Blockchain Real Estate Process to Revolutionize Leasing Property
Blockchain real estate: According to Grand View Research, the global real estate market is expected to generate a revenue of USD 4,263.7 billion by 2025. Even in the developed nations like America, citizens lost nearly $150 million to real estate scams in 2018, according to the FBI. To add, scams in the industry have jumped more than 1,000% since 2015.
When you think of Real Estate and Blockchain at a glance, you probably won’t find any relation. At the most, you may be able to relate the general use cases of Blockchain technology, such as shared ledger, immutability, and security, but nothing unique.
However, when you focus more on the age-old problems that the real estate industry is facing, utilizing Blockchain for real estate industry seems to be the next step in the evolution of technology for real estate.
In this blog, we will dive deep to understand the problems that are currently haunting the real estate industry, especially from the Commercial Real Estate (CRE) perspective. And then, map these problems to the solutions that Blockchain technology offers.
Real Estate Industry: The Present
Before talking about CRE, let’s try to understand a typical property buying process:
- An individual looking to buy property either visits a listing website or broking website or a real estate broker in person.
- Based on the individual’s requirements, these intermediaries suggest some sellers who are selling properties matching buyer’s criteria.
- These intermediaries then contact the seller to discuss the details of the deal and negotiate. (Note: Some property listing websites let the buyer contact the seller directly. However, these sellers can be the real estate brokers and not the owner of the property.)
These intermediaries promise to get the buyers best deals based on their criteria. No matter how reliable and honest these intermediaries claim to be, they are always prone to the following limitations:
All these intermediaries are in the market to make a profit. They all have a business model, which makes them biased towards the deals that earn them more profit. Such deals are not always in favor of buyers.These intermediaries can choose to limit the options visible to the seller or give priority to the ones that are more lucrative to them. Hence, there is a good chance that the buyers would lose out the property, which might be the best fit.
Everyone knows the capabilities of online scams. With an impressive website and few imposters, buyers can be deceived into buying a property that is not available/suitable for sale.Not all the buyers are well educated or vigilant enough to do background checks of these intermediaries. The result is a lot of legal suites and loss of a significant chunk of money.
Expanding the above point, forged documents play a crucial role in fooling buyers and make them buy illegal/not for sale/unsuitable property. The morphing software has made it possible to edit the entire image of a person. With such advancements, editing text in a physical document and reproducing it is an easy task.These physical documents can be property papers or bank statements. Additionally, with the right contacts, imposters can prove that the fake documents are legitimate.
- Extra Cost
The owner of the property wants to sell the property and the buyer wants to own it. Why any of them should pay some extra money to the intermediaries? Many times, the amount of money they charge doesn’t justify the services they deliver.And instead of getting better deals and making the whole experience smooth for the buyer, they end up doing more harm than good.To add, in many cases, the broker partners with the seller, to sell a property at a higher price than the market standard.
Problems of the Commercial Real Estate (CRE) Market
As compared to the process mentioned above, CRE is a much more complicated process and involves many stakeholders. Hence, Blockchain for real estate makes sense even more in the commercial perspective. CRE leasing process has many recurring transactions that mean more reconciliation cost, error instances, points of failure, and redundancies.
- Complex Agreements
As mentioned above, the CRE leasing involves many entities and they have several contracts signed between them. Any error or mismatch in any of these documents can disrupt the business proceedings, resulting in a loss for all the parties involved.
- Managing Cash Flow
Since the property is leased not by one entity, but by multiple, managing lease payouts is difficult. Keeping track of everything, ensuring payouts has been received, taking confirmations, distributing maintenance charges among entities, and more, makes the whole process cumbersome.
- Record Keeping and Security
With so many transactions happening, recording each transaction is challenging. It’s not about ensuring everything gets recorded, but also guaranteeing that the records cannot be tampered with and only accessible to authorized people.
- Absence of the Real-time Data
To get the best property that fits the criteria, access to real-time data is required to capitalize on the last-minute updates.
Real Estate Blockchain: Use Cases
Blockchain is a network of distributed databases (known as the distributed ledger), in which information of each transaction is recorded in the form of a group of hashes (known as ‘blocks’). These blocks are stacked together in an immutable way (each block has information about the previous and next block) to form a chain of blocks.
To get to the information stored in a particular block, a hacker needs to get through the whole blockchain that requires an immense amount of computing power. Thus, as a result, hacking and alteration of the information become non-profitable for the culprit. To add, this technology is ‘write-once.’ That means the new information can only be appended; the old information cannot be edited. All these features make Blockchain almost immutable.
Hence, storing real estate document information on the Blockchain will ensure their originality and credibility. Moreover, any approvals and confirmation can easily happen on Blockchain network, since all the parties are on the network. These approvals and confirmation can be stored with the timestamp for future references.
The distributed database serves as a single source of truth. Since everyone in the network has a copy of the database, the reconciliation is performed automatically. Any changes in the database get transmitted to every node (system) in the network and get updated in their copy of the database almost instantaneously. As a result, any chances of mismatches/errors are eliminated.
To add, in the case of private permissioned Blockchains that are more relevant for the enterprises, the verifying authority validates each transaction, so only the legitimate transactions are processed and become the part of the Blockchain.
They are two prominent features of Blockchain that can be helpful in real estate:
1. Smart Contracts to Streamline Lease Payouts
They are the lines of code written to get executed autonomously when exposed to a specific data trigger. Smart Contracts are a set of predefined rules that cannot be edited, once coded (in most cases). For example, If X happens, transfer the amount in the ratio 20:30:50 to A, B, and C. Thus, these Smart Contracts can streamline extremely complex leasing payout contracts.
Since each of the transactions is time-stamped and recorded, there is no need to keep track of everything. As a result, the whole process gets automated, saving time, effort, and money.
2. Tokenization to Enable Smooth Land Registry Process
A token, in the true sense, is a Smart Contract on Blockchain. However, the real use case of a token is the digital representation of a physical asset. An asset, in this case, a property can be said to be ‘tokenized,’ when a token representing the asset is created on the Blockchain that has a unique identity and cannot be traded for another token (non-fungible). Whoever owns this digital token can be considered as the owner of the property.
Thus, it becomes easy to prove the ownership of the property. To add, these tokens can be easily traded. This feature is particularly helpful in buying/selling property, anytime, anywhere, almost instantaneously.
Tokenization might not replace the legal paperwork involved in purchasing the property (this can happen only if the government switch to a blockchain based digital system completely), but it can act as a quick and reliable system to make the first level of commitment in the purchase process.
Blockchain Real Estate Process
In contrast to the general property buying process, the CRE process on Blockchain can be as follows:
Step 1: Property Marketplace
Lessor and the lessee will meet at the online marketplace where verified information about the property is available to everyone transparently, including owners details, geo-location, chain of custody, the area covered, and more. The marketplace will be integrated with the government systems to ensure the authenticity of the information.
Step 2: Identity Verification
A separate Blockchain based identity verification solution will be integrated with the marketplace. This may involve third-party verification companies, government agencies, banks, investors, and more, who will verify the identities. The solution will validate the information from multiple sources, such as bank transactions.
Step 3: Immutable Agreements
Once both parties decide to go ahead and enter into the agreement, the terms and conditions of the agreement will be recorded in the Smart Contract.
Step 4: Autonomous Payouts
Based on the T&C stored in the Smart Contract, the lease payout will get credited in the accounts of the lessor. All the data will be recorded on Blockchain with the time-stamp and can be utilized for real-time data analysis.
Benefits of Utilizing Real Estate Blockchain
- Enhanced Accessibility to Property Data
A Blockchain-based marketplace will allow users to have more control over their data. An intermediary, such as a broking agent or broking website, won’t be able to manipulate the data. This will reduce costs, enhance transparency, and improve the visibility of international listings.
- Reduce the number of intermediaries
With Blockchain solutions, the buyer and seller will be able to communicate directly, which will either remove the role of intermediaries or at least reduce their influence on the process.
- Quicker Background Checks
The Blockchain solution will have multiple verifying parties present on the network that can quickly validate the information. The process will be much faster than the current offline method.
- Hassle-free Cash Flow Management
Blockchain-based Smart Contracts can automate all the processes that involve multiple stakeholders who coordinate among each other to distribute lease payouts and pay maintenance charges. These transactions can be traced back for future reference.
- Better Decision Making
With the insights generated via data analysis and availability of the real-time data, corporates can make better decisions.
Blockchain Real Estate: Live Examples
Since Blockchain is a perfect solution for the problems in Real Estate, not only private start-ups, but also the governments have taken initiatives to adopt it. Sweden’s land registry authority and a group of participating banks, businesses and startups are in the final stages of implementing a Blockchain real state pilot. In the United States, states such as Vermont and Arizona are on their path to recognize Smart Contracts as authentic points of reference for real estate transactions.
New York-based startup, ShelterZoom is on the verge of launching real estate application that will enable buyers and sellers transact deals over a blockchain-based network. The platform allows sellers, buyers, and real estate agents to see all offers and give acceptances in real time.
Deedcoin is reducing the typical 6% real estate commission to 1% to connect buyers and sellers of property. Ubiquity has developed a Blockchain real state platform based on SAAS model that enables users to record property information and track the chain of ownership securely.
There are several other projects, like Propy, Harbor, BitRent, Blocksquare, Averspace, Atlant, BrikBit, CryptoProperties, SMARTRealty, and more, that are working on similar concepts.
Blockchain implementation is all the more crucial for Corporate Real Estate since it involves high net transactions. The real estate industry is capital intensive, and a technology solution like Blockchain that can reduce operational cost has the potential to get wide acceptance and quick adoption. Blockchain is, no doubt the next step in the evolution of technology for real estate.
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