Blockchain and Real Estate

Industry Report
July 11, 2021

Blockchain and Real Estate

The real estate industry is undergoing a digital transformation. Historically, real estate has been a “pen and paper” business and relied on inefficient methods of keeping records. It is known for its lack of transparency, high cost of transaction, unpredictable timelines, illiquidity, cash flow issues,  and limited accessibility for average investors.  Blockchain is poised to have a significant impact on the sector and address many challenges the real estate industry faces. 

Commercial enterprises and real estate professionals are increasingly recognizing the potential of blockchain technology. Brokers, lawyers, and banks have long been a part of the real estate system. New digital platforms will assume many of the functions these actors currently fulfil. Things such as listings, payments, and legal documentation will soon all be streamlined and automated. This is because blockchains offer a variety of innovations including improved safety of purchase or sale transactions, automation of property management, smarter decision-making, increased efficiency, and lower costs. In 2018 the well-known real estate brand RE/MAX announced a partnership with  XYO Network. The companies partnered to bring blockchain technology to multiple stages of the real estate process. 

Every day, companies in the real estate industry are finding use cases to apply blockchain technology and improve existing processes. In this article we will highlight some of the ways blockchain is currently being used in the real estate space. 

Fractional ownership & tokenization 

Real estate is traditionally one of the most illiquid assets. It requires significant capital investments and involves long and expensive transaction processes. Real estate investors often experience disruptions in cash flow due to settlement delays. 

Tokenization is gaining traction in the real estate sector. Tokenization in real estate refers to the digital securitization of properties. Digital securities (or tokens) can represent real-world assets, including real estate, real estate funds, revenue streams, and governance rights.

Tokenization provides liquidity by enabling tokens to be traded much like stocks. This creates a much faster property sale process. Times will be reduced from days or weeks, as seen in traditional transactions, down to almost instant transfer with tokenization. Tokenization also creates the possibility of fractional ownership which reduces barriers to entry and opens opportunities for a wider pool of investors. This will make real estate more financially inclusive, allowing the average retail investor the opportunity to invest in real estate at low cost without having to purchase entire properties. 

ATLANT allows sellers to tokenize their property and handles it similar to a stock sale. The property is liquidated through a token sale on the ATLANT platform. Collected tokens can be exchanged for fiat currency and the buyers own a percentage stake in the property.   BitofProperty is another blockchain company that provides a platform for real estate owners and investors to engage in fractional ownership investments. 

Smart contracts 

The digitization of contracts using smart contracts will bring speed and efficiency that the industry has never seen before. This is because many transactions that were one done manually will now be entirely automated. The execution of these contracts can all be guaranteed by computer protocols with no human involvement. Compliance checks, investor whitelisting, and post-issuance matters can all be automated. The same computer protocols can also check the transaction possibility and legitimacy. The agreement won’t be concluded if its terms do not meet established standards. Smart contracts offer a high-degree of transparency and security that will make buying and selling homes less stressful and risky. Gone may be the days of signing ceremonies and key-exchanges; with smart contracts it is possible to skip the need for a notary, and instead automatically receive access to a pin code lock upon the successful transfer of funds.

Blockchain realty company, Chromaway, is digitizing contracts for sale and property mortgages. Using their technology, documents can be authenticated beyond any doubt thanks to blockchain security measures. 

Smart contracts can also be used in real estate tokenization by programming unique characteristics in these tokens. Share classes and custom fee structures can be created for tokenized real estate. Smart contracts will reduce intermediaries required and will save buyers and sellers time and money. 

Property search process

Today, real estate agents use an information sharing platform called MLS to provide data about properties listed for sale. This system is expensive to sign up for and is often incomplete or outdated. The property search process will be transformed by transferring this system to a blockchain platform. This would provide more reliable data and reduce access fees. For brokers and agents, being able to see the entire transaction history of a home when helping clients with their home search will aid in a better informed decision making process for everyone. 

In 2018, Imbrex launched the world’s first decentralized real estate marketplace using the Ethereum blockchain. All information listed on Imbrex is shared by a peer-to-peer distribution method via their “Inter Planetary File System (IPFS)”. All data is never stored at a central, third-party server which means that people listing properties will always have ownership, access, and control over their data.

Due diligence and financial evaluation

Anyone who has purchased or sold property knows how painfully slow the process can be. Today’s real estate industry is built on many siloed and independent networks that lack transparency and cohesion between systems. Extensive documentation and involvement of various intermediaries is required to purchase a home. The manual identity verification process currently used requires significant time and effort for due diligence and financial verification. It leaves room for human-made errors that can be costly and slow down the process even further. Furthermore, the mortgage and loan origination and underwriting process remains unstandardized. Structuring these securities is often left to interpretation and based on outdated data. 

The decentralized nature of blockchain creates more transparency in the industry and supports better decision making. The entire process can be simplified and taken online in a secure manner using digital identities on a blockchain. It offers lenders and property owners a single version of verified information, secure data sharing, immutable transaction monitoring, and real-time payment settlement. The loan and mortgage approval process can be significantly sped up using blockchain-based solutions. Imagine submitting your profile via your smartphone with a tap of a button and being approved for a mortgage in a matter of minutes. For those who have been through the process, it seems unthinkable, but blockchain would make this possible. 

The housing bubble crash of 2008 highlights the importance of accurate and transparent data tracking and sharing. Adoption of blockchain technology could save the US mortgage loan industry up to 20% in expenses per year, which would amount to US$1.7 billion in annual savings. With blockchain combined with big data, a more accurate understanding of customer and owner histories across borders and banks is possible. This immutable and reliable data will reduce the risk of defaults taking place. Figure Technologies issues mortgages and loans using it’s own blockchain to automate the mortgage underwriting process and saves its customers significant time and money. 

The rise of blockchain-powered decentralized finance (DeFi) solutions represents the future of the mortgage industry. People are already using cryptocurrency to purchase real estate. Earlier this year, a man used his crypto assets to cover a down payment and as proof-of-funds for the mortgage he took out to buy his home.  Read more on decentralized finance in our article here.

Title management

A sad reality that every home buyer must face is that land titles are vulnerable to loss, fraud, and mismanagement in the current paper documentation system used by most of the industry. The American Land Title Association estimates that one in four residential real estate transactions have issues with the title due to the centralized, manual system currently in place. Resolving these issues is labor intensive and costly. These challenges can be addressed using blockchain technology. 

Information on real estate, transactions, title registration, property encumbrances and their condition could all be entered and tracked on a blockchain. The information would be secure and accessible online. Property appraisals could take place in a more efficient manner. Each property would have its own blockchain ID with all of its characteristics specified, which would increase transparency for all parties involved. Countries across the world are planning to use blockchain to reduce title-fraud risk and corruption. The government of Ghana is planning to use blockchain to create a digital title ID for all existing real estate.

Sweden’s land mapping and registration authority, Lantmäteriet, was one of the first government agencies to use blockchain technology to conduct property sales. The agency looked to blockchain to help solve the bottlenecks it was experiencing in its legacy system. Estimated savings for Swedish taxpayers was north of €100 million a year by eliminating paperwork, speeding up transactions, and reducing fraud. 

Property management automation 

Often property management firms experience inefficiencies when managing their portfolios. Property management is a complex task because there are many stakeholders involved including landlords, tenants, and vendors. 

Blockchain reduces costs and time spent on administrative tasks for property managers. There will no longer be the need for manual paperwork or multiple software programs. The technology secures data sharing, streamlines collections and payments, and provides comprehensive due diligence. As a result, property managers benefit from increased operational efficiency, and significant time and cost savings. 

The hotel chain Hilton Worldwide recently partnered with blockchain startup Aqua Intel to increase the efficiency of hotel management. Using blockchain technology, Hilton is able to improve the quality of its service while significantly reducing operational costs. 

Renting a property 

Blockchain-based tenant and investor identities can streamline background checks, increase security, and reduce costs. These decentralized identities allow for proof of ownership while making essential documents such as proof of insurance, identity, and credit history, easily shareable with the appropriate parties. For property owners, this means no more chasing down tenants for rent money. For tenants, gone would be the worry of wondering if you get your security deposit back.

Long-term rental platform, Rentberry, is using blockchain technology to streamline the rental process for landlords and tenants.The company uses smart contracts that provide unique features such as the ability to crowdsource rental deposits and auction rental prices. 

Property owners in apartment or condo buildings often need to make decisions on shared infrastructure and major repairs. Blockchain makes reliable remote voting posible. The technology would give owners certainty that their vote has been registered and counted properly without compromising their own anonymity. Moreover, anyone could check that the counting was done correctly and only verified property owners voted.

Challenges to Adopting Blockchain in Real Estate

Large-scale transformation is always difficult, especially in industries that are long established and resistant to change like real estate. Blockchain projects are capital-intensive and cannot be fully launched until the technology is fully developed and robustly tested. There is an increasing unmet demand for professionals with blockchain development expertise which may slow the adoption of blockchain across all industries. The challenge of integrating new blockchain technologies with legacy systems to fully achieve an industry-wide transformation is no small task. There are legal concerns to using blockchain technology because it is yet to have a clear regulatory structure and has not been standardized. The inherently complex nature of blockchain may make it difficult for lawmakers to keep up. The mainstream adoption of blockchain for real estate will require a long-term concerted effort and coordination across the sector. The rise of “blockchain consortia” that are aimed to tackle industry wide issues is an encouraging step in the right direction. 

Future of Real Estate

The future of real estate may be in digital form. Many people buy and sell domain names, and digital real estate can be thought of in a similar manner. Blockchain-based digital real estate has become a legitimate asset class and a viable store of wealth, similar to digital art NFTs. 

Digital real estate exists inside virtual worlds each with its own “digital nation”. There is a clear system of delineated, irrevocable property rights.  In these virtual worlds, players interact with the digital world—known as the “metaverse”—while displayed in an avatar’s body. The word “metaverse” comes from science-fiction author Neal Stephenson’s 1992 novel, “Snow Crash”. 

The metaverse can be described as a massive multiplayer online game (MMOG). It differs in that it is limitless. Not only could people play games, but they could also talk, shop, watch movies, attend concerts, and do many things that they can do in the real world. 

Decentraland is a leading player in the space. It is a fully decentralized digital world with no set purpose other than to become a virtual world developed and owned by its users. Its economy is based on it’s cryptocurrency, MANA. All parcels, known as “LAND”, (except for roads and plazas) can be bought, sold, and developed by the users of the game. MANA has a market capitalization of $225 million. In 2017, LAND parcels sold for US$100. In 2019, one parcel of LAND in the game sold for US$80,000. It is still early days for digital real estate, but there is clear potential for exponential growth. 

Copyright ©2021 Penrose Partners