What if we told you that it is possible to own a property, or a fraction of it, with just one click? Read this article and understand the relationship between blockchain and the real estate sector.
Those who are familiar with some terms of the financial market and investments may find it strange an article about the blockchain revolution related to the real estate market, and not to cryptocurrencies.
In fact, the subject is traditionally related to bitcoin and other digital currencies. After all, it is in this context that blockchain is often used. However, technological advances in recent times have strengthened the advantages of this technology in different markets.
In addition to several financial negotiations already accepting the use of cryptocurrencies as a currency, the blockchain system can also be used for other purposes – namely to revolutionize the real estate sector.
What is Blockchain?
Blockchain is basically a technology or system and translated, means something like “data chain”. It is basically a large database structure to store information securely.
What is recorded on the blockchain is inviolable, and numerous protection measures are used. At the same time, the information is open to the public and transparently at any time.
Traditionally, the blockchain revolution started in relation to cryptocurrencies. This is the system that serves as the basis for mining and trading the buying and selling of assets. The database is decentralized, so there is no control by a financial institution (such as a bank) or government.
For decentralization to occur, the blockchain system is not stored on a single computer or server. All machines where the system is installed have access to its stored data.
Security arises through transactions with digital currencies, which are signed and registered on the independent computers that contain the system. Thus, the data is not in a specific location, but shared across multiple machines — thus making it difficult for hackers to enter.
Blockchain in the real estate sector
Real estate is one of the largest asset classes globally and in terms of market capitalization.
However, real estate property is not available to all members of society due to the requirements imposed on housing credit. Furthermore, the real estate market is highly fragmented and centralized. The data is managed by third parties such as banks, lawyers, notaries and land registries, who end up using their own expensive software that, for the most part, are not interoperable.
In this way, smart contracts emerge with the potential to facilitate rights management in the real estate industry, including the entire settlement process.
A tokenized real estate property can be easily registered and managed on a public infrastructure and traded P2P if it complies with the regulations. The Data Hash (algorithm that maps variable length data to fixed mapping data) of each property can be recorded in a ledger, distributed to provide a universally shared dataset on all real estate related activities such as previous ownership, repairs performed, and amenities.
Real estate is an illiquid asset, which means that the purchase and sale of the asset is a lengthy and bureaucratic process, resulting in a slow “change of hands” of the property in question. Several researches already show us that the use of property registers based on the Web3 (or Semantic Web) can minimize bureaucracy and reduce the friction of the market, as well as the considerable costs involved in the transfer of property. Tokens can thus be easily split, allowing property owners to sell fractional parts of their apartments. Although the sale of parts of a property is not a new concept, Real Estate Tokenization would be the next step in the automation process, making it more efficient to issue and sell these assets at a fraction of the costs that were previously necessary. Tokens can be issued for existing properties or for a real estate project under development. Private homeowners can issue fractional tokens of an apartment they want to buy, allowing them to raise funds without going through a bank or taking out a private loan. The holders of the tokens will be co-investors and can receive a fractional income in proportion to the amount of shares they hold.
Individuals who were previously excluded from investments for economic reasons can thus only invest in a fraction of an entire unit, making the market more inclusive for those with less economic means. Rent collection is managed by the smart contract and ownership is more easily transferred.
Let’s give you an example to make it easier to understand: if someone else buys 5% of the tokenized value of your apartment, the prorated rent can be paid automatically on a monthly basis by the smart contract. In the event of a sale of the apartment at a future date, the fractional token holders of this apartment can still get their money back, which can also be automatically managed and enforced by the smart contract.
With fractional tokens, it is important to distinguish the type of rights that are granted with the acquired token: property right (as an investment, I can sell and monetize at any time) and access right (I can access that property).
Property rights need to be separated from the management of that real estate. The token management rules will have to regulate who decides on the sale of the apartment. In most cases, it would only be feasible to grant profit sharing rights, but not voting rights. However, there would have to be a regulation to specify the rights of token holders in the case of token issuer fails to pay rent to the fractional token holder. The details of such commercial cases would have to comply with regulatory standards and have a meaningful way of being enforced. There are a variety of legal options established for conflict resolution in fractional ownership situations, such as so-called “drag along” rights (minority shareholders sell their shares) and “tag along” rights (majority shareholders allow the minority to participate in a sale) or “Dutch auctions”, which could all be modeled on a smart contract to arrive at a solution suited to the purpose of a given situation.
The current process of taking out a home loan comes with a lot of regulatory oversight and diligence on the bank’s side to ensure that the person borrowing can also repay the loan, including interest. If not, the bank is co-registered in the property titles. If the homeowner is unable to repay the loan, the bank can claim the property, sell it, and liquidate the property on the market to recover the credit it provided. In the case of fractional ownership, how will such a case be managed? By trusted third parties and liquidators? Maintenance processes also need to be covered by the smart contract, otherwise it would be a nightmare to try to force litigation against hundreds, if not thousands, of non-maintenance office building owners.
Blockchain works as a complex data structure that evaluates, records and stores important information. It can show the entire history of cryptocurrencies movement quickly and simply.
Thus, the use of the system is considered much more practical in relation to other functionalities. Blockchain can be useful for storing data, legal information and processes – cutting down on the bureaucracy involved in buying and selling goods.
The peace of mind of having your data safe is another advantage that can be gained in this way. In the negotiation of a property, both the information related to the assets and the data of the buyer and the seller, will be archived online and securely.
In this way, they are available transparently. They can be sent and received quickly between interested parties, without running the risk of experiencing fraud. Do not forget that the system enjoys the protection of encryption and the use of several machines at the same time.
EASE IN NEGOTIATIONS
The increased transparency and agility provided by blockchain technology to the real estate market would especially favor buyers and investors interested in real estate.
Such characteristics promote an ease in negotiations. For example, you will be able to check a variety of information — as well as compare properties, rates and reviews with each other through the online structure.
Therefore, the buyer or investor can find the best options and even save money. It can also make it easier to get funding, as the system simplifies negotiations and reduces bureaucracy.
One more expected consequence of the relationship between blockchain and the real estate market is the reduction of costs. As transactions can be done more transparently and quickly, it is natural for some fees to be lower.
The low cost involved in negotiations brings another relevant difference: the heating up of the market. The blockchain revolution can make the real estate sector higher in demand and bring interesting returns for investors.
It is always advantageous to reduce bureaucracy and increase the security of financial transactions, right? The economy and the market benefit greatly from this, as investors are more attracted to looking for new opportunities.
With more people interested in buying or renting properties, demand in the sector grows and the economy leverages — bringing increasingly advantageous possibilities for those who want to invest in the area.
Did you like to know more about the Blockchain revolution and its relationship with the real estate market? Adding new technologies with such important financial transactions can be a rich strategy to strengthen the sector. Keep an eye out, we will certainly hear more about this topic in the future.