Blockchain In Real Estate: How The Technology Changes The Industry
At the moment, the real estate market isn't the most stable, but it still plays a significant role in the global economy. This is especially true for commercial real estate: the industry keeps developing and innovating. One of these innovations is the blockchain, which opens up a lot of opportunities to change the whole area for the better.
Blockchain technology has long been improving the banking and financial sectors, now it's time to do the same with the real estate market as well. Moreover, there is a real danger that the traditional approach to property deals will soon become irrelevant. Imagine: no realtors or agents, banks as an optional link, and the process of buying and selling property takes just a few days. All this would be possible thanks to blockchain for commercial real estate.
We offer to detail the issue properly and figure out the best way to implement technology in your business processes.
What Is Blockchain For Real Estate?
According to the Grand View Research, by 2025 the global real estate market will have reached nearly $4.5 billion in revenue. Impressive figures, but sad statistics can spoil them. The thing is, even in the most developed countries like the US and the UK, the industry suffers from huge financial damages: over the past few years, the number of fraud cases has increased several times. What's more, the real estate sector is quite inflexible, all processes are slow, which reduces the profitability of property projects too.
Fortunately, the problem can be easily solved with the help of blockchain for commercial real estate.
Most of us associate the concept of blockchain exclusively with the cryptocurrency market, but this is no longer the case. The history of the blockchain did begin with cryptocurrency transactions, but today the possibilities of the technology have greatly expanded. After all, at its core, a blockchain is a reliable network (or a chain) consisting of data blocks distributed on the devices of different users in different parts of the world. The system is decentralized: in other words, participants in the blockchain are equal, there is no controlling (leading) party among them.
Each block of information is securely protected and encrypted with a special key, thereby reducing the risk of hacking or forgery. Moreover, the use of the blockchain helps us avoid intermediary services, which is of high relevance to so many domains and business areas.
We covered the topic of how blockchains work in more detail in our other piece (follow the link).
As you can see, using blockchain technology in real estate is an excellent and promising idea. We exclude third parties from the process, such as realtors and notaries, and ensure the security of transactions.
The very first blockchain-based sale and purchase of property took place on the Ripple platform in 2017. It was this year that the New Yorker bought a house in Ukraine (namely in Kyiv) and spent 60 thousand dollars.
The experience was successful and marked the beginning of other similar projects.
Major Challenges Facing The Real Estate Industry
The real estate transaction process is more or less clear, but in its traditional form, it leads to problems of all sorts. Let's go deeper into the issue.
More Fraud Opportunities
Real estate fraud in the US and Europe is hardly uncommon, in fact, over the past couple of years, the number of such unpleasant cases has grown by more than 1000%, which has led to large financial losses. That is proved by numerous researches, including the report of the Internet Crime Complaint Center.
But why does the global real estate market suffer from fraud cases? We’d like to identify at least 3 key factors that explain why it is happening this very way:
Real estate deals are complex, multi-stage, and involve a fair amount of paperwork, giving scammers plenty of room to cheat.
Fraudsters have a motivation, namely, the high cost of real estate. The temptation is high and pushes the criminals to law-forbidden tricks.
While streamlining transactions, which is good, the Internet makes it easier to steal data, including those related to property… and that’s bad news.
Luckily, the above problems will remain a sad memory after we implement blockchain technology in real estate. By doing so, we digitize information about property objects, transfer it to the blockchain system, and thereby make it secure and immutable. Manipulating the data stored on the blockchain is much more difficult, almost impossible.
Too Much Bureaucracy
As already mentioned above, real estate deals have much to do with paperwork and signing multiple contracts and agreements. Moreover, everyone involved makes a lot of efforts to check the correctness and legality of each document, as no one wants to be deceived. Surely, all this slows down the real estate transaction, which, as a result, can take from a month to two (a fair amount of time, you must agree!).
Blockchain implies not only the digitization of workflow and confirmation of the authenticity of documents (which makes it a good thing in itself) but also the use of real estate smart contracts. These contracts are properly detailed below, they have a lot of advantages, the main of which is the opportunity to automate the transaction and guarantee the conditions for its execution. And, of course, let's not forget about the transparency of the process, which means each participant has access to documents in real-time.
The traditional approach to real estate involves many parties, and not all of them (let's face it!) are actually needed. The seller and the buyer of the property are mandatory participants (of course!). The same can be said about the land registry. But notaries, realtors, lawyers, banks, and insurers could be excluded from the transaction process... if it doesn’t work out 100%, then you can at least reduce their influence.
Of course, reducing the influence of intermediaries is possible only for blockchain-integrated real estate transactions.
Investments are always associated with high costs, which, ideally, will pay off over time, and real estate is a prime example. And since property objects are quite expensive, only large companies able to overcome the entry barrier (at least $300,000) have a real chance to invest in them.
For instance, in the US, only accredited investors and participants in REITs (Real Estate Investment Trust) are eligible to invest in real estate.
Blockchain solves the mentioned problem, and you’ll soon find out how, just read on.
Tedious Search For Real Estate Information
Any real estate transaction begins with a search for information. There are different ways to perform the task, the most popular is the use of various multi-listing platforms containing data on properties. It seems like a smart approach to business... but it has its drawbacks, namely:
the need for a subscription on a paid basis (not always, but often);
uncertainty about the reliability of the information offered and the inability to check it;
unsatisfactory updating of the database, which leads to irrelevant information.
With blockchain real estate applications, you’ll find the required information without facing these problems.
The Financial Aspect Of The Matter
With the traditional approach, financial transactions are filled with concerns: you have to go through several payment stages, involve third parties (usually notaries), deal with a lot of paperwork, and, as a result, lose more time than expected... still further, the total cost of selling property eventually grows because each additional participant in the process requires a commission for the services provided. And with all that, you can't rule out the risk of fraud anyway!
As you may have guessed, blockchain (namely, self-executing smart contracts) solves this problem too.
Key Benefits Of Blockchain In Real Estate
Transparency of real estate deals. The details of each property sale are securely stored on the blockchain network, and the parties to the transaction access them whenever they want. Thus, they always understand at what stage the transaction is and what is going on in general.
Less influence of intermediaries. The tokenization of information and the use of real estate smart contracts reduce the need for intermediaries. In most cases, the buyer and seller of the property (or the landlord and the renter) can communicate with each other without involving other participants.
A simplified approach to financial management. We’ve explained to you how complex and time-consuming payment processing is without the use of innovative blockchain-based systems. Happily, smart contracts are able to improve the situation by automating financial operations and thus simplifying and speeding them up.
Decrease in cases of fraud. Perhaps, among all the benefits of blockchain in real estate, this one is really decisive. In the end, financial fraud and the manipulation of property information are by no means uncommon, and going online hasn’t solved the problem: on the contrary, we’re now seeing sophisticated cybercriminals capable of doing a lot on the Internet. However, thanks to the blockchain, processes become transparent, the stored information is immutable, payment transactions are automated, which, coupled together, reduces the risk of fraud of any kind.
Affordable investments. If you have limited capital, you cannot invest in real estate. Sounds logical, right? Fortunately, this is no longer the case. Blockchain lowers the barrier to entry and allows each of us to participate in investing. The explanation is in the possibility of tokenizing a property, turning it into some kind of digital coin. Moreover, one object can be divided into several tokens without limiting the minimum value of each coin. As a result, anyone, anywhere, is able to invest $100 or $10K in real estate in England, France, China… and so on.
Informed decision-making. Let's summarize the above and say that the blockchain provides us with more accurate information, which allows us to make informed decisions without unnecessary delays.
How Do Blockchain Real Estate Applications Work?
In the first stage, the buyer and seller (or lessor and the lessee) use the blockchain platform to find each other. The platform contains verified information about the property, such as details of the owner, location, transaction history, if any, and much more.
Ideally, the system is also integrated with financial and government solutions to provide digital payments and ensure data validation. These features automate the verification of key information, including the identity of the seller and buyer, the experience of the realtor (if he is involved in the transaction), the truth of the property information, etc.
In the second stage, both parties discuss the deal and come to a consensus. Once this has happened, they can conclude a self-executing contract (read below what it is and what its benefits are).
Everything goes automatically, transparently, without putting either the seller or the buyer at risk. The buyer sends money to the seller, the transaction data is encrypted and transmitted to the blockchain participants. After confirming the information, the transaction is stored in the database, the money is transferred to the seller, and the buyer takes ownership (of course, subject to the conditions of the smart contract, and no other way).
Transaction data appears on numerous computers around the world, providing additional protection. Thanks to such an approach none of the parties faces fraud or deception.
How to Apply Blockchain For Commercial Real Estate?
We've detailed the challenges facing the traditional real estate industry and revealed how much you would gain by implementing innovative technology. However, there is a chance you still don't fully understand how to use blockchain solutions... so it's high time to give you specific and clear examples.
Use Real Estate Smart Contracts
Let's start by finally revealing the essence of smart contracts, which we mentioned so often in our article.
They are a self-executing set of predefined rules designed to automate and secure the transaction process. The digital algorithm makes the program autonomously perform certain actions when the specified trigger goes off. Let's say if event X (a trigger) occurs, then the amount of $Z must be transferred to parties A, B, and C in the ratio of 30:30:40.
Here's how it works:
The parties discuss the terms of the transaction and digitize them after all details are agreed upon (that is, the rules of the smart contract are being prescribed in the 1st stage).
A smart contract fixes the terms of the real estate transaction and determines the methods for verifying their implementation. From now on, they cannot be changed.
The activation of a trigger (a certain condition predetermined by the parties) leads to the self-execution of the smart contract. Usually, it’s about a smart contract transferring money to the seller’s account and doing the same with property rights: they're being transferred to the buyer.
The whole procedure takes up about an hour, sometimes even less (it depends on the speed of the blockchain). Therefore, a smart contract saves the time of the participants in the transaction. Also, it secures the deal itself: after all, you can hardly deceive a digital algorithm or bribe it: the seller will receive his money, and the buyer will get the rights to the property only if the terms of the transaction are fulfilled (for example, the buyer’s identity and solvency are confirmed, and the property being sold fully meets the declared parameters).
Tokenize Real Estate Objects
Also, it would be smart of you to turn a piece of real estate into tokens, which are a digital format of physical assets. Whoever bought the token(s) can be considered the owner of the property it (or they) represents.
If you bought just one token, while the property consists of several digital coins, you own only a part of the object.
There are different ways to strengthen your business position with blockchain technologies, and one of them involves using the so-called smart contracts.
What does tokenization, as part of the blockchain real estate system, give you?
no problem with the proof of ownership of real estate;
the ability to trade tokens and attract investors (and one object, divided into several tokens, can attract several investors);
digital documentation of property information. Tokenization doesn’t always replace legal documents, but it speeds up the transaction process and makes it easier to verify assets.
Let's use an example to illustrate what we're talking about.
Imagine an apartment building. Being digitalized, it can invite a few (say, 20) investors, and each one will own the token(s). And these investors will have no problem proving their ownership. After all, information about the real estate transaction, including its date, owners (current and former ones), and history, now exists as tokens, which are stored in a secure blockchain network.
Search For Real Estate Data Quickly & Cost-effectively
You already know that finding up-to-date real estate information is a true challenge. Not only can the data on the listing platforms be unreliable and outdated, but the platforms themselves sometimes offer paid access to their content. And no one needs extra expenses.
A good solution is to build a blockchain-based resource with a decentralized database, which isn't accessible to manipulation by third parties. Market participants themselves agree on what information to collect in this database and to what extent. It results in a reliable data source that simplifies the task of finding the required real estate details: immutable, protected, and complete ones.
Digitize And Secure Your Document Flow
Digitized document flow implies many things, including the following:
secure storage of documents in electronic format with the inability to change or remove them;
confirmation of the tenant's or buyer’s income;
verification of the identity of the seller and buyer.
As you now see, there are a lot of ways to apply blockchain in practice. And we're happy to provide a couple of examples from real life... so as not to sound unfounded.
Real-life Blockchain Real Estate Cases
Global Project From iNation & IBREA
In 2015, the International Blockchain Real Estate Association (IBREA) and iNation decided to run a global blockchain-based project. It serves as a worldwide database of all real estate objects and transactions with them, as well as the owners of the property. The goal is to provide market participants with real-time access to reliable real estate information.
Sweden's Innovative Approach
Around the time IBREA and iNation launched their globally-focused project, Sweden decided to innovate its real estate industry. To be precise, in 2016, its cadastral chamber began implementing the ChromaWay blockchain platform aimed at registering and fixing land ownership rights. The platform was created by the eponymous company (ChromaWay) with the help of other contributors, such as TV provider Telai Sverige, real estate search engine Svensk Fastighetsförmedling, local financial institutions, and consulting agency Kairos Future.
ChromaWay offers the buyer and seller of real estate to conduct a transaction using a smart contract. Moreover, registration authorities, government agencies, realtors, insurers, and banks can participate in the transaction too in order to make sure everything is going according to the law.
The ultimate goal of the ChromaWay project is to save Swedish taxpayers around 100 million euros annually and speed up the transfer of real estate ownership.
Sweden isn't the only country to appreciate the benefits of blockchain in real estate and, in particular, ChromaWay. The system is being tested in other parts of the world either, such as India and Georgia. And in Dubai, the USA, and the UK, their own similar developments are underway.
Rex MLS: Efficient Property Search
Remember, we talked about how the blockchain makes it easier to find the right information? A striking example is the innovative MLS platform Real Estate Revolution (REX). It works on the basis of real estate smart contracts from Ethereum and offers market players constant access to the most relevant data about the property, including its location, legal address, ownership history, prices, rental rates, owner details, and the like. What's more, Rex MLS isn't a local system, it's used by property buyers and sellers around the world.
BTW! So-called oracles are responsible for data validation: of course, their work is rewarded by Rex MLS.
The Real Estate Revolution project continues to develop; plans include the maximum simplification of real estate transactions.
Muirfield: Affordable Investments
Muirfield solves the problem of those who want to invest in real estate but don’t have a sufficient budget. Other benefits include free, fast, and secure transactions.
Muirfield belongs to a real estate investment company of the same name. The system is based on the blockchain and provides almost everyone with the opportunity to make money on the property. If an investor cannot afford to buy the whole object, he's welcome to use the Muirfield platform and become the owner of its part (let's recall the tokens we discussed earlier).
By the way, we can give several useful tips on attracting investors to your software startup.
And to end the topic, take a look at a few more examples of blockchain in the real estate sector:
Deedcoin connects real estate buyers and sellers and saves them money by reducing typical property fees from 6% to 1%;
New York-based startup ShelterZoom simplifies real estate transactions by allowing participants, be they sellers, buyers, or realtors, to see and accept all offers in real-time, knowing that the data is reliable, verified, and protected.
With Ubiquity's SAAS-based blockchain platform, we have the ability to securely track property ownership history.
Of course, blockchain technology in real estate is just taking its first steps. Many controversial issues still remain, including those related to the standardization of processes and legislative regulation. However, these and other problems will be solved sooner or later, that's how any new technology evolves.
Moreover, blockchain's capabilities are far from being fully explored. In the near future, we'll simplify the process of selling and leasing commercial real estate even more and secure it in a better way.
Here are a couple of ideas. As we all know, the description and pictures of the object don't always correspond to what we see later in reality. Blockchain-powered decentralized databases can give buyers a chance to rate a property item after viewing it and record the information, thus warning other consumers. And no one would be able to delete or change this data, that's the cool thing about blockchain!
Also, the blockchain would be an excellent assistant for verifying the identity of the buyer or tenant and checking both his financial capabilities and reliability in general. And again, anyone can enter data into the blockchain system... which immediately becomes immutable.
These are only a few examples of how blockchain will revolutionize and improve the real estate market in the future. A lot is still ahead of us.
Blockchain isn’t the only way to digitally transform real estate. We discuss other options in our article.
Perhaps our piece was able to convince you of the importance of blockchain for commercial real estate applications, and now you’re ready to launch your own startup to strengthen your business. If so, we're happy to help you and make you the best offer!
We'll start with the Discovery phase to form the ideal feature set and decide on the tech stack, after which we'll move on to design and development. But let's not get ahead of ourselves. Surely, we'll discuss all the details of our cooperation with you directly.