Erin Gobler8-Minute Read
UPDATED: April 21, 2023
The real estate market is seeing changes and new opportunities for buying and selling property with blockchain technology. Blockchain real estate transactions are more streamlined and cost-effective and provide increased transparency.
As blockchain becomes more prevalent in the real estate industry, we see more ways it's used, from contracts to security and beyond. However, despite the many uses and benefits of blockchain in real estate, there could also be some downsides. And if you’re entering into a real estate transaction that uses blockchain, it’s important to understand exactly how it works.
Blockchain in real estate works as a record, or ledger, of transactions. It cuts costs, removes the need for intermediaries and increases the transparency and security of payments and data to streamline communication between people buying and selling homes or investment properties.
Blockchain has multiple applications within the real estate industry. And one of the biggest changes it has made is taking a traditionally in-person industry and moving many of those transactions online.
While there are many different uses for blockchain within real estate, they all work in largely the same way because of the process that all blockchain transactions go through. Here’s an example of what a blockchain transaction might look like between a home seller and a buyer:
1. A blockchain transaction begins when someone initiates a request. In the case of a home purchase, the seller is requesting payment for the home after accepting the buyer’s offer.
2. The request is broadcast to and facilitated by a P2P network of advanced computers known as nodes.
3. The nodes validate the transaction. These nodes can validate a transaction for any type of asset, but in this case, the asset is real estate.
4. Once the transaction is verified, it’s recorded in the blockchain and combined with other transactions to create a new packet of data known as a block.
5. Once new blocks are created, they are added to the existing blockchain, where they become transparent and unchangeable.
Because of how blocks interact on the blockchain and form a chain with those blocks before, there’s a clear chain of ownership as an asset changes hands. So the next time someone sells this same home, it would be recorded on the same blockchain.
Each block confirms the exact time and nature of each transaction. And because the blockchain is unchangeable, no one can go back and alter any of the information. This process eliminates the need for central data storage and verification because, as the blockchain grows, each block strengthens the verification process.
Blockchain is disrupting the way things have been done, not only in real estate but in many different industries. It’s being used to transform the way people buy and sell homes. And as it becomes more widely available, it will cut out intermediaries, reduce costs and increase access to funds and investment opportunities.
With the tokenization of assets (which we’ll cover shortly), 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 that owners can offer fractional shares of their property and small investors can build real estate capital.
Using smart contracts, blockchain can turn assets into tokens that can be traded like cryptocurrencies. This tokenization divides real estate assets into segments that can be broken down and bought and sold individually.
Traditional real estate investing meant needing 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.
Tokenization can also benefit property owners. Let’s say you own a large apartment building that’s in desperate need of a remodel. You could use blockchain 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. Small investors could get in on investing in your property and reap some of the benefits of owning a rental unit without the risks.
Traditionally, real estate has been a relatively illiquid asset. In other words, if you own a piece of real estate, you can’t easily turn that asset into cash as you could a share of stock. But as we discussed in the previous example, the blockchain makes it easier to do that.
It’s no longer the case that you must sell a piece of real estate to turn it into cash. Instead, you can tokenize the asset and sell off just a share of it. You get cash when you need it without having to sell the entire asset.
The use of blockchain in real estate can remove some intermediaries in real estate transactions, as well as the costs associated with them. Blockchain platforms allow you to do things like write contracts, buy real estate with cryptocurrency and seamlessly record transactions. As a result, these platforms can cut out intermediaries like brokers, banks and real estate lawyers.
As we mentioned, cutting out certain intermediaries can also cut costs. If you’re no longer borrowing money from a traditional bank for your purchase, you’re also no longer on the hook for expensive closing costs and appraisal fees, among other things.
Real estate transactions face a lot of regulation, requiring plenty of paperwork and legal hoops to jump through. Smart contracts compile the required documents into a single database, easily accessed by anyone.
Need the paperwork for selling your home in Phoenix, AZ, or 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 the sale.
With transparent access to these documents, smart contracts can drastically reduce the role real estate attorneys and agents play in property transactions.
Blockchain is centralized, meaning the data is stored in multiple areas with many different backups. As a result, 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.
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 make your way in, 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.
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. This could cut the prequalifying 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.
One of the things that blockchain can provide to the real estate industry is automation. For example, consider a situation where you would have to open an escrow account, perhaps for earnest money or your monthly property taxes and homeowners insurance payments.
Normally, you would have to pay a company to manage the escrow account. But blockchain can provide an autonomous escrow process. Each party can trust the blockchain to carry out the transaction in a secure and appropriate way, and it can be done without all of the normal fees.
You can probably already tell there are some major advantages to using blockchain in the real estate industry. Here are some of the most notable benefits:
Blockchain technology has some major benefits for the real estate industry, but it’s not without its disadvantages and challenges.
Any time there is a major disruption to a particular industry, there is bound to be some pushback. Blockchain has the potential to turn the real estate industry on its head and make certain real estate professionals less necessary — and maybe even obsolete.
But that’s not necessarily always a good thing. Each of the professionals involved in a real estate transaction serves an important role. And while some of those tasks can be outsourced to blockchain technology, the buyers and sellers involved in transactions are still real people. And they are still likely to benefit from having real people — including agents, attorneys, loan officers and more — guide them through the sale process.
Another challenge with blockchain technology is who exactly owns the data. As we’ve mentioned, blockchain technology increases transparency. But does that mean that more people have access to certain information, including people who perhaps shouldn’t have access to it? It’s still in the best interest of buyers and sellers to keep certain information private.
Blockchain has been making waves in the real estate industry for several years, but it’s still a relatively new concept, and many buyers and sellers haven’t encountered it yet. Here are a few more things you should know about blockchain in real estate.
Blockchain can have many uses in real estate, as it does in other industries. Some of the most common uses for blockchain may include smart contracts, tokenization and automation.
Blockchain technology can make certain real estate professionals redundant. But real estate agents serve an important role that technology can’t fully replace. Agents have an in-depth knowledge of their local market and connections with other local agents. Additionally, it will always be helpful for buyers and sellers to have someone to guide them through the sale process.
Tokenization refers to the process of creating a digital token that represents ownership of a legitimate asset. Think of a tokenized piece of real estate as being similar to a share of stock. The stock represents partial ownership in the company. Likewise, a real estate token represents partial ownership of that piece of real estate.
Blockchain is a relatively new concept to many people, but it’s already making its mark on the real estate industry. Whether you’re buying a home for your family or starting to invest in real estate, you may run into blockchain technology along the way. It can streamline the process and help increase transparency and accessibility while reducing costs.
Of course, blockchain technology hasn’t entirely replaced the traditional real estate industry – nor is it likely to – but you can get a head start on taking advantage of this new technology by learning about its different uses in the real estate industry.
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