Bitcoin introduced the world to blockchain technology. But today Blockchain has evolved much beyond blockchain and cryptocurrency. It has not only disrupted the banking and financial industries but has impacted several other sectors including real estate.
We can find blockchain technology being implemented in industries like healthcare, entertainment, and many more. Real Estate is another such industry that has not been able to escape the disruption by blockchain technology.
The traditional way of working in the real estate industry is fast becoming obsolete. The way forward for the real estate industry is to adopt and implement blockchain technology in their business models.
Issues With Real Estate Currently:
The real estate industry forms a significant part of the World Economy. But there are many issues faced by the industry over time.
Open to a select few – Real estate has been an investment option for the select few because of the number of entry barriers, complexity, and costs involved.
Lack of transparency – The lack of transparency in real estate leads to a lot of fraudulent activities along with corruption in all the processes.
Higher costs – The number of intermediaries and the costs related to them investing in real estate is a very expensive option.
Low Liquidity opportunities – It is very difficult to convert real estate investments into cash because of complex processes and a lack of transparency.
Slow Transaction process – Most of the real estate transactions are undertaken manually, which leads to errors and frauds making the process time-consuming.
Advantages of Blockchain in Real Estate:
Blockchain technology has the potential to address most of the challenges being faced by the Real Estate industry currently.
Increased trust and transparency (decentralization) – Blockchain technology does not allow a select few to have all the power and control since it is decentralized. Every user has full access to all information and transactions on the blockchain. No transaction can be altered or removed from the blockchain by any user. This helps build trust amongst the users and increases transparency in the industry.
Reducing data silos – Blockchain can offer a tamper-proof shared database that can compile information from different stakeholders in one place. This can provide a single point of all necessary information instead of data being scattered around different real estate agencies.
Efficient transaction process – Most real estate transactions currently are done through wire transfers that take days to complete and require expensive verification processes. Blockchain-based transactions follow a streamlined process which could reduce cost and deliver in much lesser time.
Limited use of intermediaries – Various intermediaries like brokers, estate agents, and escrow companies can give rise to complexity and increased costs. Blockchain technology can help make these intermediaries obsolete by undertaking the storage, verification, and transfer of records. This leaves no scope for any scams or fraudulent activities.
Use Cases of Blockchain in Real Estate
Efficient and reliable property search process – It has become a nuisance to search for the perfect property since currently, the only way to find listings is through third-party platforms. These platforms provide minimal access to properties and command expensive subscription fees from their users. Data on these platforms are not updated and fragmented across different listing platforms.
Blockchain technology can resolve these issues by storing all property listings on a single decentralized database. The data distributed across a peer-to-peer network allows the brokers to have more control and trust over the data, as listings will be more readily accessible.
Blockchain technology will provide more information about property location, ownership history, comparable rental rates, property age, and title clarity. This will allow market participants to have access to more correct and reliable data at lower costs.
Efficient and accurate due diligence and financial evaluation process – The use of physical documents as proof of identity in any leasing or purchase and sale transaction lead to significant time spent in due diligence activities. This manual verification process involves numerous third-party service providers that increase the likelihood of loss of information and error and increase transaction-related costs.
Creating a digital identity for a real estate property would help consolidate information such as vacancy, performance metrics, tenant profile, and financial and legal status in a digital form. Blockchain technology, along with digital identities of property can greatly ease the due diligence by taking the entire process online in a secured way.
Transparent and easier Property management and cash flows – Property management is a complex process due to dependencies on various parties like tenants, landlords, property managers, and other vendors. It involves various payment and service transactions that need to be regularly executed, tracked, recorded, and validated. As a result, the process becomes very time-consuming, complex, and costly for real estate companies.
A real estate lease can be executed using smart contracts on a blockchain platform that would enable transparency and security for lease terms and transactions. A digitally signed smart contract could include all information regarding the tenant and property and lease terms. This contract could then initiate automated payments to landlords, property managers, and other stakeholders through rent or bonds.
Simplify title management – The current paper-based title management systems give rise to a lot of errors, incomplete information, and fraud. As per American Land Title Association (ALTA), there is at least one title defect in nearly all real estate transactions. Corrections of these defects incur high legal fees.
Title fraud possesses a high risk for property owners. To mitigate this risk, buyers are often compelled to buy title insurance, which adds significantly to the property purchase cost.
A blockchain-based digital identity for the property will include all information with regards to the property that is immutable. This will increase security and transparency, which in turn will reduce the risks involved in title transfers and simplify the title check process.
Faster, cheaper, and simplified financing and payment systems – Extensive documentation and multiple channel partners make the payments and money transfers for a property transaction -expensive and time-consuming. When the property is funded by a mortgage or an international transaction, the process becomes even more tedious.
Blockchain with the digital identity of a property can reduce due diligence and loan documentation time. Smart Contract based loan documents can provide transparency as they would be accessible to all involved legal parties. Execution of smart contracts on a blockchain will allow buyers to track their mortgages in real-time.
Fractional real estate investing and ownership – Typically, real estate investments require people to put down a significant amount of money upfront to acquire any property. In addition to that, intermediaries like fund managers make investing in real estate more expensive.
Blockchain technology lowers the barriers of entry to real estate investing through crowdsourcing and tokenization.
Tokenization of real estate assets is the process where a property owner can offer digital tokens that represent a share of their assets. Thus, a person need not invest in the entire property, rather can invest in tokens that collectively represent the property. Each of these transactions is time-stamped and immutable, which limits the risk of fraud and makes it easier to track them.
Blockchain technology helps real estate companies offer fractional investment options in a property. This allows a property to have multiple co-owners, which otherwise would have been unaffordable individually. With more people involved for a stake in potential returns, the overall liquidity options increase for the property.
Blockchain technology is still in a nascent stage especially, in the real estate market. Blockchain comes with its own set of challenges once it is adopted across the real estate sector.
Regulation – The complex regional regulations across countries around the globe makes it difficult for blockchain technology to be adopted globally. In addition to that, not all countries recognize smart contracts as legally binding.
These kinds of regulatory hurdles are making it difficult for companies to adopt blockchain technology. Although these regulations are changing over time.
Scaling – Real estate requires blockchain to be able to handle huge volumes of transactions quickly and efficiently since many million real estate transactions take place every year.
The number of transactions that Ethereum can handle currently is as low as 15 transactions per second as compared to Visa which claims to handle 24,000 transactions per second. This can pose a problem for large-scale real estate enterprises that require very fast processing times.
Some blockchain start-ups are claiming as high as 50,000 transactions per second which indicates that there is scope for improving transaction speed over time.
Interoperability – The blockchain market has many players in it and most of them are unable to work with each other. This lack of standardization and interoperability is a huge issue for enterprises in the real estate market.
The inability to change from one blockchain to another poses a huge issue. Many organizations are currently working towards enabling cross-blockchain transactions and introducing shared standards to address interoperability issues.
Blockchain technology in the real estate market has a long way ahead. Most of its applications are yet to be determined as successful through continuous experimentation. Blockchain technology may not be able to automate and digitize every aspect of real estate but it does have a significant advantage in many aspects of the real estate market. Blockchain is here to grow and to disrupt several industries including real estate.