How is Blockchain Revolutionizing Real Estate?
Updated: Nov 3, 2023
Real estate is a physical property of land and improvements such as buildings, roads, structures, etc. There are different types: land, residential, commercial, or industrial real estate. Real estate (RE) is among the safest options for investing. It acts as a hedge against money inflation and gives investors a sense of security in their investments. Real estate investments are available for everyone and not only just to experts.
Real estate has been non-volatile and considered risk-free for a long time. It is a physical asset that looks great on an investor’s portfolio for expansion. Despite its value, the way businesses run in this asset class is complicated, costly, inefficient, non-transparent, and, most importantly, out of reach for newcomers and individual investors. However, integrating real estate into blockchain technology promises revolutionary solutions to these problems.
In this article, I will explore How it is Blockchain revolutionizing Real Estate?
The Common Challenges of Real Estate
1. High Capital is Required
Real estate tends to be dominated by institutional investors and individuals with high net worth, preventing ordinary and low-level investors from gaining return profit from their growing real estate investments. Real estate investments provide owners with security towards unexpected and miscalculated possibilities. However, it is not liquid wealth, and to access wealth trapped within, investors have to sell their equity or seek financial aid to secure their release.
In addition, Commercial Real Estate (CRE) is slow and problematic in transforming its core business methods. CRE brokers and intermediaries struggle to cope with old technology and its mechanism for sharing data. They also face challenges managing cash flow and gathering real-time performance data. These drawbacks in currently run methods affect tenants, owners, and investors.
2. High Fraud Risk
There’s a higher Fraud risk using the traditional methods since agreements are on paper and trust is human-based. Around 1.48B records were found fraudulent from 2005 to 2019.
3. High Expense
Expense is also an issue due to multiple intermediaries and fees such as broker fees, attorney and tax, etc. All these expenses are added to the real estate value, making these investments expensive.
4. Trust
Current RE methods are based on human factors, and parties must involve another party to build trust for these investment processes. Due to the involvement of multiple agents, the RE Investment process also suffers from transaction speed. According to a survey by Chinese officials, 44% of investors fix an appointment with RE agents before investing in a new place. Furthermore, 74% of investors contact more than one agent to find the best deal and decide which area they should buy the property. This involves a lot of time which can be used to better the outcome.
The Concept of Blockchain
Blockchain technology promises a revolutionary solution to the everyday challenges associated with real estate investment. Blockchain can seem challenging to understand, but its core concept is simple. It is an information recording system in a way that is difficult to alter and hack. It is a digital ledger distributed across a network of all systems linked on a blockchain. It is a type of database, a collection of information stored electronically on a computer system.
The core difference between Database and Blockchain is that of centralization. Records are centralized in the traditional database, whereas each participant in blockchain has a secured copy of all records and changes to view any changes and provenance of data. Participants are notified when a new transaction occurs and update their ledgers.
Due to a decentralized database managed by different participants, this technology is called Distributed Ledger Technology. Each transaction in the blockchain is recorded with an unchangeable signature called a hash. Blockchain collects information in the form of a group known as a block. These blocks have storage capacity, hold data, and are chained onto the previous block using the hash to form a chain.
Check out these articles on Blockchain and Real Estate Tokenization.
Blockchain work process
Blockchain is a distributed ledger that records all transactions in the form of a block, and each block is connected using a cryptographical code called the hash. When a transaction occurs in the blockchain, it is stored in the block in an irreversible chain. The transaction is transmitted to a network of scattered peer-to-peer systems, and when they validate the transaction, these transactions are clustered in blocks.
Key features of blockchain technology are:
1. Immutability
Anything within the blockchain cannot be altered or changed. Data stored is permanent and unchangeable and cannot be updated without validation. Blockchain features through nodes, and each node has a copy of a digital ledger. Each node authorizes every change before adding it to the ledger. Therefore, any validated data cannot be altered or changed. This is important to promote transparency and avoid corruption.
2. Decentralization
Blockchain is decentralized, meaning the network distributes control and decision-making. It makes the blockchain system transparent and authentic and avoids scams. No one has to trust anyone in a decentralized blockchain network as each member has an exact copy of data. If a member tries to alter data, it will be rejected by the rest of the participants in the blockchain.
3. Security
Cryptography is another essential feature that makes blockchain even more secure. It is a complex algorithm that acts as a firewall against attacks on the blockchain. All information is hashed cryptographically and hides the nature of the data. It gives a unique identification to data. Every block has its hash and hash details from the previous block, and changing data means changing the hash, which is impossible without alerting the participant.
Blockchain in Real Estate
The real estate process in the blockchain is divided into multiple steps:
1. Buyer and seller will meet online at a marketplace, where the property is listed, and details are available to everyone, including owner details, location, custody chain, area, etc. The market is integrated with systems to ensure users' authenticity.
2. Blockchain identity verification method will be used to identify users. These verification methods can be run by investors, agencies, banks, the government, etc. Identify will be verified through different sources such as bank transactions
3. Once both parties involved decide to go ahead with the agreement, all details will be stored in the form of a smart contract
4. Based on set terms and conditions in the smart contract, payouts will be credited to the seller, and acknowledgment of ownership is provided to the buyer. All data will be recorded on the blockchain to be later analyzed.
Block-chain process in real estate
Smart Contracts
Challenging issues in the RE investment process are managing a lease agreement and operations within a property and cash flow. These complex tasks can be achieved using “Smart Contracts” based on blockchain. Transactions are documented daily from the start of a contract. Traditional contracts can be replaced by automated smart contracts that record all data related to payments and transactions regularly without any required intervention. Revenues and cash flow management can be complicated in real estate. Fees for tenants are limited to the landlord, and other parties involved, such as auditors, brokers, banks, and other institutes. This is why real estate companies invest significantly in accounting and cash flow managing activities. This issue can also be resolved using smart contracts based on blockchain technologies.
All parties involved can sign a smart contract that holds details of transactions, among other required information. These contracts can use this information to begin a lease payment to the landlord. This method can also trigger the return of the deposit payment to the tenant at the end of the contract. Smart contracts allow all parties involved to get the required information from a single source without corruption. In addition, these contracts can be used to transfer the property title from seller to buyer. Current manual registry procedures to take details can be changed with smart contracts to complete entire land sale transactions, saving investors significant time and money. These contracts increase execution assurance, simplify the process, and reduce financial costs.
Property Diligence
After liking a property to invest in, the first step is to perform careful and necessary background checks related to the property. One of the critical issues is to ensure the buyer will not face any issues in the future related to the property. This requires making sure the seller is the actual owner of the property. Records should be transferred, keeping certain of the seller’s rights and ensuring ownership is transferred to the buyer correctly. Review of all legal documents becomes paramount.
These documents are stored physically, sometimes missing, and verification is done manually. This process is often lengthy and most likely to be prone to human fault. Blockchain can simplify this tedious method. Data can be stored digitally in the blockchain platform. This data can include property records such as ownership, ledger, and financial information. This eliminates the need for third-party involvement. Whenever an owner needs to be verified, historical data can be checked, and authenticity can be identified. This can reduce inefficiency and inaccuracy and save time in the background-checking process.
The real estate investment process mainly consists of careful and persistent work and effort to find the right property for purchase or rental. Intermediaries inspect documents to avoid legal, financial, or technical issues. Unfortunately, all legal work is paper-based in current methods and can be changed or corrupted easily. This can be improved by using Blockchain-powered platforms that allow the viewing of authorized data publicly and to all parties involved, which cannot be altered. This makes financial evaluation methods quick, accurate, and automated.
Tokenization
Security of assets is another issue in traditional real estate methods, and it can be resolved by securing digital assets. This process is called tokenization. Blockchain issues token to assets, which can be used to assign ownership rights, store rules, and transactional history. They can also be traded, similar to stocks and cryptocurrency. Tokens can be divided into pieces and become available to a larger audience. This reduces the investment cost, allows faster transactions, and paces up the procedure in the real estate industry. This results in more people investing with minimum capital and offers the possibility of establishing a new business. Tokenization benefits both seller and buyer, making the real estate investment procedure. Tokenization removes go-betweens, which makes investments a lot cheaper and more manageable. These tokens can be traded almost instantly and for a low price. Using tokens, investors get high returns on their investment by investing very little. These tokens carry little risk as actual physical assets back them.
Current System Analysis
Blockchain is a solution to current real estate problems, and because of that, private and government sectors are also investing in this technology. For example, Vermont and Arizona have recognized Smart contracts as authentic for their transactions related to Real Estate. In addition, Sweden’s land registry authority, banks, and other startups have introduced blockchain in their real estate methods.
Challenges: Although blockchain can change the real estate industry's landscape, real-world applications are still few and far between. The biggest challenge to adopting blockchain is the infrastructure required to make the process seamless. Such a large-scale transformation is complex, especially in an industry like real estate, which has been established for decades, and people resist change. Therefore, there’s a crucial need for lawyers to work together with technologists if blockchain technology is adopted widely.
Data protection is also a challenge in the blockchain. General data protection regulation (GDPR) allows the right to have data removed when no longer needed in a process. However, data stored in the blockchain cannot be removed from the ledger or replaced. There are methods to amend data, but this needs to be made clear to participants.
The use of blockchain to distribute information may present challenges due to its complexity; this technology can prevent implementation in universal applications. Nevertheless, it is clear that blockchain technology has many benefits for the real estate world, but a few drawbacks need to be addressed before its implementation.
By Edith Lagunas #mujerinvestor #finance #investor #investing
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