Originally Published on Rocket Homes
Blockchain, cryptocurrency, bitcoin — a lot of these terms are used these days, and many people don’t understand what they mean. Explaining blockchain to someone now is like explaining the internet was to someone in the 1980s. With each new, revolutionary technology — like the internet or blockchain — there are early adopters who recognize the value of the tech.
Read on to learn how blockchain is used in real estate. Let’s start by defining it.
What Is Blockchain?
In the simplest form, blockchain is a record, or ledger, of transactions. These transactions are collected into packets of data, known as blocks. Once the data capacity is reached for a block, it’s timestamped and chained to the block that came before it.
A new block forms with all the information of the old blocks, add in new info, and the process continues. Because of how these blocks interact, if someone tries to alter the information in a block, the rest of the blocks can cross-reference each other and fix the error.
This makes history transparent and unchangeable. It also eliminates the need for central data storage and verification. These two factors have made blockchain a trusted method for recording information.
Blockchain technology has upended the real estate industry by providing new platforms for home buyers, sellers, and investors to connect with one another. Blockchain streamlines real estate transactions by cutting costs and intermediaries, as well as providing increased transparency.
How Is Blockchain Technology Used In Real Estate?
Like many industries, blockchain is disrupting the way things have been done. Real estate is no different. Blockchain is being used to transform the way people buy and sell homes. As it becomes more widely available, it will cut out intermediaries, reduce costs, and increase access to funds and investment opportunities.
Read on to learn the current ways blockchain is being used in real estate.
1. Smart Contracts
Real estate transactions face a lot of regulation, requiring plenty of paperwork and legal hoops to jump through. Smart contracts compile the required documents in a single database, easily accessed by anyone.
Need the paperwork for selling your home in Phoenix, AZ, or in Burlington, VT? Both states just made smart contracts admissible records. These smart contracts can be drawn up to meet all the legal and financial requirements for sale.
With transparent access to these documents, smart contracts can drastically reduce real estate attorneys’ and agents’ roles in property transactions.
2. Tokenization Of Assets
Using smart contracts, blockchains can turn assets into tokens that can be traded like cryptocurrencies. For example, this tokenization divides real estate assets into segments that can be broken down and bought individually.
Traditional real estate investing meant having to have the capital to buy whole properties or contracts in properties. With tokenization through blockchain, small investors can trade in fractions of properties. This decreases their liability since they aren’t responsible for the property.
3. New Platforms For Real Estate Transactions
With the tokenization of assets, new platforms are being launched that aim to streamline real estate purchasing and investing. There is a lot of room for these platforms to operate and disrupt the complex transactions of real estate.
For instance, platforms like Natmin focus on utilizing blockchain to facilitate escrow transactions, cutting down on closing time and costs. Another startup, Harbor, breaks down real estate assets into tokens, so owners can offer fractional shares of their property and small investors can build real estate capital.
If you owned a large, multi-unit apartment building in desperate need of remodeling, you could use Harbor to issue shares of the apartment building. The money gained from these shares could be reinvested to improve the building, allowing you to charge more rent. Thus, small investors could get in on investing in your property and reap some of the benefits of owning a rental unit without the risks.
4. Removes Intermediaries And Affiliated Costs
The transparent and secure nature of blockchain cuts down on a lot of the legal and financial hurdles. For example, some blockchain platforms allow you to buy full pieces of property with cryptocurrency. These transactions cut out brokers, banks, and real estate lawyers.
Real estate can be bought and sold securely by using cryptocurrency, eliminating costs affiliated with intermediaries, such as closing costs and appraisal fees.
5. Improved Transaction Speed
Even if you’re unable to buy a home fully in Bitcoin, mortgage lenders are looking to blockchain to speed up the process by replacing many of the legal and financial hurdles with automation. For example, this could cut the pre-qualifying process in half.
Smart contracts and the removal of intermediaries cut down on the multiple layers of real estate transactions. For example, some platforms are using blockchain to create hyper-accurate title registries. These title registries will greatly reduce or completely eliminate the work of title companies to prove who owns what land, cutting back on another piece of the closing process.
What Are The Benefits Of Blockchain In Real Estate?
Blockchain in real estate can do so many things. From helping streamline the transaction process to chunking out assets to make real estate investing a possibility for small investors, blockchain — and its associated technologies — has a large array of applications.
As more platforms utilize the blockchain to make buying real estate easier, costs overall can go down. Like inspection costs, loan fees, and legal costs, many different fees are cut using blockchain platforms.
By lowering these fees, blockchain could lower the barrier to entry for prospective home buyers. In addition, if blockchain is used to make the process more efficient, it could lower the risk for mortgage lenders and give real estate agents more clients.
Greater Access To The Real Estate Market
With tokenization, investing in real estate is much easier. No longer do you have to finance the purchase of a whole property, pay to maintain it, market it to renters, and more.
If the property owner has broken up the asset, all you need is some money to invest. Blockchain removes the intermediaries in this transaction, and the security of it will always show you own a piece of the property until you decide to sell.
Increased Transparency Of Transactions
Remember that blockchain is essentially a ledger of transactions. Since this ledger cannot be altered, it provides absolute transparency in the transactions. Therefore, compared to the traditional real estate market, it’s much simpler.
Real estate transactions traditionally have many layers with many hands in the process. Blockchains would store all of the information of parties involved in one place and make the need for many parties, such as lawyers and underwriters, smaller.
FAQ: Blockchain In Real Estate
Is Blockchain Technology Safe To Use?
Yes, because blockchain is decentralized, meaning the data is stored in multiple areas with many different backups, the data is more secure than data being stored in one location, like a server. If someone tries to alter the data in one block, all the other blocks in the chain can immediately spot the alteration. It has backups upon backups upon backups for data.
Blockchain also utilizes cryptography. Each block has an identifier that’s referred to as a “hash.” The standard length for a hash is 64 characters. Because of this long, completely randomized string, it’s hard to crack into a specific block in the chain to alter its data. And even if you did, since the ledger is distributed and decentralized, and since all interactions with it are recorded, the ledger would have a record of the alteration and could simply correct it.
How Does Blockchain Technology Improve Real Estate Liquidity?
Because property owners can tokenize their assets, they can greatly increase their liquidity. No longer must they wait to sell the whole property to get cash from it. If the owner splits up the asset, they can more easily sell off smaller portions of the property to increase their liquidity. These smaller portions sell quicker because there’s a much smaller barrier to entry than traditional real estate investing.
How Does Blockchain Apply To International Real Estate Deals?
Blockchain enables investors and buyers to purchase international real estate much easier than traditionally. If buying in cryptocurrency, there’s no international exchange rate. Decentralized title registries make sure the property is well-defined, and the title is secure. Smart contracts take into account laws and regulations around real estate transactions in each country.
Propy is a platform that already offers small investors the opportunity to invest in international real estate.
The Bottom Line: Explore How To Use Blockchain In Real Estate
Fully wrapping your head around what blockchain is and can be used for can take a little effort. As blockchain catches on, it will become much more prominent in real estate and in the mortgage industry. Its ability to securely streamline processes is unrivaled in efficiency and transparency.
If you’re curious about investing in blockchain, make sure you know the basics of investing in real estate first. If you want to purchase a home using blockchain, do some research about what platforms and services are in your area. Find a real estate agent who has experience incorporating blockchain into the home buying process.
Ubitquity CEO’s Note: We will be releasing our SmartEscrow 2.0 software this summer which will allow for the settling of real estate transactions using cryptocurrencies in collaboration with the title escrow industry, underwriters, and banks in a legally compliant manner. Email: [email protected] to learn more. — Nathan D. Wosnack
Disclaimer: The views expressed in this article are not necessarily the views of UBITQUITY, LLC, its staff, partners, or advisers.