Blockchain & Real Estate
The globalization of real estate
the aggregate global real estate market, including the value of the products (the real estate, itself), is the biggest market in the world, worth a whopping 280 trillion dollars at the end of 2017 , and with the rising prices of basically all real estate markets, this number surely has grown in the last 2 years. However, the real estate market is also one of the most rigid markets in the world. The industry is set in its ways with huge corporations, and people with exuberant net-worths deciding what the processes are, what to build where and who gets to buy or rent those properties.
It’s also an ever-increasing difficult industry to get in, with housing and property prices ballooning in the last couple of decades, almost making it impossible for regular people to get a share of the market, and with banks dishing out mortgages (literally ‘death pledges’) with 30+ year contracts making people essentially slaves for the banks.
The industry is ready to be disrupted, and blockchain technology is setting up to not only change the way we buy and sell residential, agricultural and commercial real estate but also alter the outdated processes that are being used.
First we will address the existing challenges the sector could overcome by implementing distributed ledger technology. The automotive sector and the real estate sector both have in common that in the last century they have lacked real innovation. The way businesses operate now and 100 years ago is essentially the same, albeit that internet changed the way buyers and sellers can find sellers and buyers. The processes however are unchanged. One can argue that this means that the processes are solid, but if we dig deeper it immediately shows that within them huge problems lie dormant.
Faster and easier transactions
Anyone who has ever tried, or succeeded in buying a house will tell you that it took an enormous amount of time and effort to finalize a deal. Both buyers and sellers will have to interact with a wide variety of businesses, government institutions and banks just to find the right home and acquire the right documents before even being able to get in front of the right person. Besides the fractionalized and mostly silo-like structures, one of the biggest issues is that most of these actions rely on paper processes.
By utilizing smart contracts (learn more about smart contracts below) a large part of the costs, especially fees from middlemen with specific and soon outdated knowledge, will disappear. Hard to digest professional jargon will be a thing of the past, as everyday man and woman will rely on, and trust the ‘common language of smart contracts’.
What are smart contracts
Smart contracts are basically self-executing contracts. One of the most used explanations contains a comparison with a vending machine. Where you normally have to ‘sign’ a contract with a person when you want to buy something i.e. you tell the vendor that you want a soda and you will give him money, the vendor accepts your money and gives you the soda, a vending machine does all the work without the need of a middleman. You put in some money and out comes the soda can. Smart contracts are written in code and can contain all kinds of rules, but in its easiest form works with the ‘if-this-then-that’ principle. An example in the Real Estate sector could be ‘If I receive x amount of funds – then I’ll send over the deed of the property’, making the use of middlemen validating and transacting this process obsolete.
A smart contract (deployed on a decentralized blockchain network) can make it possible to write, authenticate, and audit agreements in real-time. This can be done on a global scale and without the need for intermediaries, thus keeping the value between the main parties involved in the deal. Within the smart contract (which is typically publicly available for anyone) the instructions and dependencies are clearly defined so payment can only be executed as long as these conditions are fulfilled.
The transactions will not be bottlenecked by the banks opening hours, holiday hours, availability of personnel or the countries borders. It will act reliably and 24/7, able to confirm transactions without the need of trust or outside validation, in mere seconds. And what’s more? The fees will only be a fraction of what the fees are now, first and foremost because of the removal of a number of now unnecessary middleman taking 2-5% each and because transactions on a blockchain generally are just very cheap to complete.
The real estate market in general is very fractured, with people and companies working in different silo’s, not exchanging the necessary data and documents with each other. This could all change if the different stakeholders in the process would start collaborating more, for example by using the same distributed ledger. If we look at what specific documentation blockchain technology can replace, outdated paper deeds come to mind. These paper deeds will be digitized and will then be stored on an immutable ledger. But in essence all documents ranging from purchase agreements to inspection reports can be stored on a blockchain. This not only makes the entire ordeal a lot more transparent, it also makes life a lot easier for buyers, sellers and employees. No longer will you have to acquire a ton of different paper files from just as many different locations because everything will be stored and readily available. Another big positive in the documentation area is the effect it will have on fraud. When land and deed titles are stored on the blockchain, it becomes virtually impossible to cheat someone out of their belongings.
And let’s not forget the security effect blockchain technology will bring to all the documents with personal data. All this data will be encrypted and stored on the blockchain which will be very difficult to access or tamper with by an unauthorized party.
Investor and Tenant Screening
As with deeds, the prior scanning of both tenants and investors could be stored on the blockchain. The process now consists of manually scanning and checking every single tenant and investor that wants to buy, sell or rent a property. A lot of wasted time can be saved if previous (financial) information is available, stored and more importantly not tampered with. This information works both ways though, landlords can more easily avoid renters with a bad reputation of paying rent late, or not at all, and tenants can screen their landlords for bad behavior like refusing to maintain their property or having to deal with obscene increases in rent.
The above advantages mostly shed light on how blockchain technology can improve the current processes and workflows in the Real estate market. Adding ease of life improvements and better and faster ways of transacting between parties. While this is very important and shows the strength of a distributed ledger, the possibilities of blockchain in the sector could be far more widespread and impactful. Blockchain technology can completely evolve the way we buy and sell property, with whom we have to do business, and how we invest. We’ll explain below.
The real estate market of the future
Although we are still in the exploration phase of what blockchain technology can accomplish, we can already imagine how it will transform the real estate market. Because blockchain enables trustless and verifiable transactions worldwide, the market will become global. But there is an even more intriguing evolution in progress enabled by blockchain.
Let us try to explain tokenization in a simple way, excluding blockchain and smart contract effects. Let’s say we have something of value, perhaps a house, that’s worth $ 500.000,-. For most people this price is too high to buy in one go, so either they have to lend some money from people they know, or they take out a loan from a bank.
In comes tokenization.
You could convert the value of that asset into for example 5000 coins (or 50 or 50 million that number is entirely up to the owner of the property), essentially digitizing the value onto the 5000 tokens: Tokenization.
And because of all the reasons mentioned earlier in this article, blockchain can ensure who the rightful owner is of those coins. However, after tokenization, it is important to state what these tokens or coins truly represent (shares in a special purpose vehicle that own the real estate? A right to cash flow from a property?).
If you understand the power and the possibilities of the tokenization of assets on the blockchain, it is only a small step to envision a future where real estate is being traded in a stock-like fashion where businesses, but for the first time also regular people, can buy and sell tokens of particular properties. This will be done globally, with the prices of commercial, industrial, residential and agricultural real estate being determined in real-time by the price of the last token or tokens bought.
This has a tremendous impact with regards to the liquidity pool of potential investors for real estate. People that initially weren’t able to invest in anything can now buy parts of a house, apartment or any other kind of real estate object every time they have some money left to invest. They could save up for a couple of months and then buy a piece of the same property, or diversify in a couple of different houses, even located in different sectors or even countries.
If we then combine the strength of smart contracts with the tokenization, it’s clear to see where the strength lies. Owners of tokens of for example apartments with tenants paying rent will automatically receive a part of that rent on their account. Without the need of banks or other middlemen to transfer the funds or verify the transaction, reducing costs, and increasing the actual bottom line.
By now it should become clear that the real estate sector could profit extensively from the possibilities that blockchain technology enables. Currently, we see it takes quite some time for the decision-makers to adopt new ideas and technologies, but we hope that blockchain technology will be used as a flywheel and evolve the entire sector. If landlords and real estate investment firms embrace the inevitable they can cut costs, reduce fraud, increase transaction speeds and liquidity tremendously, and in general make life easier for themselves, their customers and their employees.
Investors and tenants would gain an entirely new way of investing, making the real estate markets no longer only available to the big boys. On the other hand, there are also industries that need to adapt or they will be left behind. Especially middlemen that refuse to learn about blockchain or develop the right systems using blockchain technology will slowly, or perhaps not so slowly, fade away. The ones combining their current knowledge of the industry with blockchain technology will become the winners of the next decades.
It is imperative that clear legislation will be released by governments in the near future since that remains one of the last bottlenecks to really get things going. And although the Real estate sector generally is slow in adopting new technologies, the first start-ups are experimenting with blockchain technology. We are excited to see where they are leading the industry and will make sure to keep you informed and updated.