Blockchain and Real Estate: The Ultimate Guide

Blockchain and Real Estate: The Ultimate Guide

21 June 2019

A recent global survey of 400 commercial real estate executives found more than a third of them expect blockchain to start impacting on the real estate industry within the next two years.

Yet, nearly one in 10 of the executives admitted they “don’t really understand blockchain and what it does.”

So, how does blockchain work, and how will it affect the real estate sector? Read on to learn about the basics.

How does blockchain work?

Imagine you and your friend Bob are standing on a stage before 1,000 people, explains Mark Zilbert at Forbes Real Estate Council.

In front of these 1,000 people, you hand your car keys to Bob, and Bob hands you his Rolex.

“Bob, you now own my car,” you say.

“You now own my Rolex,” Bob replies.

There are now 1,000 witnesses who can each declare, without doubt, that your car now belongs to Bob, and the Rolex belongs to you.

If anyone in the audience later tells a conflicting account of who owns the car or the Rolex, the other 999 people will refute it.

And, if you take a spare set of your keys and try to give that same car to someone else, the 1,000 audience members will confirm that Bob owns the car, as each of them witnessed the “transaction.”

This is the essence of how the blockchain works.

Simply put, the blockchain is a series of computers (thousands to potentially millions of them) that each keep the same record of an event or transaction in a ledger that is open to the public.

Each record is encrypted, and the ledger is allegedly hack-proof.

Since all these computers see the same thing, they offer consensus that the recorded event or transaction is valid.

As long as there is information that represents an agreement or record, the blockchain can record, encrypt and protect that information for eternity.

Most important, blockchain allows two or more parties to conclude the deal with no middleman.

This ability has the potential to transform the way real estate professionals do business.

Real estate and blockchain

Real Estate companies are now working on blockchain-based “smart contracts” that will enable real estate contracts, escrows, property records (deeds, for example) to be completed and monies distributed without using title offices or lawyers.

In some ways, these “smart contracts” resemble vending machines: The homebuyer deposits his or her money, and the machine spits out a product with no human intervention.

Thus, in the near future, it may be possible for a homebuyer to buy a home and complete the sale (along with escrow and title insurance) by clicking on a shopping cart on a website.

The blockchain ensures the buyer gets the title or deed and the seller gets the cash (via a cryptocurrency—such as bitcoin—which is purchased for cash.). The blockchain will also record the title or deed to the appropriate public records.

Consider three innovations based on Blockchain that can change how real estate deals are done

Tokenisation

Owning real estate traditionally required investors to already be wealthy and have the luxury of being able to wait years to liquidate.

That changes with tokenization.

Tokenization democratizes ownership of real estate by using cryptocurrency to split assets into tokens that are stored on the blockchain.

Someone who wants to invest in a trophy real estate project now has the luxury of being able to resell their share on the open market through secondary trading.

Also, people in different geographies and tax brackets now have access to attractive investment opportunities that they previously would not. Landlords now have the ability to sell off just a portion of their property to the crowd.

For example, investors had the opportunity to invest as little as $10,000 in the St. Regis Hotel in Aspen, USA. Unlike with most major real estate investments, these owners are not locked in until the building is sold. They will be able to sell their portion on the secondary market.

Smart contracts

As previously mentioned, smart contracts are completed entirely between the buyer and the seller (or renter and landlord) and have no human interaction.

The seller includes all of the details of the property and the buyer puts all of their necessary information on a 100 per cent encrypted and secure block.

Buying and selling could still take place via agents, or the smart contract can be advanced to incorporate the sale rules and make this decision automatically. The blockchain for each property grows as transactions are added to the ledger.

Computer protocols check the legitimacy of the transaction and no agreement can be completed until all of the terms are met, enabling transactions to be processed much faster and with far less chance of fraud.

Property title

Government authorities around the world each have their own way of storing property data. Some cities and towns have put records online while others still use printed paper. If all property title was decentralized on the blockchain, an immense amount of time and money would be saved.

While having all title on the blockchain would be great for property buyers, entering this amount of data from every municipality is an extremely laborious and expensive undertaking.

Real estate lawyer, John Danahy told the Property Council of Australia that “the first challenge is the technologically-difficult task of shifting title transfer and land registration from a database, one which is usually state controlled, to a distributed ledger system.”

Adopting blockchain in real estate would also require legislative changes, standardisation and education around blockchain concepts so that every stakeholder understands every stage of the transaction.

That being said, in March 2017, the Swedish Land Registry and its partners produced a fully functional technical solution to apply blockchain to real estate transactions. They expect to have completed the first real estate transaction with blockchain this year.

Blockchain companies also have pilot projects in Brazil, Sweden and Ghana. JLL and the Bank of China Hong Kong used blockchain technology to appraise real estate in Spain and Hong Kong this year. CoreLogic has a blockchain research team dedicated to investigating the financial, risk-management and property impacts of blockchain.

Will I still have a job?

Real estate professionals will continue to thrive in the era of the blockchain. The advice, knowledge and hand-holding of real estate professionals will always be an important part of a buyer or seller’s process.

However, the handling of money and transactions will inevitably change, and that change is already underway.

Brokerages will need to adapt their business models to understand and enable smart transactions but otherwise will continue to thrive in the era of the blockchain.