This past Sunday I was over at my father’s place for dinner and we were talking about the high transaction costs associated with buying and selling homes. That is, we weren’t talking about the high price of homes in Toronto, we were only talking about transaction costs and barriers to market liquidity.

For example, let’s say for the sake of simplicity that you own a home that’s worth $1 million and you’d like to sell it and buy a different home that also happens to be worth $1 million. In this case, you’d be making an entirely lateral move. You’re not down sizing or up sizing, you just want a different home–perhaps because you’d prefer a different neighborhood.

In order to do this, you’re going to be faced with a number of costs. But the 2 most significant are real estate commissions and Land Transfer Taxes (both provincial and municipal). You only pay Land Transfer Taxes in Toronto when you buy (take title) of a new property, but they’re unavoidable, unless you’re a first time buyer, in which case you’d qualify for a bit of a rebate.

Real estate commissions are technically optional, but 70-90% of the market in North America still uses a a real estate agent to sell their home (based on the estimates I’ve found). Typically a seller pays around 5% of the sale price. So in this example, you the homeowner would be paying around $50,000 in real estate commissions.

Land Transfer Taxes would be roughly $32,000, and so you’re looking at a total somewhere around $82,000 in order to make this lateral move. This, of course, does not include legal fees or any other moving costs you might incur. It’s a hell of a lot of money and it’s a significant barrier to transacting.

But my hunch is that we’ll eventually see real estate commissions come down. No real estate agent wants to hear this, but I think it’s almost inevitable. The internet, as a disruptive force, is bound to make it happen.

There’s been a lot of talk about Bitcoin over the past year, particularly as of late when the value of one bitcoin peaked at over USD $1,200.

Truthfully, it’s only been over the past few months that I’ve really started to wrap my head around how Bitcoin works and what the implications of it might be. But the more I learn about it, the more it strikes me as something enormous in the making.

If you’re not yet familiar with Bitcoin, you can check out this video (simple version) or this video (complicated geek version).

Essentially though, it’s a decentralized and open source digital currency that’s managed using networked computers, as opposed to any one government. And functionally, it works as a distributed public ledger that logs every single bitcoin transaction. What this means is that when you buy or sell something using bitcoin, no exchange of bitcoin actually takes place. Instead, the distributed public ledger (called a block chain) gets updated to show who owns which coins both today and previously. 

This is potentially a big deal for 2 reasons.

The first is that many people view Bitcoin as the first internet native currency. The decentralized architecture of Bitcoin matches the decentralized architecture of the internet. And so it has the possibility of becoming the transactional protocol for the internet and global commerce.

The second reason (and this is where your mind will really get blown) is that transactions can be logged in the block chain/ledger with additional information embedded into each bitcoin. What this means is that you can use Bitcoin to create contracts, such as deposits, escrows, loans and so on. And since Bitcoin is designed to function in low trust environments (ie. where nobody knows each other), there’s an opportunity to really optimize the way we buy and sell almost anything.

In fact, if you dig deeper into what’s being contemplated with Bitcoin, you’ll find things like “smart property.”

"Smart property is property whose ownership is controlled via the Bitcoin block chain, using contracts. Examples could include physical property such as cars, phones or houses."

Of course, it’s still early days for Bitcoin. But if it truly does become the transactional protocol for the internet, then I certainly do think we’ll see dramatic changes in the way we buy things like cars and real estate.