Blockchain In Residential Real Estate
Why It Will Never Be, Or Will It……
Blockchain has come and almost gone as fast as it came — or has it?. With it came a host of “revolutionary” ideas and a promise of transparency that it would reduce paperwork, transaction cost and unnecessary steps in any industry it touched. Blockchain is defined as a technology that records transactions across a shared computer network, with each transaction the list of records grows which are linked via cryptography to secure against any modification of a previous transaction record — any modification to an existing record and the entire Blockchain is broken — hence ensuring the transaction record in time. With the shared computer network model the entire cryptography chain can be maintained and validated with no one party maintaining control of the transaction record — ideal you would think for real estate where the listing of transactions can be secured, shared, verified and maintained without the need of any third-party oversight or fees because the system itself would maintain the needed transparency.
So let's explore this idea of transparency, one thing I always said to people was that transparency is much like time in that it is man made for convenience. The lack of transparency in today’s markets is not the fault of technology, in that all the data and records exist in a database and could be shared at any time. The main driver to the lack of transparency today is likely the financial reward that is associated with the transaction service and control of that information. The real estate market, of course, would argue that the fees charges have to do with the maintenance of privacy however many similar markets have been disrupted with the use of Blockchain technology that proves that concept wrong.
So the question begs to be asked, Can Crypto/Blockchain really be disruptive in the real estate market?
The first thing we need to do is to be informed about how the steps in real estate transaction occur today. Let’s look at how this is affected in the residential real estate world in Canada. Below is a list of the steps:
Buyer
(Bank) Pre-mortgage approval all confidential
• Bank will do a credit check, employment check, etc
• Buyer will share the end result with a broker who wants this document to ensure this won't be a problem in the future
• $control of financial records
• $$ what is not seen — I hear a lot from Brokers that clients financials were not “ready” o
(MLS) Home Search
• In Canada, the MLS control the online database of homes being sold — which of course they charge a fee for to the seller
• $control of house listing data
(Broker) Offer to Purchase
• $$ What is not seen — how many bids a buyer has made on other homes (low ballers), owners rejecting offers (not realistic)
Home Inspection
• $$ What is not seen — seller has an obligation to report findings but as there is not database this is near impossible to track. Record of Home Inspector (lawsuits, accuracy, overcharging)
(Bank) Final Mortgage Approval — Could Also Add Home Valuation by Bank
(Notary) — property search for liens, register loan, certificate of location
$Control of house sale registry is governed by an agency to only allow notaries
(Notary) — register sale at Registry
Seller
(Broker) Contract to sell
(Seller) Declaration
To quickly summarize you can see that Banks, Brokers, Notaries, MLS and inspectors all make money out of this transaction system at each and every step. They all own data — in different places. Clients all sign different agreements with each party who control that transaction data and we agree in part that that data needs to maintain its privacy however the result of that data can be made public in a pass / fail criteria as an example in order to meet the requirement of the transaction and still maintain the original data integrity. The seller and buyer all want data privacy of things like their salary, credit, previous attempts, criminal background. With all this complexity and money being made it's not as simple as a single transaction record.
In order to understand if Blockchain can be applicable to the real estate market let me further add to the Blockchain/technology dilemma. The Blockchain record is designed to handle text — which can be easily compressed, transferred, encrypted, de-encrypted and verified. What it cannot handle is attachments (files, images, etc). So what does this mean given that in the reas estate transaction there are many files that exist? There have been solutions that create a “database of record” — where the unique, unchangeable key to the file is placed in the text on the blockchain — however, this leads back to the idea of someone who knows needs to run and control the database and therefore charge money without clear transparency…
So where is the opportunity within Real Estate given that it is the largest and strongest asset class?
The opportunity lies within changing the market to adopt Blockchain for the purpose of tokenization — a token is a digital representation of a real-world asset, value, or function which can be the whole or fractional representation of an asset.
Think about it, instead of buying a property, you are buying simple tokens from an exchange. Tokenization will not only increase the liquidity of traditionally non-liquid assets, but it will also make it possible to trade those assets without a third-party. The property, the land, and the ownership is already established just like a stock — your option is whether to buy or sell.
One of the most interesting outcomes of tokenization is fractional ownership. This is especially intriguing when it comes to expensive assets like real-estate. Instead of one person owning one property, it can be possible for multiple people to buy tokens of the property and co-own the building. Today the barrier to entry for high return items like multi-residential apartments is far to high for the average investor, however, with fractional ownership almost everyone could partake — expanding the market and liquidity of a real estate sector.
So lets look at the outcome of such an approach — Reduce barrier to entry to real estate as an investment so its not just for the large corporate investors, bring a new level of liquidity to a market because the token can be sold on an exchange rather than waiting for a home to sell, give access to investors on a global market and lastly allow for diversification within an investment portfolio rather than being locked into one large investment. Sounds like a win-win to me.
If you want to learn more about Tokenization of Real Estate assets, Maria Vidal writes a great article on how that can be achieved:
