Blockchain 2.0: Smart‘er’ Real Estate
The previous article of this series explored the features of blockchain which will enable institutions to transform and interlace traditional banking and financing systems with it. This part will explore - Blockchain in real estate. The real estate industry is ripe for a revolution. It’s among the most actively traded most significant asset classes known to man. However, filled with regulatory hurdles and numerous possibilities of fraud and deceit, it's also one of the toughest to participate in. The distributed ledger capabilities of the blockchain utilizing an appropriate consensus algorithm are touted as the way forward for the industry which is traditionally regarded as conservative in its attitude to change.
Real estate has always been a very conservative industry in terms of its myriad operations. Somewhat rightfully so as well. A major economic crisis such as the 2008 financial crisis or the great depression from the early half of the 20th century managed to destroy the industry and its participants. However, like most products of economic value, the real estate industry is resilient and this resilience is rooted in its conservative nature.
The global real estate market comprises an asset class worth $228 trillion dollars. Give or take. Other investment assets such as stocks, bonds, and shares combined are only worth $170 trillion. Obviously, any and all transactions implemented in such an industry is naturally carefully planned and meticulously executed, for the most part. For the most part, because real estate is also notorious for numerous instances of fraud and devastating loses which ensue them. The industry because of the very conservative nature of its operations is also tough to navigate. It's heavily regulated with complex laws creating an intertwined web of nuances that are just too difficult for an average person to understand fully. This makes entry and participation near impossible for most people. If you’ve ever been involved in one such deal, you’ll know how heavy and long the paper trail was.
This hard reality is now set to change, albeit a slow and gradual transformation. The very reasons the industry has stuck to its hardy tested roots all this while can finally give way to its modern-day counterpart. The backbone of the real estate industry has always been its paper records. Land deeds, titles, agreements, rental insurance, proofs, and declarations etc., are just the tip of the iceberg here. If you’ve noticed the pattern here, this should be obvious, the distributed ledger technology that is blockchain, fits in perfectly with the needs here. Forget paper records, conventional database systems are also points of major failure. They can be modified by multiple participants, is not tamper proof or un-hackable, has a complicated set of ever-changing regulatory parameters making auditing and verifying data a nightmare. The blockchain perfectly solves all of these issues and more.
Starting with a trivial albeit an important example to show just how bad the current record management practices are in the real estate sector, consider the Title Insurance business, . Title Insurance is used to hedge against the possibility of the land’s titles and ownership records being inadmissible and hence unenforceable. An insurance product such as this is also referred to as an indemnity cover. It is by law required in many cases that properties have title insurance, especially when dealing with property that has changed hands multiple times over the years. Mortgage firms might insist on the same as well when they back real estate deals. The fact that a product of this kind has existed since the 1850s and that it does business worth at least $1.5 trillion a year in the US alone is a testament to the statement at the start. A revolution in terms of how these records are maintained is imperative to have in this situation and the blockchain provides a sustainable solution. Title fraud averages around $100k per case on average as per the American Land Title Association and 25% of all titles involved in transactions have an issue regarding their documents. The blockchain allows for setting up an immutable permanent database that will track the property itself, recording each and every transaction or investment that has gone into it. Such a ledger system will make life easier for everyone involved in the real estate industry including one-time home buyers and make financial products such as Title Insurance basically irrelevant. Converting a physical asset such as real estate to a digital asset like this is unconventional and is extant only in theory at the moment. However, such a change is imminent sooner rather than later.
Among the areas in which blockchain will have the most impact within real estate is as highlighted above in maintaining a transparent and secure title management system for properties. A blockchain based record of the property can contain information about the property, its location, history of ownership, and any related public record of the same. This will permit closing real estate deals fast and obliviates the need for 3rd party monitoring and oversight. Tasks such as real estate appraisal and tax calculations become matters of tangible objective parameters rather than subjective measures and guesses because of reliable historical data which is publicly verifiable. UBITQUITY is one such platform that offers customized blockchain-based solutions to enterprise customers. The platform allows customers to keep track of all property details, payment records, mortgage records and even allows running smart contracts that’ll take care of taxation and leasing automatically.
This brings us to the second biggest opportunity and use case of blockchains in real estate. Since the sector is highly regulated by numerous 3rd parties apart from the counterparties involved in the trade, due-diligence and financial evaluations can be significantly time-consuming. These processes are predominantly carried out using offline channels and paperwork needs to travel for days before a final evaluation report comes out. This is especially true for corporate real estate deals and forms a bulk of the total billable hours charged by consultants. In case the transaction is backed by a mortgage, duplication of these processes is unavoidable. Once combined with digital identities for the people and institutions involved along with the property, the current inefficiencies can be avoided altogether and transactions can take place in a matter of seconds. The tenants, investors, institutions involved, consultants etc., could individually validate the data and arrive at a critical consensus thereby validating the property records for perpetuity. This increases the accuracy of verification manifold. Real estate giant RE/MAX has recently announced a partnership with service provider XYO Network Partners for building a national database of real estate listings in Mexico. They hope to one day create one of the largest (as of yet) decentralized real estate title registry in the world.
However, another significant and arguably a very democratic change that the blockchain can bring about is with respect to investing in real estate. Unlike other investment asset classes where even small household investors can potentially participate, real estate often requires large hands-down payments to participate. Companies such as ATLANT and BitOfProperty tokenize the book value of a property and convert them into equivalents of a cryptocurrency. These tokens are then put for sale on their exchanges similar to how stocks and shares are traded. Any cash flow that the real estate property generates afterward is credited or debited to the token owners depending on their “share” in the property.
However, even with all of that said, Blockchain technology is still in very early stages of adoption in the real estate sector and current regulations are not exactly defined for it to be either. Concepts such as distributed applications, distributed anonymous organizations, smart contracts etc., are unheard of in the legal domain in many countries. A complete overhaul of existing regulations and guidelines once all the stakeholders are well educated on the intricacies of the blockchain is the most pragmatic way forward. Again, it’ll be a slow and gradual change to go through, however a much-needed one nonetheless. The next article of the series will look at how “Smart Contracts”, such as those implemented by companies such as UBITQUITY and XYO are created and executed in the blockchain.
-  HSBC, “Global Real Estate,” no. April, 2008.
-  What Is Title Insurance And Why Is It Important?
-  D. B. Burke, Law of title insurance. Aspen Law & Business, 2000.
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-  M. Swan, O’Reilly - Blockchain. Blueprint for a New Economy - 2015.
-  Blockchain in commercial real estate (CRE) | Deloitte US
-  UBITQUITY - The Enterprise Ready Blockchain-Secured Platform for Real Estate Recordkeeping | One Block At A Time
-  Deloite, “Blockchain in commercial real estate The future is here ! Table of contents.”
-  “XYO Network Partners with RE/MAX México to Bring Blockchain Transactions to National Real Estate Market | Business Wire,” Business Wire