Blockchain technology could have a major effect on the real estate industry, from property purchasing to due diligence to title management. We identify the early adopters and potential impact.
The real estate industry is undergoing a digital transformation.
While historically a “pen and pencil” business — often relying on inefficient and archaic methods for doing business and keeping records — technology has begun to help reshape the expanding global market.
The decentralized-record-keeping technology, which is designed to instill trust in the authenticity of digital transactions, could be used to create efficient solutions for both commercial and residential real estate — from buying property to conducting due diligence to enabling crowd-sourced investments, and more.
Some big incumbents are already betting on the tech: Real estate giant RE/MAX has entered into several partnerships to explore blockchain use cases, while Hilton Worldwide has begun using a blockchain-based property management system.
In this analysis, we dig into how blockchain technology could transform the real estate industry, and the areas where we’re already seeing its impact.
Why blockchain tech could benefit the real estate industry
Blockchain technology offers a form of shared record-keeping which is designed to be difficult to tamper with. Blockchain technology operates through decentralized peer-to-peer platforms, building resilience against the spread of corrupted information and boosting resistance to fraud.
See our explainer for more on how blockchain technology works.
Blockchain technology has the potential to address many challenges within the real estate industry, including:
- Improving trust and transparency: Blockchain technology offers a verifiable and censorship-resistant option for sharing information (such as valuation details).
- Reducing siloed databases: Real estate processes would benefit from secure and tamper-resistant shared databases that compile data and documents from various different stakeholders in one place.
- Making transaction processes more efficient: Most real estate transactions are still conducted through wire transfers and require costly verification processes that can take days to complete. Blockchain-based transactions could enable a streamlined process which delivers quickly and reduces costs.
- Limiting the use of intermediaries: Many intermediaries — from brokers to escrow companies — could be rendered obsolete by blockchain-based approaches, as records could be stored, verified, and transferred using blockchain technology. Removing the need for intermediaries could dramatically reduce costs and save time.
Areas of real estate being transformed by blockchain technology
We consider several areas that could benefit from the use of blockchain technology below, from due diligence to financing systems.
PROPERTY SEARCH PROCESS
Currently, the most common method that brokers, owners, buyers, and tenants use to store and access property listings are through third-party platforms such as Zillow.
Zillow’s platform. Source: Zillow
These platforms tend to be subscription-based and can command high fees from users. Moreover, there is a lack of standardized processes and often poor communication between the platforms.
This causes property data to frequently be inaccurate, dated, or incomplete. Further, the data can be fragmented across multiple listing platforms, which introduces inefficiencies.
Blockchain technology can fix these problems by allowing a property listing to exist on a single decentralized database.
With data distributed across a peer-to-peer network, brokers would be able to have more control over their data, as it would be more difficult for it to be interfered with by any third parties. Market participants could access more reliable data at a lower cost.
Imbrex is a real-world example of a blockchain-based property listing platform.
Imbrex’s real estate marketplace is built on the Ethereum blockchain. Buyers, sellers, and other agents can use the platform for free, earning rewards for contributing data and helping to maintain the marketplace.
Data is encrypted and stored on a blockchain, which means Imbrex does not control it and cannot alter it — contributed data is controlled solely by the listing party.
Imbrex is reportedly planning to launch smart contract-enabled transactions using its own cryptocurrency.
Imbrex’s platform. Source: Imbrex
DUE DILIGENCE AND FINANCIAL EVALUATION PROCESS
Physical paper documents for proof of identity are still the norm today. This approach requires the commitment of significant time and effort for due diligence and financial verification.
This manual verification process also increases the likelihood of errors and can involve multiple third-party service providers. These factors can be costly and slow down the due diligence process.
Using digital identities on the blockchain, this entire process can be taken online in a secure manner — increasing efficiency, lowering costs, enhancing data security, and reducing the chance of manual errors.
For example, a real estate property’s digital identity could consolidate information such as vacancy, tenant profile, financial and legal status, and performance metrics.
A digital blockchain-based solution is currently being developed by Lantmäteriet, the Swedish land authority, in collaboration with blockchain startup ChromaWay, Swedish telecommunications giant Telia Company, and several real estate enterprises.
Its goal is to digitize contracts for sale and property mortgages that are authenticated by blockchain technology.
This solution streamlines the process of transferring property titles while also adding some layers of security. All parties involved in the process, including the buyer, seller, real estate agent, the buyer’s bank, and the land registry, have their own digital identities.
Each can use a single application to securely send and sign official documents using blockchain-verified smart contracts. All actors can view the associated documents and information, with verification of the steps that have taken place during the process.
ChromaWay announced that it had completed a full transaction on the platform in June 2018.
A demo of ChromaWay’s application. Source: ChromaWay
Other organizations around the world are also making blockchain real estate strides. Bank of China Hong Kong (BOCHK), for example, stated in mid-2018 that it processes 85% of real estate appraisals using its own private blockchain.
BOCHK’s General Manager of Information Technology Rocky Cheng Chung-ngam said, “In the past, banks and [real estate] appraisers had to exchange faxes and emails to produce and deliver physical certificates. Now the process can be done on blockchain in seconds.”
Property management is highly complex, with many stakeholders involved — including landlords, property managers, tenants, and vendors.
Most properties are currently managed either offline through manual paperwork, or through multiple software programs that generally don’t integrate well with one another.
Through the use of a single decentralized application that uses blockchain-backed smart contracts, the entire property management process, from signing lease agreements to managing cash flow to filing maintenance requests, can be conducted in a secure and transparent manner.
In residential real estate, for example, a landlord and tenant could digitally sign a smart contract agreement that includes information such as rental value, payment frequency, and details of both the tenant and property.
Based on the agreed upon terms, the smart contract could automatically initiate lease payments from the tenant to the landlord, as well as to any contractors that perform periodic maintenance. Upon termination of the lease, the smart contract could also be set to automatically send payment of the security deposit back to the tenant.
One business developing a blockchain-based property management system is Midasium. The company has built a private blockchain to execute smart contracts.
This allows traditional contracts, such as mortgage agreements and tenancy contracts, to be brought onto a blockchain to establish a history of agreements and financial transactions that can be traced and audited.
Creating a tenancy contract with Midasium. Source: Midasium
All data, except for public information like property location, is confidential and encrypted. The intended goal is a reduction in legal, accounting, and transaction costs, as well as a decreased risk of fraud and corruption.
AQUA is another enterprise that offers a blockchain-based property management system, except its application is specifically for hotel and resort management.
The AQUA PMS application is a blockchain platform designed for inventory management, task management, and maintenance management. The service is seeking to help customers reduce operational costs and response times.
AQUA PMS is currently being used by Hilton Worldwide.
At present, property titles are often paper-based, creating opportunities for errors and fraud. Title professionals find defects in 25% of all titles during the transaction process, according to the American Land Title Association.
Any identified defect makes it illegal to transfer a property title to a buyer until it is rectified. This means property owners often incur high legal fees to ensure authenticity and accuracy of their property titles.
Moreover, title fraud poses a risk to homeowners worldwide. US losses associated with title fraud reportedly averaged around $103,000 per case in 2015, compelling many property buyers to purchase title insurance.
These title management issues could potentially be mitigated by using blockchain technology to build immutable digital records of land titles. This approach could simplify property title management, making it more transparent and helping to reduce the risk of title fraud and the need for additional insurance.
Some companies and governments around the globe have already implemented blockchain technology for the title management process.
For example, blockchain startup Ubitquity offers a platform for land titles to be stored on a public blockchain, where they could be less susceptible to theft, corruption, damage, or fraud.
In 2017, the company partnered with the Brazilian Cartorio de Registro de Imoveis (Real Estate Registry) to establish pilot programs.
Ghanaian blockchain company Bitland has been working on a similar solution for Ghana, where it is estimated that almost 80% of land is unregistered, according to Forbes. Those that possess unregistered land find it more difficult to prove legal ownership, increasing their exposure to the risk of land seizures or property theft.
Bitland is seeking to create secure digital public records of ownership on its blockchain platform, with the aim of protecting land owners from title fraud. Bitland has expanded to operate in 7 African nations, India, and is also working with Native Americans in the US.
Real estate giant RE/MAX has also been exploring blockchain use cases.
RE/MAX partnered with blockchain company XYO Network to explore using blockchain technology to build a decentralized online land title registry in Mexico.
XYO Network’s first project with RE/MAX involves tying location coordinates to unique digital tokens that represent land titles. As a property changes owners so will the digital token (with the transaction being recorded on a blockchain), establishing a transparent history of land ownership.
SafeChain is another enterprise leveraging blockchain technology in the title management space.
The company helps title agents verify client identities, bank account ownership, and securely transfer wire information. Its platform seeks to reduce losses from fraud and bring down operational costs.
FINANCING AND PAYMENTS SYSTEMS
Due to the extensive documentation required and the involvement of various intermediaries, existing modes of financing and payments for property transactions are currently slow, expensive, and opaque. These issues are especially pronounced when a property is financed through a mortgage and when international transactions are required.
The current process for mortgage approval for residential properties takes on average around 30-60 days to complete, according to the National Association of Realtors. For commercial real estate — which is more complex to process than residential real estate — the time it takes to get approved can be even longer, often requiring around 90 days.
This process could be simplified and made more transparent when blockchain technology is applied. For example, verifiable digital identities for properties could allow a reduction in both due diligence and loan documentation time, thus speeding up the mortgage approval process.
Source: Blockchain Technology Labs
The borrower and lender could also use blockchain technology to execute an immutable smart contract-based loan document, fully accessible by all legal parties involved. Adoption of blockchain technology could save the US mortgage loan industry up to 20% in expenses per year, according to a report published by Moody’s Investor Service, which would amount to $1.7B in annual savings.
ShelterZoom is a startup aiming to streamline real estate transactions by putting all the processes on the Ethereum blockchain.
Real estate agents, buyers, sellers, and renters can view offers and acceptances on the platform, which also allows access to property titles, mortgages, legal documents, and home inspection reports.
ShelterZoom has partnered with over 90 brokerages around the world, including RE/MAX Revolution in Boston, Massachusetts. The platform is scheduled to go live in 2019.
ShelterZoom’s platform. Source: ShelterZoom
While there are many blockchain-based payment solutions out there, one of the most established is Ripple.
Ripple connects banks and payment providers on RippleNet, its private blockchain, seeking to provide a payment platform for transferring money globally.
One use case for Ripple is facilitating cross-border real estate payments. All parties involved in a real estate transaction can be connected on an online platform, view past transactions between parties, and make payments.
Ripple claims that its approach allows transactions to be secure, quick, and low cost — a compelling proposition compared to the high fees and multi-day wait associated with traditional international payment systems.
REAL ESTATE INVESTING
Real estate investing has historically only been available to those able to put down large sums of capital — especially in regard to commercial property and multifamily housing. Additionally, real estate investing often involves expensive intermediaries such as fund managers, further raising the barrier to entry.
However, blockchain technology it looking to disrupt real estate investing by providing a way to decentralize the process through crowdsourcing and tokenization.
Tokenizing real estate assets refers to a process in which a property owner can offer digital tokens that represent a share of their property. Using a blockchain to track these investments, with each transaction being time-stamped and immutable, makes it possible to limit the risk of fraud.
This approach makes it easier to establish a market for property “micro-shares,” creating the potential for a property to effectively have numerous co-owners with a stake in potential returns.
There are many blockchain-based real estate investment platforms that currently exist, though most are still in the development phase.
One that is more established is BitofProperty. The Singapore-based company has built a blockchain-based crowdfunding platform that allows users to invest in both residential and commercial rental properties. Users receive monthly income from the properties they have invested in.
Properties listed on BitofProperty. Source: BitofProperty
Another example is Brickblock, a smart contract platform which is seeking to use tokenized real estate to help developers raise capital for projects.
Brickblock has received almost $6M in funding from Finch Capital and has several partnerships, including with JTC Group, solarisBank, and Peakside Capital. The platform has not yet gone live to the public.
While blockchain technology could help solve many problems within the real estate industry, there are always challenges that come along with transitioning to an emerging technology that has not yet fully matured.
It is important to note that blockchain technology is still in its early stages, and full adoption across the real estate industry comes with its own set of challenges.
Navigating complex regional regulations around the globe is a key issue that faces the adoption of any new technology, blockchain-based platforms included.
For example, some blockchain-based real estate investment platforms do not allow investors from the United States to participate because the relevant regulations tend to be strict and cause additional administrative overhead for the sale and trade of tokens. It is therefore easier for these platforms to simply prohibit Americans from participating, even with the loss of a huge market of potential investors.
Moreover, not all states and countries recognize smart contracts as legally binding, which poses a huge threat to parties that may not be aware of this — especially when it comes to contracts representing sizable investments like properties and titles.
The regulatory hurdles that come along with blockchain technology are holding many enterprises back from adoption. Though some movement is taking place in this area.
Arizona Governor Doug Ducey signed a bill into law in March 2017 that made smart contracts legally binding. As of October 2018, 17 US state legislatures have either passed or are considering laws related to blockchain adoption, according to Deloitte. It is likely this trend will continue to spread across the US and the world.
In the real estate industry, there are millions, if not billions, of global transactions made every year. This requires networks that can handle large transaction volumes quickly and efficiently.
However, Ethereum can only currently handle about 15 transactions per second, and Bitcoin only around 5 transactions. In comparison, Visa claims it can process over 24,000 transactions every second. A transaction bottleneck would pose a major issue for large-scale real estate enterprises that require ultra-fast processing times.
However, Ripple has claimed that its XRP token could theoretically process around 50,000 transactions per second — roughly double the amount of Visa. The blockchain startup has also stated that it already processes up to 1,500 XRP transactions per second, indicating that slow transaction speeds are not necessarily inherent to the blockchain approach and may dramatically improve over time.
Many different blockchains exist, and most of them are unable to communicate or work with one another. This lack of standardization, or interoperability, is a challenge in the blockchain sphere as a whole.
A rental company, for example, may wish to use the public Ethereum blockchain to execute lease contracts, but would prefer to keep tenant data and rent rolls on a private blockchain. Or an enterprise may begin using one blockchain solution, and later find a better solution for their needs and decide to migrate.
To keep the past transaction histories protected, the second blockchain would need a way to reference the first blockchain — and this is currently not possible due to lack of interoperability.
There are a number of organizations working to solve this challenge, including Interledger, which aims to create a protocol for enabling payments between blockchain networks. A solution to enable cross-blockchain transactions would be beneficial, but blockchain platforms may have to introduce shared standards to fully address the interoperability issue.
As blockchain is still an emerging technology, most people still don’t fully understand what it is, how it works, and what its uses are.
Widespread adoption of blockchain technology is still some way off, especially as many industries have yet to fully explore its potential applicability. In the real estate industry, it could be a while before a majority of businesses feel confident enough in blockchain technology’s capabilities to adopt it for day-to-day operations.
Until then, early adopters may find themselves with an advantage over those that lag behind, potentially creating opportunities to intensify competition and for new industry trailblazers to emerge.
There is a long road ahead before blockchain technology reaches maturity.
Companies are still experimenting with its applications, and many issues remain to be addressed as the general public continues to learn how to use and understand the decentralized technology. Moreover, blockchain technology must overcome the somewhat negative image it has gained from speculative cryptocurrency bubbles, with some projects amounting to thinly-veiled get-rich-quick schemes or even outright fraud.
Yet, it is clear that this emerging technology has the potential to disrupt many industries, including real estate.
With industry leaders and governments exploring and implementing blockchain applications in the real estate space, it’s possible that this old industry may be one of the first to make the leap into a decentralized digital world.