Blockchain is an innovative technology that’s positioned to change a number of different industries, including real estate. Blockchain is a digitized ledger that decentralizes access and increases trust by being a single unalterable source of truth for information. Often mislabelled as a cryptocurrency such as bitcoin, blockchain has the ability to upend the real estate industry in a number of critical ways.
Here’s an overview of blockchain in real estate, the use cases when buying, selling, and financing real estate property, and whether investors should explore real estate tokenization.
What is blockchain in real estate?
Blockchain is often confused with cryptocurrencies like bitcoin. Simply put, bitcoin is a cryptocurrency that utilizes blockchain as its technology to operate. Blockchain enables the tracking of transactions and records across a distributed network of computers. Blockchain increases trust as it acts as a ledger distributed across an array of computers that’s unalterable and accessible to all.
Here’s how the blockchain process works:
- A transaction or record is requested.
- This request is broadcast to a network of computers (nodes).
- Using algorithms, the nodes process the request.
- The request, which can be a currency, a record, or a legal contract, or other information is verified by the nodes
- Once verified, the ledger is updated with a new block of data.
- This block of data is added to the blockchain and cannot be deleted or altered.
As you can see, this process can have a number of real estate applications, such as legal contracts, financing, buying and selling a property, and so on. Blockchain can add an additional level of trust in a real estate business activity, such as transactions and leasing.
The application of algorithms and technology to legacy real estate processes will reduce a significant amount of friction and speed up the processes of buying, selling, leasing, and financing this asset class.
Blockchain can “tokenize” real estate
Think of tokens as a store of value. In a residential or commercial real estate blockchain, tokens represent an ownership stake in various classes such as equity, debt, or cash flow. For instance, if a 100-unit apartment building is owned by 50 different investors secured on the blockchain, each of those investors could own tokens to reflect their ownership in the equity of that asset.
In this example, the real estate blockchain platform is used to document, store, and verify these ownership tokens. The tokens can then be more easily traded, sold, and liquidated. The real value of blockchain is not just trust and efficiency but liquidity as well.
The real estate sector is traditionally an illiquid asset as the sale of this asset is long and process-heavy. If real estate tokenization is issued via a blockchain, it becomes much easier to buy, sell, and trade your interest in any real estate asset using blockchain as the platform on which the transaction occurs and is verified.
It also democratizes real estate investing. Consider that same 100-unit apartment building mentioned above is worth $20 million. Instead of a REIT or group of accredited wealthy investors purchasing this, a lead investor buys it through a blockchain transaction. This lead investor breaks that cost into 20 million tokens, or shares. These tokens can then be sold to main street investors for $1 dollar each, giving the lead investor access to a broader range of buyers and creating a marketplace to buy and sell tokens of this particular asset.
Real estate tokenization is already happening. Consider the St. Regis Aspen Resort, which used “Aspen Coin” tokens to raise $18 million.
How blockchain technology is changing the real estate industry
Blockchain platform technology can be applied to numerous aspects of real estate business. Here are a few worth noting:
Nick Clare, Head of Project Management, JLL UK, says that blockchain has the ability to “create, authenticate and audit contracts in real-time, across the world and without intervention from a middle man…[and] have instructions rooted in the transaction so that payment can only be taken as long as the instructions are fulfilled, providing complete transparency to all parties and reducing the likelihood of payment disputes.”
Smart real estate contracts enabled by blockchain will not only speed up the leasing process and save on costs, but it can also improve due diligence. Blockchain would have the ability to verify identities and incomes, and reduce the likelihood of fraud.
The entire real estate transaction process can be held on the blockchain. The submission of an offer, verification of title, the acceptance and verification of that offer, the due diligence process, the financing, and closing can all be verified and codified within a digital ledger. The use of blockchain for real estate transactions has significant implications for real estate agent and broker jobs.
Credit checks, income and identity verification, debt to income ratios, and so much more can be held on and verified using blockchain. The mortgage financing process is fraught with friction and frustration. If all your critical documents are held on blockchain, no longer do you need to scramble to get dozens of different documents to your bank or broker.
Traditionally kept offline, blockchain tech has the ability to store and verify these critical legal real estate documents. Imagine if you could log into a blockchain land registry to verify title ownership of any plot of land in your area.
Identity verification and contracting signing can be facilitated and held on a blockchain. Whether it’s income verification of the tenant, employer checks, or other references, this can all be facilitated and held on a digital ledger.
If an asset becomes tokenized to 1,000 investors instead of 10, you automatically increase the liquidity of that real estate investment. If buyers and sellers of tokens are more easily able to sell and buy shares in a particular asset, then exit strategies and liquidity problems drop significantly.
A real estate blockchain can be used as a single source of truth to verify ownership of assets. This includes fractional ownership through a token, and all the owners of those tokens will be publicly available.
Bottom line: Future of blockchain in real estate
Blockchain has significant implications for the real estate industry. It could eliminate the need for middlemen in transactions, improve trust among transactors, act as record-keeper, speed up all contracts, leases, and transactions, improve liquidity, reduce fraud, and reduce costs and fees. This is a major disruption, but much of this innovation is presently theoretical.
Although some real-world examples of blockchain exist, we are some time away from executing on the full promise of blockchain in real estate. Investors should take all of the above into consideration and start thinking about ways to expose themselves to these forthcoming innovations in the real estate industry.