The real estate industry is one where slow, paper-dependent processes can cause major delays in the change of property ownership. The involvement of numerous stakeholders, significant amounts of money, and various regulations create transactional friction.

Every transaction goes through many middlemen, including listing agents and banks, resulting in high transaction costs. Blockchain technology has the potential to transform all of this. Just one of the benefits would be the ability to authenticate and track transactions in real-time without the use of a third party, such as a bank. 

Challenges in the real estate industry

Property-related information is increasingly available in digital form but is often hosted on disparate systems, causing a lack of efficiency and transparency when it comes to property search processes.

In a real estate leasing or purchase and sale transaction, due diligence activities take up a lot of time. This is mainly due to the use of physical documents and other documents stored in soloed places. As verification happens manually, it involves plenty of administration and loss of information and errors are common. The involvement of third-party service providers adds to time and costs.

Managing ongoing lease agreements, property transactions and cash flow is complex. For instance, a lease requires various payment and service transactions that need executing, tracking, and recording on a regular basis. It is also important to have rigorous accounting, compliance and cash flow management.

The absence of real-time rich data results in duplication of records, opaqueness and data redundancy, which means that management decisions are often based on data sets that do not provide a real-time view of ongoing activities.

Recording property titles is challenging as much information is still kept offline. There are often concerns about the authenticity of the mortgage and title documents, as well as the accuracy of information attached to the title.

Processing of financing and payments can be time-consuming and inefficient due to the involvement of multiple-channel partners and extensive documentation.

Benefits of blockchain technology

Blockchain technology could enable the real estate industry to address inefficiencies and inaccuracies. It enables close to real-time settlement of recorded transactions. This can remove friction, reduce risks and limit the ability to cancel transactions

Blockchain enables two parties to transact directly with each other. The peer-to-peer distributed network records a public history of transactions and retains secure proof that they occurred. This verifiable record mitigates risks of fraud, abuse, and manipulation.

Why use Blockchain for real estate leasing, purchase and sales transactions?

Among core real estate processes, leasing, purchase and sales transactions are ripe for blockchain adoption. Managing real-estate properties involves various entities such as owners, lenders, tenants, operators, investors, and service providers. They all need to access, provide, and modify the information, so there is a need for a common database.
Using Blockchain technology can increase trust between participants involved in transactions by using digital identities and transparent record keeping. For example, Aqua, a blockchain-based property management system, allows hotels to maintain protected and encrypted records of customers across many different locations. Customers have more control and can validate and change their personal profiles and requirements.

More security and transparency in title management and auto-confirmation by government land registries would mean no need for trusted intermediaries, like title companies.

1. Efficient and reliable property search

A blockchain-enabled MLS (multiple listing service) would allow data to be distributed across a peer-to-peer network in a way that gave brokers more control over data and made listings freely accessible. Data would include details such as property location, ownership history, property age, capital values, comparable rental rates and tenant details.

2. Quicker due diligence

Using Blockchain technology would make it possible to create secure online records that would have a significant impact on the speed of the due diligence process. By moving it online, this would alleviate the challenges related to physical identity proof, underwriting and obtaining a mortgage commitment.

3. Smart contracts

On successful completion of due diligence, a smart contract executed between the buyer and the seller would automate every part of the lease or sale agreement. Buyers and sellers are able to access the smart contract using personal digital keys, reducing the risks of fraud. Computer protocols check the transaction is legitimate and no agreement is completed until all the terms are met.

Buyers, sellers, title agents, notaries, mortgage lenders and brokers can come together through a suite of smart contracts on the blockchain to facilitate transactions. For example, the loan contract between the buyer and the mortgage lender can be linked to the smart contract between the buyer and the seller.

Smart contracts can automate payments and fees to incentivize good behavior from landlords and tenants. Executing smart contracts offers immutable and traceable records, audit trails of transactions, including mortgage payments, property cash flows and ownership history. Smart contracts also enable buyers to track a mortgage in real-time.

4. Real-time insights for better decisions

A more open and shared database for all involved parties would enhance data quality and also enable real-time recording and retrieval. Using predictive analytics could help with drawing smarter and near real-time insights from the blockchain data. Using these insights could improve the quality of operating decisions.

5. Transparent property title management

Blockchain technology will be able to cut the amount of time it takes to record and transfer titles. A number of governments are currently looking at applying blockchain to store and access title records. For example, the U.K. government plans to move the land registry to blockchain by the year 2022.

Dubai is currently working on recording all real estate transactions on the blockchain. Sweden’s land registry authority, Lantmäteriet, together with industry players, already has a blockchain-based digital land register platform.

Benefits of having a blockchain-based digital property identity, including history, location and title details etc. include more security and transparency with less title-fraud risk. It would also speed up title transfer execution and use of title as collateral.

6. More efficient processing of financing and payments

Many blockchain startups and traditional payment platforms are currently developing and testing blockchain-based payment solutions.

According to PWC, mortgage applications take between 30 and 60 days to complete and with so many steps and intermediaries involved, the cost of obtaining one is high. Using Blockchain technology can simplify financing processes from the time of loan application, through due diligence to the servicing stages of a transaction.

Blockchain and Tokenization

Digital assets can represent real-world assets. Transferring property into a blockchain ledger, dividing it into small fractions and making the fractions available as tokens create a new path to property investing. Once tokenized, the blockchain allows secure, compliant digitization of transactions and processes around the assets. This potentially decreases the time and costs needed to raise funds and could help to raise bigger amounts.

Depending upon the investment amount, an investor gets a share of the larger token and can trade token shares on a secondary market based on current property value. Token investors own the private keys on the tokens and have undisputed control over the asset.

One player in tokenized real estate assets is Harbor. With total funding of $38 million from investors, it has created a platform for the tokenizing of private securities to raise capital.
The real estate market is not very liquid, mainly because of the involvement of large amounts of money and third parties like lawyers and banks.

Due to the large initial investment required, many potential property buyers are unable to invest in real estate. Property tokenization makes the market more liquid. Assets can be divided into smaller units. For example, a property selling for $2 million could be divided into tokens of $400 or less.

Blockchain-powered real estate crowdfunding

The Netherlands’ financial regulator recently approved the blockchain-powered real estate crowdfunding platform, Max Crowdfund. The platform’s parent company will be starting the roll-out with Julurida, a distributed ledger technology provider. Developers and investors can raise money from the public and investors can gain exposure for as little as 100 euros.

Outlook and adoption challenges

Despite many possible use cases of blockchain in the real estate industry, there are some barriers to wider adoption. One challenge is data related. It would require enormous effort to transfer real estate data sets, such as land title records, into the blockchain.

It is also highly likely that new data protection laws would have to be put in place specifically to regulate blockchains. For example, the European GDPR regulations include the right for users to have data deleted and the blockchain is programmed by default not to do this.

Another barrier to adoption is interoperability. For mass adoption, there would have to be an interaction between many different private and public blockchains. A company working on this is Wanchain.

A final word

As with any new technology, blockchain has critics who question its security and reliability. However, challenges to widespread adoption are in the process of being addressed. The real estate industry could certainly benefit from ways to streamline transactions, eliminate fraud and inaccuracies as well as offer more transparency.

This article is authored by a prominent, Province & Domain agent, Joshua Monteiro. To learn more about him, click here.