Blockchain real estate investment is about to transform and disrupt the real estate industry and its conventional operational methods that are rife with challenges.
Because, despite being one of the high return-generating assets, the industry might fall behind other investment vehicles due to their lack of technology adoption.
Real estate has always been resistant to technology adoption, relying heavily on paperwork, multiple intermediaries, physical meetings, etc. Therefore, simple processes become time-consuming and prone to inaccuracies.
However, this scenario is being revolutionized, thanks to blockchain real estate.
Introducing blockchain in real estate can transform the entire industry by replacing the above traditional methods with better and more efficient property searches, transactions, and ownerships.
As a result, real estate investors are optimistic about blockchain real estate investments.
This brings us to our today’s topic of discussion – Blockchain Real Estate and how they are taking over traditional real estate.
Existing challenges in the real estate industry
Common sense dictates that if there is a need for something new then there must have been some problems with the previous one. Neglecting the need for technology in the real estate industry has resulted in the sector being full of challenges and obstacles.
- Lack of transparency and access
The real estate industry has always been known for the requirement of huge upfront capital investment.
Due to its high return generating capability and steady income, real estate has always been a preferable choice of investment for all. But, until now it was only open to the rich investors.
Investing in real estate not only meant having a vast sum of money but also required inspection of other forms. Accessibility issues are also related to factors such as credit scores, financing, international bank accounts, cash requirements, accreditation, and having the best managers on the team.
Moreover, there is no single market database and a specific way to access data and information required for selling and buying a house. As a result, the lack of transparency in the market can be a burden for investors.
- Expensive capital required
A real estate investment is unlike your penny stocks where you can purchase bulk stocks in a deal. Investing in real estate requires vast amounts of capital and that is justifiable too.
Behind a successful real estate transaction, there are a lot of moving pieces and people involved. Buying and selling a real estate property is not a single-step process.
Traditional real estate includes a larger number of intermediaries like attorney fees, broker fees, taxes, exchange fees, and others. The cost of investment is also significantly greater than investing in any other asset class.
- Immense paperwork
Due to this vast number of intermediaries present, it is quite obvious that a single real estate deal would generate hundreds and thousands of paperwork. This is all just from purchasing a real estate property.
In addition to this, managing and selling the property will add more paperwork like taxes, insurance, lease agreements, and others.
Structuring a proper workflow will somewhat reduce the stress of the immense workload. However, it is still a headache to manage all this paperwork as it certainly eats up a significant portion of time and reduces productivity.
- Time-consuming transactions
Involving multiple intermediaries also results in a slow transaction process speed. The more the number of intermediaries, the longer it’ll take to process the transaction.
Apart from that, the transaction also slows down due to massive paperwork which takes time to process. Moreover, the immense paperwork and multiple intermediaries also open opportunities for errors in the process.
On average, it takes about 6 months to locate a property and another 6 months to complete the entire formalities and transaction process to acquire it.
- Involves high risk and fraud
Being a large investment asset class, it is no doubt that real estate is highly subject to high risk, fraud, and Ponzi schemes. Traditional real estate involves multiple intermediaries and each one of the processes are handled manually. This leaves you at high risk of data manipulation, and information theft, along with being prone to various kinds of fraudulent activities.
For example, mortgage frauds are pretty common in the real estate industry. As we know in traditional real estate, data can be easily altered and tampered with. Therefore, miscreants can easily falsify loan documents and information in a mortgage application to illegally profit from the loan amount.
Some types of fraud involve real estate developers who solicit investors for money by offering them false shares in a limited liability company (LLC) or certain ownership percentages in a piece of property.
Real estate properties especially commercial real estate properties are highly illiquid assets. Since real estate investment requires high capital to purchase, it would also require them to sell at a higher price. As real estate assets are highly valued and subject to high fees, there are few buyers around who are interested in purchasing your asset.
Challenges in Commercial Real Estate
Commercial real estate is a complex industry due to its much more complex structure and a greater number of stakeholders. Some of the existing challenges in traditional CRE are:
- Complex Agreements
As Commercial real estate involves multiple entities, they usually involve several contracts and agreements. Manually processing all these agreements and contracts involves greater risks and any kind of error can lead to losses in business.
- Cash flow Management
Managing multiple properties can be difficult when you have multiple renters. Lease payments are difficult to manage when you have to keep multiple tracks of rent, maintenance, and more.
- Lack of Real-time data
Often people miss out on good opportunities and deals since they are unable to keep up with the latest market news. Real-time data is crucial to get the property that fits the criteria at the last minute and capitalize on updates.
With multiple intermediaries, large investment capital, and a greater number of agreements, CRE is more prone to security risks and fraud.
Blockchain in real estate: What is it and how does it work?
Previously, a piece of paper inscribed with specific rules and regulations set by the court was required to prove your ownership. Today things are a bit different, as we head into a more digital world of blockchain.
Blockchain Real Estate
Blockchain is mostly famous for its use in digital transactions and cryptocurrency such as bitcoin. Transactions in blockchain are recorded on a public ledger and distributed across a network without any central governing authority.
Transactions in blockchain are transparent, fast, secure, and efficient which makes it appropriate for commercial real estate. The adoption of blockchain technology in real estate can disrupt the entire industry.
Blockchain technology in real estate is on its way to transforming the entire real estate industry. Blockchain in real estate would help the real estate industry revolutionize by making transactions more secure.
Moreover, it provides a decentralized way to record and transfer ownership of properties. By automating the real estate transaction process using smart contracts, buyers and sellers can efficiently and easily buy and sell properties.
In 2021, an anonymous buyer paid $28 million for a penthouse in Miami Florida using bitcoins. It was the largest crypto real estate transaction ever recorded.
Blockchain real estate companies like Propy, Imbrex, Meridio, and others are some of the well-known marketplaces for real estate tokenization.
According to an MSCI report, the property investment sector saw an increase from $7.4 trillion in 2016 to $8.5 trillion in 2017 due to the tokenization of assets.
Blockchain real estate process
The process of purchasing commercial real estate properties on the blockchain is a bit different.
- Online Marketplace
You can search properties at the online marketplace where you can meet up with the landlord. Since in blockchain, data stored is transparent to everyone you can get detailed information about the property. Moreover, the marketplace is integrated with government systems which further ensures the authenticity
- Identity Verification
For ensuring security and authenticity, the marketplace is integrated with separate blockchain-based identity verification. Various companies, government agencies, banks, and investors can verify your identity. As a result, sources of information such as bank transactions will be validated in this way.
- Agreement on Smart Contracts
After agreeing, both tenants and landlord enter into an agreement deed with specified terms and conditions. The details and information of the agreement are recorded on a smart contract.
- Autonomous Payouts
The payouts will be credited to the landlord’s account based on the terms and conditions in the smart contract. Using Blockchain, all the transaction data are timestamped and can be analyzed in real-time.
Blockchain real estate use cases
- Refined property search
In residential real estate, 93% of home buyers search for properties online. However, in traditional real estate, you can search for properties through the Multiple Listing Services(MLS) only. Thus accessing different listing platforms means several platform fees.
Blockchain can eradicate all these challenges and make real estate searching transparent, easy, and efficient with its centralized database. Moreover, the data cannot be inaccurate or tampered with since it is decentralized.
In blockchain platforms, you can list your properties for better reach. Since it is a single marketplace, it helps you connect with buyers and sellers more efficiently.
- Efficient property management
The present real estate scenario deals with tons of paperwork and involves multiple stakeholders such as landlords, property managers, tenants, brokers, etc. Therefore, managing properties on a large scale can be quite difficult.
With blockchain real estate, all the aspects of property management can be integrated into a single decentralized platform. You can perform tasks like signing leases, regulating cash flow, overseeing maintenance, and even collecting payouts easily.
- Smart Contracts
In blockchain real estate, Smart Contracts help in automating various tasks in the real estate investment process. They are self-executing contracts with specific instructions that get executed when specific instructions are met.
Smart Contracts are the new form of leases that contain information about the terms and conditions of the agreement between the landlord and tenant. Blockchain-based smart contracts can automate lease signing and even collect rent from tenants.
- Automated real estate transactions
A normal real estate purchase can take a lot of time. From searching for properties to acquiring them, it can take as long as 6 months for the entire process to complete. During this period, the price of the property, as well as the broker’s fee can change. Using smart contracts can automate the entire process. As a result, you can save a lot of time when purchasing a property.
- Preventing fraud
One of the most important use cases of blockchain real estate is the prevention of ownership or title fraud. By providing transparency in transactions, ownership, and property information, it is difficult for fraudulent activities to take place. Moreover, information once stored is impossible to tamper with.
- Fractional ownership
This is by far the best use case of blockchain real estate. The real estate industry, especially the commercial real estate sector requires huge amounts of investment. Fractional ownership makes it possible to invest in huge capital-demanding investments.
Dividing the entire real estate property into smaller fractions allows multiple investors to invest in the property. As a result, middle-class investors can own a portion of a high-priced property too.
- Tokenized ownership
In blockchain real estate, the entire property can be represented as tokens. These tokens can represent the value of the assets. Therefore, you won’t own a specific property but rather invest in tokens that will represent the collective value of a specific property.
To know more about blockchain real estate uses cases, read our blog here.
Benefits of blockchain real estate
- Blockchain real estate lets you run a quick background check with the help of the multiple verifying parties present on the network.
- With real-time data and information, it is possible to generate insights by analyzing the data collected. As a result, this will help in making better decisions.
- Blockchain solutions in real estate allow buyers and sellers to connect directly on the online marketplace. Thereby, eliminating the need for multiple intermediaries.
- In blockchain real estate, property data available is accurate and genuine. Transparency in data prevents data from getting altered or manipulated.
- Fractional ownership makes investing in real estate open to everyone. Using blockchain platforms, peer-to-peer rental markets are emerging and making new property crowdfunding more feasible.
The Lilypads Bottomline
Despite the fact being in the development stage blockchain real estate is on the verge of taking over traditional real estate as we gradually head into a digitally advanced world. With all the existing challenges, the need for blockchain real estate investments is now more than ever.
Embracing technology like blockchain, artificial intelligence, big data, and others will not only eradicate the present challenges but also open new investment opportunities for real estate investors.
Lilypads platform provides tokenization of commercial real estate properties, creating the perfect opportunities for you to invest in commercial real estate investments.