’re no where near the real estate transfer vending machine some of us joked about in the 1990s. Realtors, attorneys, and title and escrow professionals still have to pay attention to their customers and transactions. We might even consider Canada’s more governmental approach.** However, regardless of what technologies are developed and implemented, and which technologies win the market, to implement technology for the greater benefit of everyone involved, the stakeholders, professionals and consumers, have to start communicating. Developers have to understand the real estate pain points and develop products to alleviate them without creating new problems. Title companies should work with developers in this task and not simply favor or fund development that does little more than hold their turf. The 2008 to the present proliferation of under-used lender and title company secure portals is a lesson to the various implementations of blockchain and other new real estate technology. If no one else buys into your product, it’s not going to work for professionals or consumers.
**Does blockchain technology make Torrens title registration look better than ever before? Cook County, IL scrapped Torrens in the 1990s as it was deemed corrupt and too slow for modern transactions. Can government ever be improved rather than scrapped?