blockchain in real estate

While technology has not caused tectonic shifts in the real estate industry in the past, Blockchain real estate has emerged as a crucial driving force in the industry recently. Blockchain platforms are instrumental in the ongoing transformation in the real estate market with their decentralized, peer-to-peer networks that eliminate intermediaries thereby reducing the costs of the property transactions process. 

Furthermore, blockchain real estate implements smart contracts that instill much-needed transparency and security in the operations. On the other hand, tokenizations and fractional ownership bring down the financial barriers of investment in the market. 

Hence, the endless use cases and benefits of blockchain in real estate transactions can entirely streamline the operations while saving both time and costs.

What is blockchain real estate?

Blockchain is a digital, decentralized ledger of all transactions in a peer-to-peer network. Therefore a blockchain contains blocks that store specific information or data of a transaction. This data once stored, cannot be altered or tampered with. 

Hence, these recorded data become immutable. Moreover, the decentralized structure of Blockchains enables all permissioned users to access information in a secure, efficient, and transparent way.

Let’s break down the steps of how Blockchain works:

  1. A transaction or data is requested.
  2. This request is transmitted to a peer-to-peer network of computers/nodes.
  3. These nodes process the request using algorithms.
  4. The requested information which can be a record or a legal contract is verified by the nodes.
  5. The transaction is encrypted.
  6. After encryption, the ledger is updated with a new block of data.
  7. This newly created block of data is eventually added to the Blockchain and cannot be altered or deleted.

The global real estate industry can use blockchain technology in several cases along the entire property value chain. It can tokenize equity interests in real estate. 

Furthermore, blockchain-based smart contracts also digitalize land records and rental collections, and payments. Therefore, the application of technology to legacy real estate processors will help reduce a considerable amount of friction while speeding up the process of buying, selling, leasing, and financing this asset class.

Blockchain real estate enables tokenization and fractional ownership

Deloitte states that “ tokenization of assets is the process of issuing a Blockchain token or a security token that digitally represents a real tradable asset”

So, in residential or commercial real estate, tokenization creates tokens on the blockchain and assigns them to real estate properties. Thus, these tokens represent a certain amount of ownership shares of these real estate assets. These include equity, debt, or cash flow.

For instance, 25 different investors secured on the blockchain, owns a 50 unit apartment building. Each of those investors could own tokens that reflect their ownership in the equity of that asset. 

Therefore, in such a real estate Blockchain platform the investors can store their documents and transaction data. This, in turn, can verify their ownership tokens. As a result, these tokens become tradable. So, the investors can easily sell and liquidate these tokens.

Moreover, Blockchain-based tokenization disallows third parties from participating in real estate transactions and buying asset shares through initial coin offerings. 

In addition to this, tokenization allows the investors to raise capital for development investments. It tackles the age-old illiquidity of real estate. Investors can move their funds and property owners can manage their equity more efficiently. As a result, the Blockchain platform democratizes real estate investments for a wider base of investors and developers.

Fractional ownership

In addition to tokenization, decentralized blockchains can help leverage fractional ownership in commercial real estate.

Typically commercial real estate investments would require significant capital upfront. Instead of a Real Estate Investment Trust purchasing an institutional-quality asset, a lead investor can share their shares of assets digitally. Investors with restricted resources can acquire these tokens for as low as $1 each. Therefore, each investor can micro invest and own a stake in a property.

Moreover, fractional ownership also takes the burden of property management off these retail investors. Therefore, they can enjoy the benefits of passive investments in sophisticated commercial real estate projects.

Blockchain real estate: smart contracts streamline commercial real estate operations

Smart contracts are fully automated, self-executing contracts. They record specific clauses and rules in the form of protocols and place those in a blockchain network. Therefore these electronic contracts do not need any manual support and can automatically trigger defined actions.

With the help of smart contracts in real estate, investors and property managers can take care of several tasks. These include escrow management, payments, transfer of title, and so on.

Payments and leasing

Smart contracts automate every payment ranging from rents, Security deposits, fees to maintenance, Lease, license, escrow, and purchase payments.

Smart contracts could trigger these actions depending on the secure code embedded in the contract. 

Therefore, such automation would reduce settlement time to seconds and even facilitate cross-border transactions without any intermediaries.

Automated legal agreements

Smart contracts could program leases, purchases, and sales agreements. As a result, they are automatically executed and enforced when the pre-decided conditions are met.

Moreover, a mutual blockchain-based KYC procedure among the participants of a transaction can conduct proper due diligence of these digital identifications. 

In the context of real estate, digital identities would store information about an entity. These include their financial and legal status, the tenant profile, and so on. So, blockchain real estate could accelerate pre-transaction procedures. These include underwriting, financial evaluation, and securing a mortgage commitment.

This reduces the expenses related to inspections, registration fees, and the professional fees and commissions charged by intermediaries.

Registries and Sales

Mismanagement can often lead to errors in land titles, which in turn can lead to inaccurate ownership of the property. Hence, buyers and sellers often have to go through a lengthy and costly procedure to correct these mistakes in land registries.

However, blockchain can prove useful in such cases. The data stored in a blockchain is immutable and hence, is a secure, shared source of truth. Therefore, blockchain can provide real and instantly verifiable proof of title insurance. 

So, this reduces the possibility of a dispute regarding the owner of the property and whether or not there are any open claims on that property.

Hence, the digital, distributed nature of blockchain eliminates tedious paperwork, risks of fraud, and property loss. Moreover, buyers and sellers need not hire any middleman and pay them hefty fees.

The Lilypads Bottomline

In a nutshell, Blockchain real estate is still at rudimentary stages of implementation. Despite its numerous uses and benefits, it will likely still be years before we see Blockchain be a part of mainstream real estate operations. 

Real estate investors, firms, buyers, and sellers still need a significant amount of technical proficiency to grasp the underlying nuances of Blockchain. However, it is noteworthy that the adoption of this innovative technology will not only speed transactions and cut down costs, but also introduce transparency and security in the market. 

Furthermore, the revolutionary strategies of tokenization, fractional ownership, and smart contracts would enable individual investors to participate in sophisticated real estate projects and generate maximum returns with minimal investment.

Also read by Lilypads:

  1. Blockchain in Real estate: a much needed revolution
  2. Blockchain in Real estate: unlocking change
  3. Commercial real estate deal management with blockchain