Upgrading Real Estate: Blockchain, Smart Contracts & Tokenization is the Future.
This time last year, a $1 million property purchase was made in the United States. A month prior, two houses were sold in the United Kingdom. On the surface, these events are far from out of the ordinary. But what makes these transactions unique is that they were the first instances of property being bought and sold using cryptocurrency.
Given the state of crypto in 2019 and the desire to find “the next big thing” in a bear market and post-ICO world, we have seen an emergence of new projects that seek to bring the benefits of blockchain and tokenization to the real estate industry.
As a comparably illiquid sector, real estate is a prime candidate for the benefits of faster and more transparent transactions, improved contract and ownership records, faster monetary transactions, and greater accessibility for investors.
Making the Illiquid Liquid with Fractional Ownership
There are some who argue that the illiquidity of real estate is what determines its stability due to the painfully slow processes involved, combined with the slow rate at which it might increase in value. This is exacerbated by the inaccessibility of real estate for the majority due to high starting costs and competition over affordable real estate in desirable locations.
Similar to art ownership (as discussed in my previous blog), real estate is an asset of value that can be sold fractionally, offering more people the opportunity to generate income from property investments. Each fraction, represented by a token, can be independently traded, effectively liquidising the real estate market with the help of seamless smart contract transactions.
Leaseum Partners, which is currently raising funds through a Security Token Offering (STO), is looking to bring New York City real estate to a wider investor audience with fractional ownership and, thanks to the blockchain, 24/7 global trading.
Projects like those led by Leaseum Partners will open the doors to a massive new pool of investors, bringing further interest into real estate markets while enhancing the experience for traditional players in the space.
Saving Time with Smart Contracts
The act of buying and transferring ownership of property remains a tedious and lengthy process. These transfers typically need to be reviewed and confirmed by an array of intermediaries including agents, lawyers, and governmental bodies, just to name a few. By applying blockchain and smart contract technology, the process can be simplified, thus saving time and money for both the buyer and the seller.
Blockchain startup SMARTRealty is one example of a company working to create a seamless process for buyers and sellers to interact. This includes transferring ownership, making payments, and solidifying the terms of their agreements, as well as all interactions between landlords and tenants who need to send and receive regular rent payments, record the length and conditions of their tenancy agreement, underline any penalties, and establish renewal agreements, all using the blockchain.
Streamlining the transactional processes involved in the real estate sector has the potential to drastically reduce the time spent waiting for signatures and confirmations, exponentially accelerating the process of buying and selling a property.
Effectively Managing Commission Payments
As a range of intermediaries is involved in a typical real estate transaction and commissions are often split, as agreed upon beforehand by those involved. Naturally, this process can get very complicated as agreements can be ambiguous and it doesn’t take much for tensions to run high when there’s a large amount of money on the line.
With the application of the blockchain, all participants involved would have the immutability and transparency of smart contracts to rely on.
Zap, a company which offers smart contract solutions for these purposes, has already been used in a real estate commission transaction in Manhattan. A commission of $3400, paid in Ethereum, was fairly split between the brokerages and agents involved.
“In a real estate office, many people have disagreements because of informal oral agreements that are subject to people’s sometimes-selective memory. However, if their wallet is in the smart contract tied to the deal, it is fixed and immutable. You’re either in or you’re not. Trust is automated.” — Nick Spanos, Founder at Zap.
Although the real estate industry is a perfect use case for Zap, their website also outlines the practicality of using their technology in other areas such as elections and voting, sports betting, crypto prices, energy uses, and public transportation.
Personally, I find this list too specific and believe that smart contracts will be useful in nearly any industry. I am excited to see how the use of smart contracts in our everyday life develops and which industries will be the first to successfully implement it.
Managing Data Flow & Protection
Within the real estate market, registries are needed to manage the key data of their properties, including information like who the current owner is, if there were any previous owners and if there have been any tenancy agreements in place.
Unfortunately, these registries are often slow and uncoordinated. Different countries hold their own registries, with specific regulations and process rules for their country and citizens, which can create more difficulties for international investors.
In an increasingly interconnected world, this also means data silos present a huge problem for international property owners, with existing regulations unable to fit into a 21st century way of doing business.
A registry stored on the blockchain has the potential to solve these data silos, allowing people to access information with ease whilst simultaneously protecting their information from those who have not been granted access. These registries would be easier to update, ensuring all transfers of ownership are updated immediately, improving coordination between governments and real estate agencies. Currently, government agencies maintain records such as title ownership, planning permissions, and tax. By keeping all information contained together, governments would also benefit from needing fewer resources to maintain records.
Distributed digital time-stamping will also allow authorities to verify and sign documents that confirm the ownership of property, complete with necessary personal information of the owner. This has alreadybeen put into practice in the country of Georgia, with a collaboration between theBitfury Group and Georgia’s National Agency of Public Registry taking the necessary steps towards practical real estate solutions on the blockchain.
Despite being one of the most illiquid, archaic, and bureaucratic industries out there, the real estate sector is one of the most well-positioned spaces for blockchain disruption.
Existing landlords will be able to save time and money by simplifying maintenance and financial transactions.
Agencies and authorities will be better able to manage their properties and records, ensuring no confusion or breach of contract which, in turn, reestablishes trust in their systems.
Renters will have greater confidence in the knowledge that their tenancy agreements are clear and immutable, whilst pondering the opportunity to purchase their own piece of fractional property ownership, allowing a previously-overlooked demographic the opportunity to expand their financial assets and benefit from a reliable, tangible sector.
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