Blockchain in Real Estate: Smart Contracts, Tokens, Assets
2023 was the year when blockchain in real estate was really on everyone’s lips. Tech-savvy vendors engaged in discussions on the potential of this technology to put an end to manipulation and fraud in numerous verticals, including real estate. Today, we will figure out if blockchain is just another temporary trend or a revolutionary technology that will disrupt the industry.
Blockchain technology is becoming a prosperous area for investment. Real estate businesses are interested in using this technology to facilitate deals, protect client data and money, and streamline operations. To uncover how blockchain influences this competitive market, we should look deeper at its mechanisms and practical applications.
Thus, let’s talk about blockchain for real estate, the benefits and challenges of implementing this technology in property management, and the most common use cases of blockchain in this vertical.
What is blockchain in real estate?
The term “blockchain” is often used interchangeably with cryptocurrency names like Bitcoin or Ethereum. However, there is a difference between these. Bitcoin and other cryptocurrencies are a virtual equivalent of money, while blockchain is the technology that enables the existence of these digital assets.
Blockchain is the decentralized ledger that distributes data across a network of computers and nodes, enabling secure information access and flow. To understand how blockchain and real estate work together, we should refer to the very name of this technology.
When you use blockchain to store your data, it is distributed between a number of data blocks composing the chain. This way, your data is decentralized and stored in a distributed network of computers instead of being stored in one computer.
As a result, someone willing to steal your data has close to zero chance of accessing it. Compared to traditional methods of storing data, blockchain transactions have a transformational effect on the industry.
In real estate, blockchain has the potential to transform almost every aspect of interaction between stakeholders. They can exchange data on transactions, sign legal contracts, access real estate records, etc., while not worrying about security issues.
All this facilitates the growth of the blockchain and real estate markets. As reports show, by 2028, its market share will grow to $3,884.8 million and show no evidence of decline.
Examples of blockchain technology in real estate
The simplest way to understand how blockchain works in real estate is to investigate the process of tokenization. In the context of real estate, tokenization involves turning one’s share of the property into a token. In other words, tokenization is shifting the shares into the digital form and representing them virtually.
Here is an example. Suppose that three partners buy a property, all having equal shares. They decide to leverage the blockchain and refer to real estate tokenization services. After their shares are tokenized, they will be stored in the form of assets on the blockchain and represent their ownership rights. And the value of the tokens they receive will be equal to their share of the property.
The tokenization of real estate ownership allows the owners to trade it, like this is done with cryptocurrencies. Once one of these partners decides to sell their share, the tokens will be put on sale. This is how blockchain technology in real estate can be used to verify and manage property ownership.
In its essence, tokenization involves the securitization of property ownership in the digital format. When tokenized, the ownership of the property is granulated into data pieces distributed and stored in the network of computers.
While people can sleep soundly about their shares and money, blockchain technology will take care of all the processes happening around their assets, including transactions, data transfers, issuance, trading, and others.
Example of blockchain technology in real estate.
Here is one more example of how blockchain in real estate works. Let’s say that a person puts up their house for sale and leverages blockchain technology for the selling process. Another person decides to purchase the property and sends an offer to the seller. After accepting the deal, the seller requests the payment from this buyer via the blockchain.
The request is processed by blockchain nodes using the predetermined algorithms. The technology will leverage specific criteria that will also be predetermined by parties to verify the request. Once it happens, the exchange takes place. It’s worth mentioning that parties can program the blockchain and customize the requirements to fully meet their needs.
In the blockchain realm, the exchange will exist in the form of new data added to the ledger as an additional string chain. The new data block will appear on the blockchain and can never be changed or removed, which ensures transparency and reliability in making deals via this method.
As you see, blockchain has the potential to disrupt the real estate industry, bringing numerous benefits to many stakeholder interactions and processes. In the next section, we will figure out what these benefits are and how real estate representatives can use them in practice.
Benefits of blockchain for real estate
The use of blockchain can facilitate the digital transformation of this industry. Instead of relying on outdated procedures of selling, managing, and purchasing properties, stakeholders can now use advanced and secure methods of testifying their ownership and ensuring transparent operations.
Those in favor of blockchain technology emphasize the following benefits of its application in real estate:
Benefits of blockchain for real estate.
Transaction fluidity.
Real estate deals are prone to numerous threats. To protect stakeholder data and money, a lot of preventative measures are applied to the processes of purchasing and selling property and making transactions. While these measures reduce the security risks, they do not remove them completely and, at the same time, can serve as extra obstacles leading to a ruined deal.
The thing is, not all stakeholders are eager to devote their time to completing numerous procedures to validate their compliance and trustworthiness. Blockchain technology changes this completely by removing most of the obstacles and additional measures required earlier to ensure security.
In its essence, blockchain technology and its security protocols are implemented to make data disruption close to impossible. As a result, buyers and sellers leveraging blockchain for real estate can easily and securely make transactions and complete operations without the need for extra measures.
All this increases the fluidity of the processes and makes the real estate industry more accessible to a wide audience.
Data transparency and accessibility.
As of now, there is no more effective technology for data distribution and flow than blockchain. In the real estate context where big money transactions take place, this benefit is of utmost importance.
Digital assets can represent almost everything in the real world, from money or property ownership to pieces of art or contracts. Thus, it’s very important to ensure uninterrupted access to such assets for stakeholders.
The use of commercial real estate blockchain allows for transparent and uninterrupted data distribution without the risks of disruption. With the help of blockchain, stakeholders can access their data in real time and get full visibility of money transactions.
Decentralization and security.
This benefit prompts a growing number of people to refer to blockchain in the business context.
One of the strengths of the blockchain is its capacity to fully protect people’s data and capital with the help of risk-free security protocols. On top of that, effective authentication methods are used to ensure that access to assets is given only to verified people.
Increased transaction volume.
Blockchain technology increases the efficiency of real estate operations. Instead of traveling long distances to sign contracts, make agreements, or make purchases, people can move all these operations to online mode.
The time efficiency of blockchain evidently leads to the increased number of transactions and deals completed over a short period.
Cut operation costs.
The implementation of blockchain technology has the potential to cut operation costs. Apart from eliminating the need for intermediaries, vendors can also get rid of unnecessary expenses. This includes inspection costs, taxes, registration expenses, loan fees, etc.
Depending on the state and laws, these costs can vary and significantly affect one’s budget. Luckily, many of the processes associated with these expenses can be automated with blockchain.
Access to global asset distribution.
The lower the minimum investment, the more accessible real estate becomes to a global audience. Anyone interested in purchasing even the smallest share of interest can leverage the blockchain technology and make a secure and transparent deal.
Wide investment opportunities can help countries balance the situation in the real estate market by attracting foreign vendors. If somewhere is an excessive need for real estate investments, stakeholders from other countries can seamlessly access and consider the offers.
This leads to an increase in connectivity of the real estate industry on the global level and more balanced asset distribution.
Challenges of using blockchain technology
Challenges of using blockchain technology.
Despite its potential to disrupt the industry, blockchain is still hard to implement across the whole vertical. As of now, only highly modernized and tech-savvy vendors can smoothly move from traditional approaches to blockchain-based interactions.
Why so? Because of a couple of challenges, including:
Lack of regulatory basis
When dealing with real estate software development services, you should always be aware of the new laws and requirements regulating the market. They vary from state to state and even from one jurisdiction to another.
Thus, the use of blockchain in this industry should unfold in compliance with all the changes and innovations, which is tough to do without the help of industry consultants.
What’s more, the dynamics of the market can lead to uncertainties when signing agreements or making transactions via the blockchain. Hopefully, the spread of blockchain for real estate investment initiatives will push the legislators to standardize the procedures and requirements for digitally-based interactions in this industry.
Lack of expertise
Software development gives companies access to a large talent pool of engineers. As of today, the talent pool of blockchain developers is not that big.
That’s because blockchain development requires profound expertise in blockchain design, security, maintenance, and implementation. This, in turn, prompts businesses to be specifically selective when looking for a blockchain development partner.
Privacy concerns
Many people are unwilling to use smart contracts and blockchain transactions because of privacy concerns.
Agreements often contain sensitive information and financial details, and it feels safer for parties to entrust these to established agencies and vendors instead of trying their luck and using innovative technologies.
Shift from legacy systems
Even though real estate and blockchain can grow in hand, blockchain application is primarily associated with some other industries. Meanwhile, the areas that rely heavily on legacy systems and traditional ways of interaction between parties won’t transform that quickly. And real estate is one of these.
Paper-based agreements and contracts and the use of outdated legacy systems still form the ground of real estate processes. The shift toward blockchain will be time-consuming and costly. No less challenging will be the attempt to migrate the decade-long records of real estate agreements to the blockchain.
Resistance to change
The real estate industry is one of the most traditional markets. Its core asset, property, is inevitably linked to the physical world, and it’s hard to shift this market completely to digital. This is why a big obstacle to blockchain implementation is resistance to change.
Particularly resistant are those stakeholders who now take the leading positions in the market. As the current conditions of work bring them regular profit, they are not eager to make transformational changes that could affect their state of business in one way or another.
So, these were the most critical challenges associated with blockchain technology in real estate. You may wonder what are the solutions that could speed up the technology implementation. The answer is to foster collaboration between industry stakeholders who should work closely with tech specialists and legislators to build a solid regulatory background.
Besides, industry leaders and tech-savvy companies should encourage the adoption of this powerful technology to eliminate the chances of fraud and manipulation and make the industry more secure. The successful cases of blockchain applications in other industries can serve as guidelines and sources of insights for those willing to make a revolutionary impact on the market.
The potential of blockchain and real estate: 5 use cases
Below, you can see the most common applications of advanced blockchain technology in the real estate market. All these applications lead to more secure, transparent, flexible, and controllable services and transactions.
Smart contracts
How smart contract works.
Contracts and agreements in the real estate industry have all the chances to shift to the digital format. To protect them against any breaches, blockchain technology will be used, leading to the spread of smart contracts.
As its name indicates, a smart contract is an automatic program that implements and validates the terms of the contract without the need to involve third parties or intermediaries. In a smart contract, the terms of agreements are literally coded in the protocol and the agreement is executed on-chain.
It works in the following way: parties agree upon the contract’s terms and conditions and create a smart contract. They do it by themselves or hire a blockchain developer who helps them with the creation and deployment process. After the contract lands on the blockchain, the program starts the automated check if the contract conditions are met.
The conditions can be anything defined in advance, from data pieces or bills to the transactions or events completed. Once the conditions and contract requirements are met, the smart contract will be executed and the result of the agreement will also be recorded in the blockchain. The agreement participants can access and review it anytime.
Real estate liquidity
Blockchain enhances real estate market liquidity.
Liquidity is determined by the ease of trading activities and the access of market opportunities to stakeholders. In other words, under high liquidity conditions, a seller can easily access a buyer and vice versa. Similarly, parties can easily convert their assets into cash and generate profit.
The use of blockchain in real estate increases the liquidity of this market and optimizes the complicated closing processes. The traditional process of purchasing or selling property involves a lot of bureaucratic hassle, which usually is very time and effort-consuming.
What’s more, before moving to the very sell/buy process, the parties have to negotiate the deal first. This all makes traditional real estate one of the most illiquid areas.
With blockchain, all these processes unfold differently. To sell a property, a person should only tokenize their ownership and put these tokens up for sale. Instead of looking for buyers for weeks or months, the seller can trade their tokens on marketplaces and real estate platforms and quickly cash in on their property once it’s sold.
On top of that, they do not have to wait for a buyer to purchase the whole property to start benefiting from it. Instead, the seller can break their ownership into fractions, which will be more affordable in terms of price and attract more buyers.
Real estate negotiations
Factors that may influence real state negotiations.
The implementation of blockchain commercial real estate will completely change the way people negotiate deals. In particular, the role of intermediaries, including brokers, consultants, layers, and banks, will be affected.
Earlier, the function of intermediaries was to facilitate the processes, testify to the trustworthiness of the business deal, and provide security assurances to all parties. Today, all this can be achieved with the help of the blockchain, meaning the real estate negotiations are not taking a different shape.
Everything from payment verification to legal compliance can be done and validated with technology. The need for intermediaries is removed, while real estate negotiations are fully digitized and brought to a new level in terms of speed and security.
This application of blockchain has an evident effect on the way trading platforms and marketplaces work. Once they start leveraging this technology, they give more people the opportunity to purchase property and participate in this rapidly growing market.
Without the fear of malicious intentions of another party, users can securely make transactions, exchange documents, and buy or rent real estate. The process of trading tokenized real estate is quite similar to trading stocks on the exchange market, which facilitates the deals and transactions between parties.
Fractional property ownership
Fractional ownership vs full ownership.
Managing real estate on the blockchain allows for fractional property ownership. In other words, tokens represent the precise share that one owns, and they can sell, trade, or buy new tokens, manipulating their interest in one way or another.
For example, a person is interested in purchasing one-third of the property’s equitable interest, which is represented in 3 tokens. In that case, they will have to buy 1 token that will be equal to one-third of the asset’s equitable interest. There is no need for them to buy all 3 tokens if they do not want to do so.
Thus, fractional ownership increases the flexibility of purchasing decisions and gives people with limited funding wider market opportunities.
Automated transactions
With the application of blockchain, real estate vendors can eliminate the need for escrow accounts, as this technology can ensure all the benefits that escrow gives.
A distributed network of nodes leveraged in transaction processing allows you to protect your money, make timely payments, and store funds for further deals. You no longer have to hire escrow agencies to execute real estate agreements, meaning that your expenses associated with this process will also go down.
The future of blockchain in real estate
Perspectives of blockchain for real estate.
Despite challenges and obstacles on the way, blockchain keeps penetrating the real estate industry. We can claim this based on the benefits it offers and the market statistics that show the need for the game-changing technology.
For example, in the first quarter of 2022, the average house price in the US was around $323,000 at the start, making property ownership a distant dream for a big part of the population. In the second quarter of 2023, the cost surged to $495,100, frightening buyers to even ask what could wait for them in 2024.
Another point determining the growth of blockchain adoption is security. Last year, the cost of real estate fraud was estimated at more than $395 million, marking a rise of 13.3% compared to the previous year. This brought devastating outcomes for individuals, many of whom lost their whole life savings.
As property prices, operations costs, and financial risks go only up and up, so does the need for stakeholders to find efficient tech-driven solutions. And blockchain is one of these. Fragmented ownership allows people to buy the property share, sell it more expensive, or keep it and replenish their assets later, making a dream of buying a house closer to reality than ever before.
Conclusion
Blockchain is the technology of tomorrow that is available for the real estate industry today! From more secure transactions to a more efficient closing process, blockchain revolutionizes the way people do real estate business.
On top of that, leveraging this technology can be a chance for business founders and startup owners to gain a competitive advantage when entering the dynamic market.
If you want to outperform your competitors by facilitating the user experience, consider integrating this technology into your real estate platform. As an experienced design and development company, Limeup has a proven record of developing products powered by blockchain.
One of our recent accomplishments is the creation of the real estate tokenization platform Bloсkch for our German client. We built a web and mobile application for this platform powered by blockchain.
With the help of these apps and the technology lying at the core, property owners can turn their shares into digital token units. Then, these units can be sold, purchased, and traded on marketplaces securely and transparently. This expands the access and exposure of real estate services and opens new revenue opportunities for stakeholders.
The development of this platform required deep market expertise and the consultancy of legal professionals. Combined with our design and development competencies, these efforts resulted in the creation of a new user-centric, competitive, and compliant blockchain solution.
Contact us if you need help with building blockchain products from scratch or integrating this technology into your existing products. Our team of experts will investigate your needs and come up with a rough project estimation and plan.