Tokenizing real estate
It’s June, the month when Blocksquare’s first pilot project is planned to start. If the target funding is reached the first PropToken will be deployed. Let’s take a closer look!
PropToken — a standard for all jurisdictions
Our goal is for Blocksquare to become a global standard for real estate tokenization. As such, it offers an easy, safe and intuitive interface for real estate businesses to create, issue and manage PropTokens. To make this service available at scale, the use of PropTokens must adapt to any jurisdiction. If we take into account all various countries, legal systems, real estate types, tenancy models, investor requirements and local customs, the variations of structuring deals becomes endless. This suggests any legal implementation of a PropToken offering should be left open to interpretation by the certified partner tokenizing the property, rather than dictated by Blocksquare.
In our view, investors should require by certified partners to achieve the following when offering real estate using the PropToken standard:
- Title holding company should NOT be able to single-handedly sell the property off-chain,
- Investors should be protected for worst case scenarios e.g. title holding company bankruptcy, sale, take-over, etc.
For example, the pilot’s structure introduces an insurance company offering PropToken holders protection secured by a mortgage on the property title. This solution covers both requirements in one go and answers two top questions asked by all investors we interviewed:
- How can I trust the Certified Partner won’t sell the property and run away?
- What happens to the property if the title holding company goes bankrupt?
With many products, prototypes and ideas in the field of real estate tokenization around, it will be interesting to see which approach will become favoured by investors and earn their trust.
Our goal is to reach out and get in touch with potential investors as much as possible — a time-consuming task that lets us better understand the product and where clearance or simplification needs to be made. The easier it is for investors to understand, the more likely it is for them to feel safe to invest.
While a process overview is presented in the above chart, the below flowchart details the tokenization process:
- Certified Partner creates PropToken smart contract (PropToken creation is subject to ETH mining fees),
- In the creation process, the Certified Partner is required to enter all needed property identification data (cadastral municipality, parcel number, building number, individual part number, property ID, right ID, street address, postal number and city — required input data differs from country to country).
- After the successful crowdsale, the Certified Partner is required to distribute 100,000 BSPT to investors using the provided BSPT distribution tool.
How to sell a PropToken offering?
To be honest, we are exploring uncharted territories here. Not so much for the crowdsale process, but definitely for the real estate tokenization part.
The approach taken for the pilot takes into consideration the lessons learned during the past 2 years observing & participating in the ICO craze, analysing real estate crowdfunding, analyzing IPOs and some common sense.
The Certified Partner’s role
While Blocksquare provides the technology for simple creation, issuance and management of PropToken smart contracts, our Certified Partner’s main responsibilities are to (A) find a great investment opportunity, and (B) find investors interested in the deal. Even so, our common goal is to tokenize the first property — meaning Blocksquare will assist INBA in any way possible for a successful sale of the pilot project.
Target investors hold fiat currency
While the idea for Blocksquare came from the assumption that people would be interested to invest crypto in tokenized real estate, our research leads us to the conclusion this may not be the case — at least not for the moment. The reality is that (A) crypto investors look for 5–10x returns, and (B) when they invest in real estate, they do it mainly as single buyers. Therefore, investing in tokenized properties would come only from a recreational motive, rather than serious business consideration.
On the other hand, the interest in fractional cross-border investments in real estate properties has much appeal between the non-crypto community of investors, especially if the property is an investment that would be out of reach if not for tokenization. For this group, requiring to exchange fiat to crypto to invest in a property represents only unnecessary additional steps and exposes the investor to currency risk — both factors that seem to tip the investors to rather not opt for finalising the deal. They would consider using crypto only if it would simplify their ability to invest.
This suggests investors should be given the option to sign a contract and send a wire transfer. Plain and simple.
Fiat held in escrow by Certified Partner
While signing a contract today is done directly online and facilitated by SaaS providers like DocuSign, real estate brokers already offer fiat escrow services by default. This means the collection of funds can be completely entrusted to the Certified Partner — INBA in the case of our pilot. This gives Blocksquare as a technology service provider even greater chances for wide-spread adoption and scalability.
Big stones first
A professor explaining his class the importance of using one’s time wisely and setting priorities using a jar, golf balls, pebbles and sand went viral some time ago. In order to fill the jar full, one must put the important things (golf balls) in first, follow with pebbles and finish with sand. Otherwise, the important things won’t fit and will get left out.
We believe the same approach should be taken in the crowdsale process for our upcoming pilot — the big investors need to be addressed first, followed by regular investors, and finally, the deal needs to be opened to the crowd. The problems of ICOs, where backroom deals lead to market price distortions, are obsolete when talking about real estate. The targeted amount is clear, while the price per BSPT is easily calculated:
target total investment / 100,000 BSPT = price per 1 BSPT
Let’s take a closer look at how the pilot stages will go!
Phase #1: Private pre-sale
The big investors need to be invited before any open announcement is made, making sure the deal won’t be “rotting” online. This stage is characterized by a high per investor minimum (5–10% of the total cap, depending on the total deal worth) and should last until at least 60–70% of the total cap is raised.
We foresee investment pools and clubs potentially popping up to target private pre-sale PropToken offerings — the “up” for pool managers is participating as “first buyer” with higher volumes than otherwise, while on the other side they offer investors ease of access and due diligence. We encourage our community to form such an investment club if they see fit.
Phase #2: Pre-sale
When the private pre-sale reaches the target amount, the project can be publicly displayed online. In the pilot’s case, that means our certified partner’s web platform. The widget presents the investor the main details on the deal, while the investment scope is presented on the CP’s web platform. The pre-sale stage is defined by both a minimum and maximum amount per investor and may eliminate the need for the main crowdsale.
Phase #3: Main crowdsale
After successfully raising at least 85% of the total investment target, the crowdsale for retail private investors can start. The minimum is lowered substantially and participation is available only with ETH. Investments are collected to an escrow smart contract. As ETH to EUR conversion rate is subject to fluctuations, the currency risk is placed on the investor’s side, meaning the ETH conversion to EUR will take place on the day when the raised ETH amount overpasses the crowdsale target.
BSPT distribution & storage
After the successful conclusion of the pilot’s crowdsale process, the distribution of BSPT-SVN-000000001 will be executed. Because we decided to opt for the most frictionless investment method — bank transfer, INBA will be given access to a new component of the Blocksquare system— the BSPT distribution tool. The tool enables Certified Partners to easily send the specified shares to investors Ethereum wallets.
We recommend storing BSPT tokens (as well as any other ERC20 compatible tokens) on a hardware wallet like Trezor or Nano S. Please understand the importance of creating and safely storing your recovery phrase — you won’t be able to recover your BSPT real estate tokens without it!
Our progress is going well and we strongly feel the set out strategy demonstrates we are going in the right direction. We are making history here and encourage all our supporters to spread the word to potential investors who might be interested in the private pre-sale stage.
Get in touch:
…or simply email us at email@example.com ;)