How Blockchain Could Change the Real Estate Industry
You've heard of cryptocurrencies – unless you've been living under a rock – but you're not sure how they work. Bitcoin, the world's largest cryptocurrency, is run on what's called distributed ledger technology, or blockchain.
And while economists are skeptical about the virtual currency industry, they're sure about one thing: blockchain is going to change the financial world.
A quick overview of blockchain requires you to envision a ledger of transactions. These transactions would normally reside on one ledger, but when using distributed ledger technology, copies of the ledger are on thousands of computers.
Encrypted, the transaction exists on thousands of computers, and anyone has the ability to download a blockchain and become part of the network.
What's even more interesting is that all of these computers "communicate" with each other to:
- Agree on transactions
- Agree on the order of the transaction
No central authority is present, and all of the users of the network must agree on the transaction details.
Now, imagine the magnitude of this technology for just one second. A normal ledger can be "doctored," and it's easy for a party to change the ledger in their favor. Fraud occurs routinely in ledgers, and it is easily overlooked because the creator of the ledger has full control over the document.
Blockchain will offer a form of validation across thousands of potential ledgers.
The risk is drastically reduced with blockchain, and in most cases, the risk is completely eliminated. Validation is required across every node in the network, and if one is amiss, it's a lot easier for a red flag to pop up.
What Blockchain Means in the Real Estate World
Real estate transactions require an intricate web of complex transactions to take place. The use of blockchain provides a series of checks and balances that would allow for validation and security that don't yet exist in the industry.
There are a lot of potential uses of blockchain, but one that I am most excited about is called smart contracts.
What are smart contracts?
When using blockchain, you're using technology to your advantage. What I didn't tell you is that blockchain can include a series of coding that only executes when triggered. For just one moment, I want you to imagine a deal that's structured as follows:
- You agree to purchase 4 acres of land
- You agree that one acre is transferred to you for each 25% of the property paid
Now, you're paying for the land in a loan over time. Well, you've paid your first 25% of the land's total value, and you're waiting for your one acre of land to be put in your name. This scenario takes a lot of time because the owner of the land is in the hospital.
And you're itching to have the land in your name so that you can build a home.
Perhaps the owner has decided to not transfer the land to you as agreed and is not holding up to their end of the agreement. A lengthy legal battle would normally ensue, and all the while, you're out your 25% of the land cost and have put all of your building plans on the back burner.
It's a scenario that happens all too often.
Smart contracts are such that the agreement would be built into the contract. So, as you pay, the coding would search for the 25% amount paid and may even initiate coding that would sign over one acre of land to you as per the contractual agreement.
Distributed across thousands of computers, all of them verify that you have met the contract's obligations, so the land is now in your name.
There are no lengthy legal battles, and there's also no time wasted in the process.
Smart contracts have the ability to virtually eliminate risk if someone is not meeting their end of the contract. There are thousands of records of the transaction, so even if the person is incapacitated, the contract's coding can be triggered in the blockchain.
The key benefits to blockchain's smart contracts are:
- Autonomous. The smart contract will self-execute without the need for any human involvement. This means that once the contract is fulfilled, the execution process will take care of the rest.
- Self-sufficiency. Once both parties agree to a contract and it exists on the blockchain, it's final. There's no way to alter the contract, and there's no ways to refute the contract either. It's a self-sufficient contract that can't involve third-parties once it has been published.
Of course, there are also many other benefits, such as reducing the risk of fraud.
Fraud Reduction is on Its Way
Did you know that real estate fraud costs buyers millions of dollars annually? Fake title ownership is on the rise, and title fraud costs around $1 billion for insurance companies to control.
Rental scams are leading major real estate fraud, too.
Non-owners will copy listings, lure in a potential renter, and then they'll ask for money upfront. Security deposits are common, so the fraudsters will ask for the money upfront, and the potential renter will unknowingly pay for the costs to someone who doesn’t even own the property.
Blockchain also has the ability to stop fraud in its tracks.
Everledger is a prime example of a company that is doing just that. Built on blockchain, the project is geared towards the diamond industry, but businesses of all types are using the technology.
What it does is track assets across the lifetime of their ownership.
For the rental property, for example, blockchain would allow land title information to be uploaded. Users could verify ownership through this documentation, and there's a means to determine the chain of ownership the entire time.
You can also prove that you're the first owner of the documents, and with verification in place, forgery would not be possible.
Experts agree that blockchain will do two main things to transform the real estate world:
- Cut title insurance costs
- Eliminate fraud-associated costs
And when blockchain is used to verify ownership, it's easier to cut out the middleman. This means a reduction in brokers, inspectors, title companies, government agencies and others that act as middlemen, which only increases the costs of a real estate transaction.
Real Estate Becomes a Liquid Asset
Real estate can be sold, but it's a lengthy process that involves lawyers and doesn't happen overnight in most cases. But when you add blockchain to a transaction, these illiquid assets become liquid assets.
Investment properties can be sold quickly with blockchain.
Investors will no longer have to wait for transactions to go through or go through the closing process. They don't need to sit down with lawyers and hash out details with ten different people. Blockchain removes all of these barriers so that investors have the ability to turn their real estate portfolio into a liquid asset.
Fractional ownership may also be a possibility.
Blockchain allows for fractional ownership, and what this means is that:
- Portions of real estate can be purchased and sold
- Investors can save money on owning just a portion of a property, lowering maintenance and other fees
Fractional ownership will become more common as blockchain technology advances in the real estate world.
Land Titles Become Easier to Track
Land titles are quickly transitioning to blockchain, and the blockchain will be able to record all of the land titles quickly. This has been a difficult aspect of land ownership because a majority of the documentation resides offline.
That is, the information is less accessible and harder to properly manage.
Blockchain will reduce:
- Title recording times
- Title transfer time
And almost 100% transparency will be offered. "Digital Street," a project in the United Kingdom, is already underway. The project plans to transfer all of the United Kingdom's land to the blockchain by 2022.
The same concept is currently being tested in numerous European countries, including Sweden.
Self-governance is Introduced
Real estate transactions will be able to be self-governed. That is, the accounting systems will be 100% automated. Yes, few do have automation already, but with blockchain, the industry will have a system that automatically balances and records transactions.
There's no fear of manipulation when blockchain is present – not yet at least.
Digital leases will also be a thing, and what this means is that money will be withdrawn automatically, and there will be no risk of human error occurring. It's the perfect means of administering a lease.
The rampant fraud and misconduct is removed from the equation.
But while real estate will change because of blockchain, the changes are tied to security, transparency and cost-effectiveness.
Putting all of this into practice requires innovation and projects to help leverage the strengths of blockchain. There's a lot of great technology that is already in place, but it's the blockchain projects that are still in their beginning stages that will really transform the way we look at real estate.
Real Estate Related Blockchain Projects
We're starting to see real estate-related blockchain projects come to life. There are some projects that aren't necessarily just for real estate, but they can definitely be used to advance the industry.
The most promising projects that have piqued our interest are:
SMARTRealty is poised to change the real estate industry, and the way this works is by offering smart contracts. The company will serve as a contract platform with a template system that creators can use to make their own contracts.
What's different and unique about this startup is that they realize that contracts need to be specific to the transaction.
When contracts are created on the platform, they're done so with the assurance that they'll:
- Comply with local codes
- Comply with local statutes
Buyers, sellers and even tenants will have the peace of mind in knowing that their contracts are based on a solid legal founding.
There will also be a listing platform created for property owners that will allow property to be listed for rent or sale. And the company plans to offer listings for everything, from short-term rentals to sales and purchases, too.
Harbor is a San Francisco based company, and it has received funding from some of the world's best investors and firms. Peter Thiel's Foundation along with Craft Ventures and Pantera Capital have all invested millions into the company.
What the company does is focus on hard-to-trade assets.
These assets can be anything, but they also include real estate, which isn't an easy asset to trade. What Harbor does is use blockchain to turn assets into a tokenized security.
These securities will also comply with SEC regulations, so they can legally be traded. Let's think of a real estate investment trust, or REIT. Harbor will check all of the asset's compliance, allow for a "regulated asset," and then if the asset is to be traded, Harbor will take care of the checks and balances.
Ubitquity is a company based in Delaware and offers a software-as-a-service blockchain platform. What the platform does is actually one of the points that we already covered. The company will keep records and track property.
Ubitquity works with municipalities, title companies and recording companies to record ownership of real estate.
The company works with legacy programs and platforms that record property transactions. Users can upload and record documents on the platform, and then they can perform title searches and verifications.
The company is piloting its platform at the moment, and they just released version 1.0 of their platform and API.
Blocksquare is another company that is focusing on real estate tokenization, and the plug and play system is set to be used with commercial real estate. The company is geared towards small investors, and they're based out of Europe.
Fractional ownership will be possible thanks to Blocksquare, so anyone with an Internet connection will be able to invest in commercial real estate using tokenized assets.
A proof-of-title protocol will be in place, which will utilize blockchain for the use of smart contracts. PropToken, the so-called smart contracts that the startup is using, will bring security to traders. Rules and regulations will be put in place for each property, and these very tokens will be able to be stored in ERC20-compatible wallets.
Propy is a property listing platform, and the platform secures all transactions through blockchain. Property can be purchased or sold entirely online, and the company raised $15 million through their own token sale last year.
The company was originally designed to accept just cryptocurrency payments, but fiat currency is also being accepted.
Propy will use blockchain for all of a property's record keeping, so the risks in purchasing a property are very limited. Dishonest contracts will also be eliminated since the final contract, accepted into the blockchain, must be approved by all parties.
Utilizing a decentralized title registry, the company calls itself an asset transfer platform, and the platform makes extensive use of smart contracts to validate property sales. Propy Registry will also keep records and history of all real estate transactions, offering a clear chain-of-ownership for a given property.
Blockchain has a lot of potential to change the real estate industry, and as the industry starts to create new platforms and services, we'll see the old way of handling real estate transactions fade away. It's only a matter of time before blockchain will be a part of most real estate transactions.
It's the safer, more secure way to buy and sell real estate.