How will Blockchain Change Real Estate Investing in 2020?

By Adam Gower Ph.D.

How Will Blockchain Change Real Estate Investing_ - COMPRESSED

There has been a lot of chatter about “cryptocurrency” in recent years, with terms like “Bitcoin” making real estate and financial headlines. Most people still do not understand the basics of cryptocurrency. Indeed, it is a somewhat opaque and foreign concept. Fewer still understand how cryptocurrency will change real estate investing in the future.

 

In short, think of cryptocurrency as an alternative type of currency. It is a digital, or virtual, form of currency that can be traded just as you would use dollars, pounds, euros, or yen.

 

Yet unlike these other forms of currency, which have some physical representation (bills, coins, etc.), cryptocurrency is entirely digital and only exist in electronic form. Public and private “keys” – similar to identification numbers – are used to trade cryptocurrency between individuals and to prevent counterfeiting.

 

One of the unique features of cryptocurrency is that it is essentially unregulated. There is no central bank or other agency that can issue or print cryptocurrency. The decentralized nature of cryptocurrency means that it can be utilized without any form of government control or interference, which is one of its primary appeals to those who use it.

 

In this article, we take a look at how cryptocurrency is increasingly being utilized in the real estate sector and how this trend might evolve moving forward.

 

Contents

How is blockchain affecting real estate today?

A revolution in property investment?

How is blockchain currently used in real estate?

What drives the need for digital in the real estate sector?

How will blockchain be used in real estate of the future?

What is the Biggest Opportunity for Real Estate and Blockchain Right Now

Conclusion

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How is blockchain affecting real estate today?

 

In short, blockchain is the technology that underpins the cryptocurrency system. It provides a time-stamped series of immutable, recorded data that is managed by a cluster of computers rather than one single entity. Each of these blocks of data is secured and bound to each other using cryptographic principles, hence the name “blockchain”. This makes falsifying data incredibly difficult.

 

The blockchain network has no central authority, which is what makes it so unique compared to the central banking system.

 

Blockchain information is open for anyone and everyone to see, making it a very transparent way to share data for those involved.

 

Let’s use a simple example. You want to buy an airline ticket. In order to do so, you use a credit card and pay a processing fee for their facilitating the transaction. Blockchains are a way for the airline and the passenger to save money, as it allows the entire ticketing process to be conducted directly between the two entities. The airline ticket is a block, which is added to a ticket blockchain. The blockchain is a unique, independently verified record that has been time stamped for added measure.

 

The final ticket blockchain serves as a record of all transactions for that airline route, or even the entire airline network, which includes records of every airplane ticket ever sold. This blockchain system facilitates free transactions and replaces all processes and businesses that serve as intermediaries, allowing the transaction to happen more efficiently.

 

Today, blockchain is at the intersection of commercial real estate and “FinTech,” particularly as it pertains to allowing for fractionalized ownership of real estate through crowdfunding.

 

Blockchain has opened the doors for making real estate transactions simpler and faster than ever. While technology is still in its nascent stages, blockchain will increasingly be used for smart contracts (i.e. automated contracts) and tokenization. Read on to learn more about these concepts.

Blockchain has opened the doors for making real estate transactions simpler and faster than ever. While technology is still in its nascent stages, blockchain will increasingly be used for smart contracts (i.e. automated contracts) and tokenization. Read on to learn more about these concepts.

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A revolution in property investment?

 

Blockchain has the potential to completely upend how property investments are made in the future. For example, commercial real estate has notoriously high barriers to entry. Not only are the capital requirements high, but not all investors have the same access to information. We see this every day, with some investors getting access to off-market transactions ahead of others, which limits the pool of investment opportunities for the masses (or, at least, provides those with information a first-mover advantage).

 

Commercial real estate is also inherently illiquid. Shares of real estate cannot be bought and sold as seamlessly as other securities that trade on the open market.

 

Blockchain provides a solution to challenges such as these. For example, blockchain provides a decentralized system in which all data that is stored inside a blockchain is available to others who are part of the network. It is not owned by any one single entity, thereby increasing transparency. Moreover, blockchain data is immutable and cannot be tampered with, making this a highly secure way of transacting.

 

There are a few ways we could see this creating a revolution in property investment. The first pertains to real estate crowdfunding: with data more widely available, and with blockchain’s security, more owners would be open to investing in crowd-funded real estate deals. This lowers the barrier to entry for those who may not otherwise have the capital needed to invest alone.

 

By extension, this opens the door to a second opportunity: fractional ownership. As blockchain becomes more widely accepted, investors will become more open to the idea of fractional ownership. Fractionalization is not a new concept, per se. Fractionalization is basically selling shares to more than one person. We see this in real estate funds already. Blockchain (and more specifically, cryptocurrency) is a technology to enable further fractionalization in commercial real estate.

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How is blockchain currently used in real estate?

 

As noted above, blockchain has yet to become widely adopted in the real estate industry. There are no known transactions that have occurred entirely via blockchain or using cryptocurrency. Instead, transactions that have utilized blockchain have still relied heavily on traditional processes.

 

That said, pieces of transactions are now starting to rely on blockchain. Smart contracts, for example, allow contracts to be automatically self-executed when certain conditions are met. Smart contracts have instructions embedded into their blockchain that outline those requirements. Once the first set of instructions is complete, it triggers the next series of instructions, and this process continues until all activities are finished and the contract can be executed.

 

There are a few companies already employing blockchain technology in real estate.

 

For example, PropertyClub is a real estate platform that uses blockchain to help investors identify, buy, sell, invest in and market CRE deals. The company uses smart contracts to conduct its real estate transactions, using cryptocurrency like Bitcoin to facilitate payment. ManageGo is another company operating in this space. ManageGo provides ledger-backed software to help property managers process payments and respond to repair and maintenance requests in a timelier fashion. Finally, RealBlocks is an example of a fintech company that utilizes blockchain to help investors buy fractionalize interest in specific assets and/or larger portfolios.

 

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Why is blockchain changing real estate?

 

There are several reasons why blockchain is changing real estate, many of which we’ve described above. For example, blockchain is making commercial real estate transactions decentralized and more transparent through the use of highly secure, immutable data. Artificial intelligence is shaping commercial real estate in many ways, and blockchain is one such example.

 

Smart contracts are one way blockchain is changing real estate, and as noted already, have many benefits. The most obvious benefit is that they help to cut out the middlemen associated with transactions (i.e., lower commissions and fees). They also help to speed up real estate transactions by allowing self-signature as certain milestones are achieved. Blockchain also allows for the fractionalization of real estate assets, thereby increasing the pool of potential investors who may be inclined to own a portion of a property or portfolio alongside others.

 

It is worth noting, however, that blockchain remains highly unregulated. There are pros and cons to this lack of blockchain regulation. On one hand, it speeds up transactions by reducing government bureaucracy and third-party interference. On the other hand, it gives some investors pause given the customary oversight involved in commercial real estate transactions (among brokers, real estate advisors, attorneys, government agencies and the like).

 

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Can a crowdfunding issuer sell its own securities?

 

Changes to regulations have opened the door for commercial real estate crowdfunding unlike anything we’ve seen before. Now, sponsors can solicit capital contributions from a larger pool of investors rather than only amongst those whom they personally know. This has created a new opportunity for a crowdfunding issuer interested in selling its own securities.

 

Fractionalization in real estate is not new. This is the same concept applied by funds that aggregate capital to be deployed into a single asset or larger portfolio. Blockchain is a new way to facilitate this fractionalization; it is essentially a technological solution to fractionalization.

 

Blockchain can support fractionalization even without cryptocurrency. Let’s use the example of an airline fractional ownership company. Most people do not want (or cannot afford) to own their own airplane. Instead, many buy shares (usually tied to certain blocks of time) in which they can the use that airplane on certain occasions. In this case, many people would buy shares of the airplane as a cooperative. They register their ownership to the blockchain and usage of the airplane is tracked in a computer system. The computer system is automatic: when someone uses the plane, their blockchain automatically logs that use and will make a record of the debt owed to the consortium of owners. A ledger is then distributed to all accounts accordingly, with blockchain recording all records seamlessly.

 

The same concept applies to a crowdfunding issuer seeking investment in a deal. For a certain investment amount, they would issue fractionalized shares of the real estate to the owner. Blockchain would record all data and issue updates and briefings to the rest of the ownership group as appropriate.

 

Does it mean that with blockchain and property fractionalization, you can sell off your fractional ownership any time and realize your investment?

 

It remains to be seen how liquid property shares will become when blockchain is more widely adopted. Blockchain just provides a different currency for sponsors to be able to finance their properties in an unregulated manner. An investor might purchase a certain fraction of a property using Bitcoin, for example, but because Bitcoin is not regulated, its value can fluctuate to extreme highs and lows. Depending on the value of Bitcoin at that time, it could make it more or less difficult for someone to sell their fractional ownership share in a property.

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What drives the need for digital in the real estate sector?

 

Commercial real estate transaction costs are already unnecessarily high. Each transaction, for example, requires a title search. Every new owner will need to pay the same fee, as did all owners previously, to do a historical inventory of ownership records to confirm there is no cloud on title. Ten, twenty years from now, all records related to a property could theoretically be digitized and encrypted into blockchain, thereby reducing transaction costs by making the entire chain of title more readily available to users in a single data set eliminating the repetitive research currently necessary to insure title.

 

In fact, all property records could be digitized in this same manner. Consider the construction of a new building: all of the architectural documents, all engineering plans, all appliance manuals and more could be recorded into the blockchain. Therefore, if one or several owners (in a fractionalized ownership scenario) want or need access to those materials, they’ll be readily available. This will reduce transaction time and costs, thereby opening the doors to a broader set of investors.

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How will blockchain be used in real estate of the future?

 

It is conceivable to think that blockchain technology will be used to streamline all real estate transactions. Currently, the length of the real estate transaction process (residential and commercial alike) can take months. This is one of the primary reasons real estate is considered an illiquid asset. If blockchain allows for detailed, robust and highly accurate accounting and recordkeeping the way some experts anticipate, the transaction process could move from months to days, even hours.

 

We can see how this might play out in a fractional ownership situation. It will make it much easier for many small investors to purchase shares of larger properties or portfolios. Those shares will be more easily traded, and therefore, may open the door to more investors willing to buy fractionalized interest in a deal given the increased illiquidity. It may shift the dynamic from corporate ownership to more fractionalized structures, with even corporate owners willing to sell equity in projects to third parties on a fractionalized basis.

 

Of course, the success of this approach will hinge on future regulations. Currently, blockchain is highly unregulated, as are cryptocurrencies. There have been cases, for example of cryptocurrency offerings (“initial coin offerings”) that turned out to be a scam. Investors purchased coins thinking they’d be getting cryptocurrency in exchange, only to have the group behind the offering virtually disappear. The lack of regulation is what has spooked some investors from entering this realm of cryptocurrency or blockchain investing. While a lack of regulation is exactly what leads to greater efficiency, it also serves as a mental roadblock for some who prefer the third-party oversight.

 

How will blockchain affect real estate transactions?

 

There are three primary ways we see blockchain affecting real estate transactions, as noted above:

 

    1. Speed: Commercial real estate transactions often include months of due diligence, both prior to signing a purchase and sale agreement and then between P&S and closing. With information more readily available, transactions will move forward with much greater efficiency. Consider a real estate closing that needs funds to be wired. Domestically, this can take at least 24 hours. International transfers can take up to a week. With blockchain, transfers can happen instantaneously.

 

    1. Security: Blockchain code cannot be edited, and therefore, it provides an incredible accounting tool for all associated activities and monetary exchanges. As more information is recorded to the blockchain, security will continue to improve.

 

    1. Anonymity: Blockchain uses sophisticated code to log records and facilitate transactions. Individuals have what’s known as a “wallet” which is not actually a wallet to store money, but rather a software program that tracks their public and private “keys” that then interface with various blockchains so users can monitor their balances, send money and conduct other business. Think of a key as similar to a computer’s IP address. These keys provide a high level of anonymity for those who do not want to be readily identifiable. Some real estate investors prefer this anonymity. Others, still, would feel more comfortable knowing who else is involved in a transaction. There are ways for investors to disclose their identities (and for others to search keys for identities), but this is another potential obstacle for blockchain’s use in real estate becoming more mainstream.

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Conclusion – What is the Biggest Opportunity for Real Estate and Blockchain Right Now

 

The biggest opportunity for real estate developers and investors right now is in continuing to stay near the basket, as the expression goes, and continuing to monitor the development of the technology. The biggest barrier right now is less government regulation and more about trust in the system.

 

Think about it for a moment.

 

It wasn’t that long ago that contracts were all executed with ‘wet’ signatures. Principals in a transaction would print out on paper a contract, apply pen to said paper, sign, and then exchange, often signing the same exact documents in duplicate so multiple principals could each have their own copy. Now it is commonplace for documents to be signed digitally i.e. on a computer screen or smartphone, and then distributed via email or other digital means.

 

There’s little or not regulation over that; just broad acceptance once it became increasingly used and trusted. Anyone attempting to explain the technology behind how that works as a means for persuading someone to use it instead of paper, would be better off simply stating that the system is secure, commonplace, and a lot easier, and less costly and time consuming.

 

The benefits of a system or product or investment are what sell it; NOT the technology behind it.

 

The biggest opportunity for blockchain in the real estate industry is to stop attempting to explain the technology – even as I have done in this article – and instead to describe the benefits: Sell shares in your deals (as you already do), execute contracts digitally (as you already do), exchange information (as you already do), but do it faster, cheaper, and more securely than ever before.

 

So the biggest opportunity right now for you, as my podcast guest Professor Andrew Baum of Oxford University, one of the world’s foremost authorities on blockchain, advises is find a budding new blockchain startup, don’t invest in them (yet), but share your insights into CRE while learning what they are doing and when the time is right, you’ll be perfectly positioned to capitalize on what will, inevitably, be a next generation revolution to hit our industry.
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