The world today is on the brink of an extraordinary revolution driven by “the great growling engine of change-Blockchain”. From banking and finance, real estate, and healthcare to Government processes, Blockchain is disrupting existing industrial arrangements, one after another. In this blog, we will discuss the various applications and benefits of Blockchain in real estate across various core operations such as asset management and property transactions.
Real estate professionals today are realizing the potential of blockchain to revolutionize the market by boosting property sales, payments, and investment opportunities in the industry.
What is Blockchain?
Blockchain is a digital distributed ledger built around a peer-to-peer system. It was originally conceived by Satoshi Nakamoto in 2008.
It constitutes a list of records known as blocks, which are linked by cryptography to form an interconnected chain. And, each block contains the cryptographic hash, transaction data, and timestamp of the previous block.
The database is decentralized in nature. So, it distributes the information across the network among the participants (who are connected directly on a peer-to-peer basis). Therefore, this leads to the accessibility and accountability of the data.
This chain allows a write-once, immutable updating only by a consensus among the participants. So, blockchain platforms are transparent and auditable.
In addition to this, Blockchain uses self-executing smart contracts that map the legal terms and conditions of an agreement into an automated digital protocol. Therefore, it needs m intermediary and the transaction becomes highly transparent.
Furthermore, these securely automated smart contracts make the transactions cost-effective.
Fortune Business Insights studies that the global blockchain market size in 2019 was about $2.1 billion and it is expected to climb to over $69.04 billion by 2027, exhibiting a CAGR of 56.1% during the forecast period.
Read Lilypads’ blog on the uses and benefits of smart contracts in commercial real estate transactions here.
Blockchain in real estate: why does the industry need blockchain?
A $217 trillion industry, the global Real estate market is the world’s largest asset class.
However, real estate investors and professionals experience friction in transactions due to the presence of multiple middlemen.
Moreover, untrue data and information with no public ledger require third parties like banks and auditors for data verification. Therefore, residential and commercial real estate buyers and sellers have to pay more for and fill in tons of paperwork.
So, Blockchain in real estate can relieve these bottlenecks by:
- Improving trust and promoting transparency
- Creating an Immutable shared database
- Optimizing transactional process
- Reducing Frauds
- Increasing liquidity
Steps to using Blockchain technology in a real estate transaction
- Property search through blockchain-enabled MLS
A blockchain-enabled MLS system (multiple listing services) allows users to search and find listings based on their requirements, which the users enter in the MLS.
- Property Visit
Buyers visit the properties that suit their requirements. Brokers schedule these visits.
- Negotiation and signing of the letter of intent
Both the lessor and lessee negotiate the terms of the deal. If the terms and value of the deal align with lessee, they send the letter of intent to the lessor.
- Pre-lease due diligence
Before signing the deal, the lessor conducts background and identity verification of the lessee. Hence, they can use their digital identities stored in the blockchain.
And, the lessee, on the other hand, can cross-verify prior claims and transactions on the property. They can use the blockchain-based storage of the asset data.
- Framing of the clauses of the agreement
Once both the parties are satisfied with the agreement terms met between them, their legal teams create the clauses and terms.
- Lease agreement
The agreement is recorded in the Blockchain network in the form of a smart contract. Security deposits or advance rent payments can then be initiated through bank accounts or bitcoin wallets.
Once the property is transferred to the lessee, the transaction agreement is officially recorded.
- Automated payments using smart contracts
The smart contract releases the regular lease payments from the lessee to the lessor based on the terms in the agreement. On completion of the lease term, the smart contract then transfers the security deposit to the lessor.
Blockchain in real estate: applications and use cases
1. Property search process
Real estate primarily uses third-party platforms for property listings that serve as the platform for communication among sellers, brokers, and buyers.
Carrot reports 84% of new homebuyers to deem online information crucial for their property search process.
However, these third-party platforms often present unreliable and limited information.
Moreover, they lack uniformity and fragment the property information across multiple listing platforms.
However, Blockchain in real estate stores the property listing on a single decentralized peer-to-peer database network.
As a result, brokers and owners have complete autonomy over their data. Moreover, they can recognize their sole validating authority of the information, without any third party.
So, property listings can be more accurate and authentic.
2. Property management
Currently, Real estate property management involves scattered manual paperwork by multiple stakeholders. These include landlords, property managers, tenants, and brokers.
But, Blockchain in real estate integrates all aspects of property management in a single decentralized platform. These include data sharing, signing of lease agreements, streamlining payments, and cash flow management.
Furthermore, smart contracts enable a lessor and a lessee to enter into a digital peer-to-peer agreement.
This contract contains important terms like rents, payment frequency, mortgage agreements, due diligence, etc.
Therefore, property management becomes transparent, efficient, and cost-effective at the same time.
Lease legally binds the participants of a property transaction through a written contract. This legal contract contains the terms of the agreement met between the parties.
Blockchain-based smart contracts can also automate the signing of Leases.
The smart contract signed digitally by both parties includes all the details related to the property, tenant, and rental value.
Moreover, it can automatically trigger the rental and lease payments to property owners.
As a result, the lease contract becomes a smart tenancy contract. Hence, Blockchain real estate streamlines Leases and makes them transparent.
4. Tokenization and Real estate Investment
The World Economic Forum reports, in the next 10 years, cryptocurrencies like bitcoin and digital assets will store over 10% of the world’s GDP.
Blockchain-based tokenization refers to the digitization of real assets.
It divides assets into shares or “tokens” which then represents a pre-defined share of the asset.
Blockchain ledgers secure these tokens. Hence, its owner can trade these “micro-shares” of its assets to investors via crypto exchange.
Therefore, retail investors can become fractional owners of the asset.
Tokenization enables investors to buy and sell real estate assets and owners to raise capital directly without any intermediary. And, they can also trade tokens quicker in a cost-effective way.
Furthermore, owners/developers can reach out to a wider global market through crowdfunding that increases their liquidity.
5. Land title and property registry
In real estate, Land titles and property registration involve lengthy hardcopy documentation and legal procedures that have chances of fraud.
American Land Title Association reports an error rate of 25% is detected in titles during the transaction process. As a result, it affects property transfer titles to buyers.
However, Blockchain in real estate uses immutable digital records of land titles. So, the encrypted nature of digital records makes property titles immutable and reduces the risk of title fraud.
Hence, the property title management process is optimized and streamlined without any intermediary.
Payments and money transfers in real estate need higher fees and lengthy paperwork.
Furthermore, cross-border payments charge even greater transactional rates
But, Blockchain smart contracts speed up cross-border transactions and reduce the transaction rate by 80%.
Moreover, the digital identity records of property and participants shorten the time for due diligence and documentation.
In addition to this, the distributed ledger provides a common transparent platform where participants can pre-authorize transactions. They can also track the end-to-end transmission of payments in real-time.
Besides, the contract also consists of all the informational meta-data like the details of the sender and receiver.
Hence, blockchain real estate reduces the risk of payment delays.
7. Loan approval and mortgage securitization
The current mortgage lending operation is an elaborate paper-based process with multiple third parties.
But, Blockchain in real estate requires no documentation as it includes all the data into an immutable smart contract. Both borrowers and lenders can access these terms that maintain ownership rights and loan transaction history.
Furthermore, the contract helps the borrowers in tracking their loan status. Also, lenders can verify the identity of the borrowers faster and achieve real-time payment settlements.
8. Due diligence and Financial evaluation
Due diligence in real estate involves the verification of a property’s history regarding ownership, maintenance, repairs, occupancy, etc.
But, due diligence operations are long-drawn, paper-driven, offline processes.
However, blockchain introduces digital identities.
These are digital records of all the physical, financial, and legal information of the property.
Also, tenants and investors can store their digital identities in this arrangement. As a result, there is no need for time-consuming background checks.
Besides, blockchain in real estate streamlines the financial evaluation process by securing only the accurate data in the ledger. Hence, it protects data integrity.
Therefore, digital identity records:
- Increase efficiency
- Lower costs
- Boosts data security
- Removes manual errors.
The Lilypads Bottomline
As yet, the real estate industry uses manual processes as a part of its core operations. Therefore, the adoption of Blockchain in real estate still remains at a nascent stage.
However, the numerous uses and applications of Blockchain and smart contracts in real estate can restore much-needed transparency and cost-efficiency in the market.
Besides, real estate professionals are certain that blockchain in real estate will unlock greater capital flow and investment opportunities in the market.