Proptech has digitized many processes for property management companies, but blockchain technology and smart contract leases are driving a revolutionary shift.
Imagine a future where residential leases are fully digitized and self-enforcing. And instead of writing, executing, and notarizing them on paper, we create them with computer coding language. The technology for this future is already here.
Although the vision of fully automated smart contract leases may still seem far off, the field is progressing daily. Traditional leasing agreements have always been time-consuming and frustrating for property managers and tenants. So a more efficient digitized approach is becoming increasingly attractive. Let’s examine the benefits, hurdles, and outlook of automated smart leases!
Blockchain-based smart contracts can increase efficiency, security, and transparency in residential leases. And improving on these three factors can streamline processes while fostering trust between landlords, managers, and tenants. Let’s dive deeper.
Contract automation will create the greatest benefits to landlords, managers, and tenants. With smart contract leases, tenants can make payments directly to the smart contract which autonomously allocates and disburses funds. Landlords can even allow predetermined payment splits between roommates while simultaneously confirming that tenants have occupancy rights.
And smart contracts could one day automatically enforce the terms of the lease and ensure that the property owner and tenant are held accountable for their respective obligations. Each automated lease term creates new opportunities to find efficiency and rebuild a process.
Smart Contracts written on a blockchain add a layer of transparency and security. Because blockchain technology is a distributed and immutable ledger- you can’t tamper with a contract once it’s executed published. And as blockchain becomes more integrated with technology stacks, the utility will multiply.
Transparency garners trust and builds relationships. If each party in a lease knows that the terms are immutable and automatically enforceable, it should minimize disputes. This in turn builds greater trust and transparency in processes, while delivering better outcomes for all parties.
While all these benefits seem to make smart contracts an obvious choice, we still must acknowledge the adoption hurdles. The onus is on operators to understand these barriers.
Smart contracts, as a nascent technology, are currently governed by legal frameworks that are either archaic, in development, or non-existent. Few states have any legislation in place that address the use or validity of smart contracts. So until governments start establishing these frameworks, smart contracts can actually create uncertainty for property owners and tenants.
Smart contracts are based on complex technology that requires a certain level of technical expertise to create and manage. The scarcity of skilled labor in a nascent technology naturally creates adoption barriers for its less technically savvy users. But this represents a massive opportunity for software engineers and lawyers with specialized expertise in blockchain and smart contracts.
To fully leverage automation, smart contracts must be integrated with existing property management systems and infrastructure. This integration process can be intricate and time-consuming that involves specialized development.
Further complicating matters, many proptech startups target institutional customers from day 1. But for institutional operators to consider blockchain as a legitimate solution, they need advancements in permissioned blockchains and the ability to create interoperability between technology stacks to grow. The infrastructure just isn’t there yet.
The security and transparency of blockchain also presents one of its greatest weaknesses. Most smart contracts are stored on a public ledger blockchain, making all transactions visible to anyone. While the information can’t be tampered with, it creates privacy issues. Nobody wants their personal and financial information visible on a blockchain.
In order to program and execute smart contract terms, the terms must be quantifiable and clear. So subjective language within lease terms must be defined objectively before autonomous smart contracts can run successfully. Terms such as “good faith”, “reasonable efforts”, or “normal wear and tear” are commonplace in legal documents, but they lack clear and specific definitions. Once objective terms are definable and executable by code, confidence in the technology will catalyze its growth.
Only a few examples of successful implementation of smart contract leases exist since the use of smart contracts is still in its infancy. (You can explore blockchain-based proptech companies in the directory here.) And most of these solutions are being developed within closed ecosystems- not as open-source projects. But time and development will quickly close the gap between the realization of a fully automated lease and our current iteration.
Regardless of the obstacles to overcome, the potential benefits of smart contract lease automation make this technology an exciting area for continued exploration. As the field of Proptech continues to evolve, I encourage real estate professionals to stay informed about the latest developments.
With continued innovation and collaboration, the future of blockchain property management looks bright. The conversation on smart contract lease implementation is just beginning, and I look forward to seeing the exciting developments to come.
Joshua DeDecker is a professional in the field of real estate operations and property management. His passion for Proptech emerged during his tenure as a SFR REIT and BTR operator. Josh is Co-Founder and CEO of Dig-a Hash who is dedicated to popularizing the use of blockchain in real estate operations. Want to learn more about blockchain property management and the solutions being built? Let’s connect!
