How Blockchain Technology is Changing the Real Estate Industry For the Better
You have probably heard a lot about blockchain — from simple mentions to hype about how it is going to replace cash. Blockchain is a way of creating data that can be copied, but not changed, which allows for secure authorization and tracking of transactions and contracts. It allows for smart contracts that enforce themselves — perhaps a scary thought, but one that will, once people become used to it, improve trust. And the changes are mostly positive. Here are a few ways in which blockchain technology is starting to revolutionize real estate.
1. Digital transactions. In the past, real property was considered too high value to be transferred entirely through digital channels. The higher security of blockchain and smart contracts allows people to safely transfer large amounts of money over the internet. Writing a closing check may become a thing of the past as people can simply hit a button to transfer the information. The higher level of security with blockchain, which fragments the data so a hacker cannot get all of it, makes it safer to do any kind of financial transactions over wireless networks — including very high value ones. Which brings us to tokenization.
2. Tokenization. In tokenization, you buy a digital token, but it represents real property. This is being employed as a way to allow people to buy buildings that don’t exist yet — that is to say, to invest in developments. The law has not yet caught up — tokens are not officially considered to be shares. The system includes smart contracts, which literally enforce themselves by, for example, not releasing information until certain criteria have been met. In the future, those smart contracts may be encoded into keys. So, for example, somebody could buy a condo in a building that is still under construction, and then take possession the day it opens with a smart key that does not just open the doors, but controls every aspect of their new home. Again, though, the law needs to catch up with the idea, but in the future somebody’s smart key…or phone, or even biometrics…may be the only title they need to their property.
3. Fractional ownership. Tokens can be split in a way buildings can’t. This lowers the barrier to entry for real estate investing without using a broker. This would also let somebody invest in, say, a commercial building without having to manage it. Oh, and this might also result in a new way to handle home equity loans, with the bank taking only partial ownership in foreclosure, that can then be traded…or the person given a fair chance to buy it back. Fractional ownership may also be useful for timeshares — and will also allow people to timeshare without going through an agency. For example, it would allow people to sell part of a lake cabin to somebody who will use it at a different time. Large families might also use timed tokens and smart keys to determine who gets to use the vacation home. It could also allow for a smoother way for smaller companies to own, rather than lease, their office. Fractional ownership might also reduce the power of condo associations — or democratize them by splitting deeds to the building itself amongst the residents. (The downside is it might, if done incorrectly, also allow residents to buy more of a say in the rules). Finally, fractional ownership could be leveraged to allow parents to gift their children part of their home, reducing the amount of transfer at death and possibly allowing some families to avoid probate court.
4. Decentralization. Think back to the housing bubble. And think about what lack of transparency — and subprime lending — did. Decentralized systems such as blockchain make transactions more visible and as the system itself enforces the contracts allows for trust (of course, some people are going to find it hard to trust these things to an impersonal AI. This will be, of course, bad for brokers, lawyers, and banks — but good for people buying and selling real estate as the process will be faster. This will also make real estate more liquid and change how it is treated as an investment. Real estate could become much the same as stocks. This may, of course, reduce the number of brokers using real estate as part of an investment plan for long-term investors or retirement accounts, as it may result in a more volatile and faster-moving real estate market. For the most part, this is likely to be good, but it might have some impact on rent fluctuations, especially in high-value markets such as New York and Los Angeles.
Blockchain and smart contracts are going to make a huge difference to real estate investing and trading. The primary obstacles right now are legal, with “digital currency” not being well-supported by the system. The poor reputation cryptocurrencies have in some quarters may also slow adoption — but blockchain has some interesting possibilities. For example, imagine that your timeshare key works for the week you booked, and only that week, making sure nobody can overstay their welcome. Or closing on a house being as simple as walking through the door and being recognized by the house’s AI.
Whether blockchain will “replace money” is uncertain — and it might be hype — but if handled properly it will make it much easier to buy and sell a home, easier for ordinary people to invest in real estate directly, and improve the real estate market by improving liquidity and allowing for fractional ownership. If you would like to know more about how smart contracts can help your business, contact PPC Digital Black.
