Why Real Estate on Blockchain? Does blockchain disrupt real estate?
Blockchain’s disruption of financial services and subsequent widespread application across industries, it’s hard to find a segment that has not been influenced by the technology. Cryptocurrencies have made a strong impact on payments, remittances, and foreign exchange. Initial coin offerings (ICOs) have challenged stock investing, startup loans, and venture capital. Even the food supply chain industry has been upended by blockchain.
Real estate hasn’t escaped blockchain disruption either. Previously, transacting high value assets such as real estate exclusively through digital channels has never been the norm. Real estate transactions are often conducted offline involving face-to-face engagements with various entities. Blockchain, however, opened up ways to change this.
The introduction of smart contracts in blockchain platforms now allows assets like real estate to be tokenized and be traded like cryptocurrencies like bitcoin and ether.
Being a relatively new technology, blockchain has already become widely recognized as a disrupting force to industries that have primarily run on paper-based systems in the past. The banking, medical, pharmaceutical, shipping, and many more industries have begun adopting blockchain technology to reserve a spot in the future business market. Being primarily paper-based, the act of buying or renting a home has become a complex, convoluted, and time-consuming process. For far too long, the real estate industry has relied upon outdated systems to conduct business.
At the moment, real estate suffers from three main problems:
- the lack of cheap funding options for prospective home buyers
- an increase in the number of intermediaries
- a high rate of fraud primarily fueled by an outdated paper-based system
Why Real Estate on Blockchain?
The technology is already being developed to provide more efficient supply chain management and logistics. It is also being adopted in many industries, such as banking, medical, education, shipping, and transport. The Internet of Things (IoT), artificial intelligence (AI), and blockchain will most likely shape the way business is conducted in the future.
As a digital distributed ledger, blockchain provides businesses with a platform to conduct more reliable, secure, transparent, and effective business practices, namely:
Improved security — by running the system through each node in the network, blockchain eliminates the ever problematic single point of failure.
Improved transparency — each member of the chain is provided with access to the same information. The blockchain network can be updated with new information through a majority consensus or vote. In the same sound fashion, old information can be altered.
The Current Issues in the Real Estate Industry
Plagued by outdated systems, an improvement to the real estate sector is long overdue. Not only in the US , Nigeria but all over the world, real estate is facing two major problems.
Lack of Affordable Funding Options
Due to the rise in student debt and housing prices, it is expected that many millennials will be unable to afford a home. And it is not only due to their unhealthy avocado toast addiction but also due to the rising rates of rentals.
According to CNBC, people aged between 18 and 34 give 30 percent of their paychecks to their landlord. The economy has changed drastically since the 70s and 80s, and now millennials, with their ridiculous spending habits and disregard of the future, must shoulder the consequences.
One of the more prominent solutions to this problem is blockchain. Currently, Brickblock ,a blockchain startup, is developing blockchain solutions to provide more convenient means of home investing. Also Brickblock is saving investors both time and money.
An Increase of Intermediaries
Nearly 80% of homebuyers use a real estate agent or broker. The standard commission for these services hovers around 6%. In its simplest form, an agent’s or a brokerage’s fees for a home of 75 lakh would be 5lakh. This is a significant amount of money for just showing someone around a house.
At the moment, brokers and agents are the necessary requirements for the real estate industry. Blockchain, however, might have what it takes to reinvent real estate.
Brokers, lawyers, and banks have long been part of the real estate ecosystem. However, blockchain may soon usher in a shift in their roles and participation in real estate transactions. Cutting out the intermediaries will result in buyers and sellers getting more out of their money as they save on commissions and fees charged by these intermediaries. This also makes the process much quicker as the back-and-forth between these middlemen gets cut.
So Why Isn’t Real Estate Industry Improving Yet?
Introduced in 2008, blockchain technology is still considered new. Not very many people know about it and therefore are not aware of how they can benefit from it.
Secondly, think about how many intermediaries there are in the real estate sector: hundreds of thousands of real estate agents and probably thousands of brokers. These people would definitely like to ensure the safety of their jobs, so why would they adopt the use of blockchain?
For these reasons, blockchain may not bring any significant changes to real estate markets anytime soon. So, for blockchain to begin bringing about the changes that so many people are hyped on, it needs to be adopted on a mass scale even if many job titles would need to be restructured. The entire real estate market could become a thing of the past if blockchain is adopted into it.
Bring Real Estate in Blockchain
1. Fractional Ownership
By allowing fractional ownership, blockchain also lowers the barriers to real estate investing. Typically, investments would require significant money upfront in order to acquire property. Alternatively, investors with could also pool their money to acquire bigger ticket properties. Through blockchain, investors would simply have to access a trading app to buy and sell even fractions of tokens as they see fit. In addition, fractional ownership would also help them avoid managing the properties themselves such as maintenance and leasing.
Blockchain technology has impacted the real estate industry in a variety of ways, including offering a new means for buyers and sellers to connect with one another. Blockchain could be used to cut intermediaries out of the real estate transaction process, thereby reducing costs. This technology could also help to codify the practice of fractional ownership of real estate.
2. Decentralization
Blockchain commands trust and security as a decentralized technology. Information stored in the blockchain is accessible to all peers on the network, making data transparent and immutable. One only has to go back to the housing bubble crash in 2008 to see how greed and the lack of transparency in the part of institutions can have catastrophic consequences. A decentralized exchange has trust built into the system. Since information can be verifiable to peers, buyers and sellers can have more confidence in conducting transactions. Fraud attempts would also be lessened.
3. Benefit of Liquidity
Real estate has long been considered an illiquid asset since it takes time for sales to conclude. This isn’t the case with cryptocurrencies and tokens since they can, in theory, be readily traded for fiat currencies through exchanges. However, as tokens, real estate can be readily traded. A seller doesn’t have to wait for a buyer who can afford the whole property in order to get some value out of their property.
Global real estate is worth hundreds of trillions of dollars, but is dominated by the wealthy and large corporations. Through blockchain technology, it is possible that more people will be able to access the market where transactions can be made more transparent, secure, and equitable. Real estate transactions may eventually become truly peer-to-peer activities with blockchain-powered platforms doing most of the work.
4. Maintaining Transparency through Smart Contracts
Only a handful of people buy a property without availing any loan or any other mortgage process while the rest of the buyers and investors usually apply for home loans. And you are well aware of how harrowing the entire procedure is.
It takes a long time until your loan application gets processed and then the amount is sanctioned. However, the Blockchain technology offers the facility of Smart Contracts that can actually simplify the whole process. The Smart Contract allows you to develop a digital ID for the concerned property either as a buyer or seller. This makes the transfer of the ownership much easier, faster and smoother. In addition, the smart contract also helps in monitoring the transaction process.
So Why is blockchain important for real estate?
As Blockchain’s inherent system of trust makes it the ideal technology for real estate. Real estate companies(American Tower Corporation , Equinix , Simon property group)all over the globe are using blockchain’s smart contracts and ledger abilities to transparently and efficiently facilitate renting, buying, investing and even lending.
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.
Yet, it is clear that this emerging technology has the potential to disrupt many industries, including real estate.
With that, I conclude this blog. I hope you enjoyed reading this blog and found it informative & interesting. Thanks!!
