The world today is on the brink of an extraordinary revolution driven by “the great growling engine of change-Blockchain”. From banking and finance, supply chain management and healthcare to Government, security and transportation, Blockchain is disrupting conventional industrial arrangements, one after another. Fortune Business Insights studies that the global blockchain market size in 2019 was about $2.1 billion and it is expected to climb to over $69.04 billion by 2027, exhibiting a CAGR of 56.1% during the forecast period. While it is difficult to find an industry that remains unaffected by the application, Real estate hasn’t eluded the disruption either. Blockchain in real estate is addressing various core operations across the business such as asset management and property transactions. Real estate professionals today are realizing the potential of blockchain to revolutionize the market by boosting property sales, payments and investment opportunities in the industry.
What is Blockchain?
Originally conceived by Satoshi Nakamoto in 2008, Blockchain is a digital distributed ledger built around a peer-to-peer system that constitutes a list of records known as blocks, which are linked by cryptography to form an interconnected chain with each block having the cryptographic hash, transaction data and timestamp of the previous block.
The database is not centralized in nature and it distributes the information across the network among the participants (who are connected directly on a peer-to-peer basis). This leads to the accessibility and accountability of the data. This chain allows a write-once, immutable updating only by a consensus among the participants, making the system incorruptible and auditable.
To further ensure transactional transparency, Blockchain uses self-executing smart contracts that map the legal terms and conditions of an agreement into an automated digital protocol. By doing so, the need for an intermediary is removed.
By eliminating the laborious manual process, Smart contracts establish greater contractual security, openness and cost-effectiveness to the transactions.
Types of Blockchain
A permissionless blockchain network is a public, non-restrictive distributed ledger. It operates without a central owner. Anyone on the internet can sign in to the platform and become a participating node authorized to validate transactions. They are also approved to access past and current records.
Each node in a P2P network owns a full and up-to-date copy of the entire ledger. Every proposed local addition to the ledger by a network participant is communicated across the network to all nodes. Nodes collectively validate the change through an algorithmic consensus mechanism. After the validation is accepted, the new addition is added to all the respective ledgers. This ensures data consistency across the entire network.
The most common examples of a permissionless blockchain are Ethereum and Bitcoin.
Contrary to its permissionless counterpart, a permissioned blockchain is restrictive. A private distributed ledger, permissioned blockchain operates in a closed setting. It is accessible only by participants or nodes trusted or “permissioned” by the central entity to access the network and make changes to the ledger.
The base of this model consists of privately hosted nodes among key participants and applications running at the summit level of the distributed network.
Hyperledger is the most common example of a permissioned blockchain.
The pillars of Blockchain
Blockchain is most keen on disrupting the centralized structure of data storage. It eliminates the presence of a central authority which was vested with the exclusive license to validate new transactions and records in a traditional database.
Blockchain adopts a decentralized structure that equally allows every participant to access past transactional records and validation of new ones. The decentralized arrangement also makes the system hack-resistant than a centralized ledger, the single database of which is vulnerable to cyber-attacks and tampering.
In Blockchain, the identity of the participants is encrypted via complex cryptography. However their transactions are still visible in the network which confers unprecedented transparency in a financial system.
Due to the incorporation of the cryptographic hash function, Blockchain makes a data permanent and unmodifiable. This is because when a new block is hashed in the ledger, it includes the data from the previous block, creating an unbreakable chain. Once created, the data in a block cannot be altered and any attempts of revision would be rejected by the subsequent set of blocks due to an asymmetry of their hashes and break the chain altogether.
This ensures the immutability of data and provides a greater amount of accountability.
Why does the Real estate industry need Blockchain?
A $217 trillion industry, the global Real estate market is the world’s largest asset class.
However, the industry is heavily bedevilled with transactional friction and asymmetric information. Intransparency of real estate data with no public ledger for its registration has led industries to hire third parties like auditors and banks for data verification. This in turn results in a ton of hectic paperwork, and ultimately culminates in higher transactional costs.
The presence of multiple brokers, owners, tenants, and other intermediate entities also generates a risk of information being modified. A possibility of mistrust breeding among participants also exists.
According to the National association of realtors, 48% of real estate firms cited that keeping up with technological innovations was the one of the biggest challenges faced by their firms in the last two years.
The introduction of Blockchain in the Real estate industry can relieve these bottlenecks by:
- Improving trust and promoting transparency
- Creating an Immutable shared database
- Optimizing transactional process
- Mitigating Frauds
- Increasing liquidity
Steps to using Blockchain in a real estate transaction
- Property search through blockchain-enabled MLS
A blockchain-enabled MLS system (multiple listing services) allows users to search and find listings based on their requirements, which the users enter in the MLS.
- Property Visit
Buyers visit the properties that suit their requirements. The visits are scheduled by the brokers.
- Negotiation and signing of the letter of intent
Both the lessor and lessee negotiate the terms of the deal. If the lessee is satisfied with the terms and value of the deal, he/she sends the letter of intent to the lessor.
- Pre-lease due diligence
Before signing the deal, the lessor conducts background and identity verification of the lessee with the use of the digital identities of individuals stored in the blockchain. The lessee, on the other hand, can cross-verify prior claims and transactions on the property using the blockchain-based storage of the asset data.
- Framing of the clauses of the agreement
Once both the parties are satisfied with the agreement terms met between them, the clauses and terms are formulated by legal teams.
- Lease agreement
The agreement is recorded in the Blockchain network in the form of a smart contract. Security deposits or advance rent payments can then be initiated through bank accounts or bitcoin wallets. Once the property is transferred to the lessee, the transaction agreement is officially recorded.
- Automated payments using smart contracts
The smart contract releases the regular lease payments from the lessee to the lessor based on the terms in the agreement. On completion of the lease term, the smart contract then transfers the security deposit to the lessor.
Blockchain applications in real estate (Use Cases)
- Property search process
Traditionally, Real estate primarily uses third party platforms for property listings that serve as the platform for communication among sellers, brokers and buyers. Carrot reports 84% of new homebuyers deem online information crucial for their property search process. However, these third-party platforms lack uniformity and they fragment the property information across multiple listing platforms. This results in the inaccuracy and insufficiency in the property specifics.
Blockchain, on the other hand, stores the property listing on a single decentralized peer-to-peer database network. This enables the brokers and owners to have complete autonomy over their data, and recognises their sole validating authority of the information, without the intervention of any third parties. This establishes the accuracy of the property listings and substantiates their authenticity.
- Property management
Real estate property management is currently conducted through manual paperwork by multiple stakeholders including landlords, property managers, tenants and brokers. This upsets the much needed balance in the integration of the property data.
The application of blockchain organizes all aspects of property management from data sharing, signing of lease agreements to streamlining payments and cash flow management under a single decentralized platform.
Through the introduction of smart contracts, a lessor and a lessee could enter into a digital peer to peer agreement. The contract would entail terms like rents and scheduling of payment frequency, mortgage agreements, due diligence etc. This instils transparency and efficiency in the overall operation while cutting on costs and time at the same time.
The lease is the most important step of a real estate property transaction, which legally binds the participants of a property transaction by the means of a written contract, that entails the terms of the agreement met between the parties.
Executing a real estate lease using smart contracts enables leases to be signed without manual reconciliation. The smart contract signed digitally by both the parties include all the details related to the property, tenant and rental value. It can be used to automate the rental and lease payments to property owners. As a result, the lease contract becomes a smart tenancy contract which restores seamlessness, transparency and a legal validation to the transactional process.
- Tokenization and Real estate Investment
The World Economic Forum reports, in the next 10 years over 10% of the world’s GDP will be stored in crypto assets.
Blockchain-based tokenization refers to the digitization of real assets. It is the process where assets are divided into shares or “tokens” which then represents a pre-defined share of the asset. These tokens are secured in the blockchain ledgers and the owner can trade these “micro-shares” of their assets to investors via crypto exchange. The investors then become fractional owners of the asset.
Tokenization enables investors to buy and sell real estate properties and owners to raise capital directly without any intermediary. Investors can trade tokens expeditiously at a much reduced cost of investment. Furthermore, this gives a large number of small and mid-sized investors the opportunity to enter the real estate economy with real assets alongside large accredited investors, thereby expanding the market boundaries.
The owners/developers also market their assets to investors globally without any financial third party which in turn improves liquidity through increased crowdfunding.
Tokenization can also be programmed to include rules to ensure that asset issuance and distribution comply with regulations and meet the requirements of the issuer and the demands of the investor, thus making the transfers transparent and risk-free.
- Land title and property registry
In real estate, Land titles and property registration continue to rely on lengthy hardcopy documentation and legal procedures, which makes them susceptible to errors and fraud. American Land Title Association reports, an error rate of 25% is detected in titles during the transaction process, which, until rectified, halts the property title transfer to buyers.
Blockchain aims to replace the obsolete paperwork with the use of immutable digital records of land titles. The encrypted nature of the digital records reduces the risk of title frauds and authenticates the property titles without any costly third-party legal intermediation. Thus the property title management process is optimized to include a higher degree of transparency and cost-effectiveness.
Payments and money transfers in the real estate incurs a considerable fee and an arbitrary time period and paperwork. In the case of cross-border payments, transactional rates increase twice as more due to foreign exchange and intermediary charges.
With the application of blockchain and its smart contract component, cross border transactions are accelerated and reduces the transaction rate 80%.
The digital identity records of property and participants reduce the due diligence and documentation time.
The distributed ledger provides a common transparent platform that allows participants to pre-authorize transactions and track the end-to-end transmission of payments in real time. Besides, the contract also encompasses all the informational meta-data including the details of the sender and receiver. As a result the risk of delayed payments is minimized.
- Loan approval and mortgage securitisation
The current mortgage lending operation is an elaborate paper-based process. The necessity for multiple third parties for the confirmation of information and settlements, makes the entire procedure severely time-consuming.
The National Association of Realtors observes that the current process of mortgage approval for residential properties takes around 30 days to complete, while the waiting period gets extended up to 90 days, in the case of residential real estate.
Blockchain removes the trail of documentation and streamlines all of the data onto an immutable smart contract which is accessible by both borrowers and lenders. These smart contracts include every crucial information regarding ownership rights and loan transaction history. The contract facilitates the borrowers to track their loan status and the lenders to benefit from quicker identity verification of the borrowers. As a result, real-time payment settlement is achieved.
- Due diligence and Financial evaluation
Due diligence in the real estate property transactions involves the verification of a property’s history regarding ownership, maintenance, repairs, occupancy etc. This verifying operation is still a predominantly paper-driven, offline process.
Physical documents and involvement of multiple third-party expose the process to errors and corruption, and elongate the entire transactional time period.
This tedious issue in real estate can also be resolved through Blockchain.
Blockchain introduces digital identities, a digital record of all the physical, financial and legal information of the property. In addition to the property, identities of the transacting parties like the tenants and investors can also be digitized in the arrangement. This saves the additional need and expense of background checks. The process of financial evaluation becomes hassle-free and the data integrity is safeguarded, by securing only the accurate data in the ledger.
Digital identity records thus increase efficiency, lower costs, enhance data security, and eliminate the presence of manual errors.
Today the practicability of Blockchain in the real estate market is still at an elemental stage.
Essentially a paperwork based industry, the Real estate marketplace operations still dwell in opacity, bureaucracy, scams, and mistakes in public records.
However the adoption of its disruption has the potential of radicalizing the real estate horizon by weaving enhanced cost efficiency and transparency in its operations. Proper knowledge and utilisation of the Blockchain services would unlock capital flow and investment opportunities in the real estate ecosystem and usher the market into a digital era of decentralization.