Blockchain Technology in Real Estate:
A New Era of Liquidity, Security, Transparency & Accessibility
Blockchain technology has soared to prominence over the
last couple of years as numerous industries harness its potential, from banking
and financial services to media and supply chain management. Tracing its roots back to 1982, when David
Chaum first outlined the concept, blockchain has evolved into a powerful tool
that promises to revolutionize various sectors, including the lucrative global
real estate market, valued at over $11.4 trillion in 2021.
Blockchain technology is revolutionizing the real estate industry, through the tokenization / digitization of real estate assets via smart contracts, to securing transparent proof of title on the blockchain, to reducing many of the associated costs of real estate transactions through disintermediation, and so many more innovative and transformative means of the use of blockchain in the real estate industry.
As a career real estate pro (developer, broker, investor and consultant), and as a Proptech / Digital Assets / Web3 Strategic Advisor, I am absolutely thrilled about this exciting and innovative era of the scaling and adoption of blockchain in the real estate industry.
Through my work as a US Regional Chair with the Foundation for International Blockchain and Real Estate Expertise (FIBREE), and my advisory work with Resource Blockchain, working with tech platforms and real estate owners and investors, I have come to learn just how impactful this technology is becoming in regard to the largest global asset class - Real Estate.
As I have said for many years now, evidenced by my Forbes articles on this very topic since 2018, the tokenization of real estate assets via blockchain technology will completely transform the way the real estate business transacts, in nearly all aspects, in the very near future.
This short article explores a few ways in which blockchain technology is truly transforming the real estate industry, offering a fresh approach to transactions, enhancing security, and democratizing the industry.
What is real estate tokenization?
One of the industries that is effectively pioneering asset tokenization is the real estate industry, an economic sector that moves billions and billions of dollars every year and that, unlike other industrial sectors, is innovating the way small and medium level investors participate in the global real estate investment space.
The tokenization of real estate assets enables the transformation of the entire sector and the expansion of its fields of influence but also guarantees greater profitability, security, and certification of the asset.
Benefits of Tokenizing Real Estate Assets
Streamlining Processes with Smart Contracts
Traditionally, real estate transactions have been very cumbersome, costly, and slow - have you ever bought or sold real estate? Time is money, and real estate transactions have always been stubbornly lengthy and costly.
A solid portion of that time / money equation in real estate has to do with all the disparate parties involved in any transaction, some of which often include title companies, lawyers, brokers, appraisers, bankers, inspectors, and the list goes on - each of these parties taking their time to process their part of the transaction, and of course charging for their part in the process. Enter Blockchain. Blockchain-based real estate transactions are seamless and lightning fast, since the smart contract automates the transaction instantly, for example, when any update to a contract occurs, it is instantly recorded and the other party is notified that it is their turn to sign, or funds are instantly processed upon having fulfilled the requirements in the smart contract.
Conventionally, this has been a foreign concept in the world of real estate investment, where property investors must perform extensive research and comparative market analysis and then undertake significant risk of the unknown or undisclosed prior to and throughout their capitalization cycle. Today’s world of tokenized real estate eliminates much of this mystery and risk, since the blockchain automatically and permanently records every owner's stake in a tokenized asset. For example, each stakeholder's rent share is defined because all transactions are documented, while the underlying digital asset’s smart contract is embedded with their ownership and voting and distribution rights, ensuring ultimate transparency.
Smart contracts, enabled by blockchain, allow brokers, buyers, and sellers to expedite transactions by eliminating intermediaries. Automating processes such as title searches and escrow services, smart contracts provide stakeholders with secure access to property data, facilitating the finalization of real estate transactions.
Tokenizing Real Estate for Customization and Accessibility
Tokenization, a crucial aspect of blockchain technology, involves digitizing securities, making real estate more accessible to a larger pool of potential buyers. Tokenized real estate assets can be tailored to meet investor and stakeholder needs, expediting the exchange process and enabling efficient administration of financial components like payouts or dividends.
Enhancing Real Estate Liquidity
Blockchain technology can dramatically increase real estate liquidity by allowing individuals to tokenize and sell a portion of their property’s equity, offering an alternative investment opportunity. The first NFT-based (NFT: Non-Fungible Token, also a smart contract) residential home sale in the U.S. exemplifies how real estate can be digitized and streamlined, attracting more investors.
Liquidity traditionally has meant direct and immediate access to your money — a concept that was almost unheard of in any real estate scenario because property investment has always required significant equity, often called “trapped equity” since that money is now securing the underlying asset and usually cannot be recouped until a successful sale of the property. Through the lens of digital assets and property tokenization, liquidity now means 24/7 access to secondary markets which bring about global trade opportunities, low barriers to entry for investment and crypto-to-fiat banking services and exchanges.
Crowdfunding & Resilient Ownership
This term is relatively fresh within the last decade; however, it has often been dedicated to friends-and-family investment, private equity and investment pools, which are not often the most popular option given equity dilution, depreciated dividends and missed NOI targets.
The new Real Estate 3.0 paradigm of crowdfunding represents an asset-tokenized, global pool of investment opportunities, along with greater market exposure open to individuals, and not just accredited individuals, often investment opportunities are open to investors for as little as $100 per token, as well as institutional investment and resilient tokenized real estate asset co-ownership.
Bolstering Transaction Security
Blockchain-based property platforms are simplifying the process of ownership, ensuring the integrity of property documents and eliminating fraud risks. For example, in 2021, approximately 1 out of 120 mortgage applications contained fraud. By securely storing transaction details on a digital ledger, blockchain technology mitigates these risks and paves the way for a safer, more efficient, and cost-effective process.
Fractionalization
We have all heard of those endurance condo time-share presentations where you, too, can be the proud owner of two weeks a year in Cabo — the old-school version of the fractionalization of real estate. The thing with this is, you don’t actually own any portion of the property - the actual real estate is owned by someone else, and you are simply entitled to your two weeks of usage of the property. A business model that may be great for some, however certainly not for real estate investment.
In today’s world of tokenized real estate assets, developers and owners can sell percentages of equity in new or existing projects to fund development, pay down debt, purchase new property for future development or simply to regain their initial equity position, while investors can participate in high-yield, prime assets while benefiting from ownership rights such as voting, equity distributions, appreciation, and the unprecedented liquidity that is baked into the tokenization paradigm.
Global Capital Pool & 24/7 Secondary Markets
In the past, this meant reaching out to foreign real estate investors, global private equity funds or REITs to attract or contribute to real estate investment opportunities. Today, with blockchain technology and smart contracts, the world is your oyster.
Through the lens of tokenized real estate, literally anyone can participate in development investment or existing property investment, and investors can access previously unattainable real estate investment asset classes anywhere around the world while knowing that their investment is secure on the blockchain, complies with applicable local regulations and can be traded easily when it’s time to cash out.
Improved Corporate Governance
Traditionally CSR (corporate social responsibility) or now often called ESG (environmental, social and governance) has meant a company applies the core principles of fairness, accountability, responsibility and transparency to their business operations and for their stakeholders. However, this is often only demonstrated through the old-fashioned and rigid quarterly earnings reports or annual shareholder meetings, and often times we’ve seen these concepts used for marketing and ‘greenwashing’ operations.
Now, with the digitization of assets on a blockchain, corporate governance not only provides an immutable record of all transactions, but of greater magnitude, it provides immutable ownership rights, voting rights and dividend rights (when applicable), essentially automating and broadcasting the core principles of corporate governance in real time to each and every stakeholder.
Greater Compliance
When it comes to traditional investments, adherence to all applicable securities laws and regulations is mandatory, otherwise hefty fines and federal justice are coming your way.
Now in the world of digital securities and tokenized assets, compliance, anti-money laundering (AML), Know Your Customer (KYC), and other compliance regulations are already embedded into the code of the smart contract on the blockchain, ensuring that an investment is approved by the SEC and/or FINRA. This results in much faster settlements, little to no further legal / compliance costs, drastically more efficient exchange and higher-yield returns, all while remaining perfectly in compliance.
Capitalization Table Management
Traditionally, for owners and investors, cap table management is the effort to diligently keep all investments straight and to stay on track to profitability. In today’s blockchain real estate environment, your cap table is embedded in the digital asset’s smart contract on the blockchain, transparently and immutably providing every investor a full analysis of the property’s percentages of ownership, equity dilution and value of equity in each round of investment by founders, managers, investors and other owners. Again, tokenization automates the process, providing stronger corporate governance and investor data, while providing 100% transparency for all participants, not just whomever is managing your money, as it has been for so long.
The Future of Real Estate and Blockchain
Blockchain technology is revolutionizing the real estate industry, fostering security, transparency, and accessibility for investors, buyers, and sellers alike. While ongoing development in the field is evolving to bring about seamless integration into the current real estate investment space, blockchain has already demonstrated its incredible value in improving transaction speed and processes and democratizing the industry. As real estate embraces blockchain technology, we can anticipate a more efficient and equitable marketplace poised to thrive on a global scale.
We are just now at the cusp of industry transformation, and we’re all in it together. I advise all real estate professionals and investors to familiarize themselves with the most important concepts in the new realm of real estate finance and investment to bring the highest level of professional expertise and contemporary knowledge to your clients and investments in this digital age.
To learn more about blockchain and how it's impacting the real estate space, reach out to Resource Blockchain.
To learn more about utilizing digital assets for the purchase or sale of real estate, reach out to Mountain Life Real Estate, one of the first Crypto Certified Agencies in the nation, with years of experience in the real estate and digital assets spaces.
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