Blockchain Technology and the Future of Real Estate and Homeownership

Posted by Amrock

There are many technologies making waves in today’s real estate industry and residential housing market. However, few have the potential to change fundamental elements of the sector like blockchain technology.

In the near term, blockchain technology could make real estate transactions more efficient, secure, trustworthy, and accountable. However, blockchain could one day make everything from fractional ownership to peer-to-peer real estate transactions a reality.

What Is Blockchain?

Blockchain is a type of distributed ledger technology (DTL) most known for being the foundational technology supporting the cryptocurrency Bitcoin. Bitcoin has been making news all month for its wild volatility, but the accounting technology supporting it all is much more stable, and its applications extend far beyond its first purpose.

Investopedia explains a blockchain as being comparable to a full digital history of a financial institution’s transactions. The “chain” is made of blocks, each of which records all of the most recent transactions, not unlike a very large bank statement. This series of blocks is chained together in a linear and chronological order, from the most recent transactions all the way back to the originating “genesis” block.

But blockchain technology isn’t just a variation on typical accounting software. Practically any document type can be inserted into the blockchain, and the technology is decentralized, with transactions designed to be immutable, meaning they can’t be deleted or falsified. That’s because each blockchain user gets a complete copy of the blockchain, and so every user of the blockchain can verify any transaction within their copy of the ledger. While the transaction history is known to all, important details such as bank accounts, identity, and encryption protocols are kept secure behind state-of-the-art encryption.

Blockchain and Real Estate Transactions

One of the most immediate real estate applications of blockchain technology is in the speed and security of the home sale transaction itself. As VentureBeat observes, even a simple property sale involves almost a dozen stakeholders — the buyer, the seller, real estate agents for each, a mortgage lender, potentially lawyers for buyer and seller, the title company, an appraiser and an inspector, and the local municipal registrar. This can make for an opaque and inefficient process that typically takes anywhere from 30 to 60 days to close.

“Blockchain can make the process more transparent, increasing trust on all sides and reducing bureaucracy. Self-executing contracts or ‘smart contracts’ can assure all required steps have been executed before money is transferred, released from escrow, or repaid to the bank, or before any titles are transferred,” explains VentureBeat. The result will reportedly be higher trust, lower costs, and speedier transactions.

Fractional and Incremental Homeownership

With the increasingly prohibitive cost of real estate, many have been looking for alternative solutions. In 2015, the Seattle Times reported on a trend of pairs of couples purchasing larger homes as a group to afford a place to live in Seattle’s high-priced market. Across the country, the New York Times likewise reported on groups of friends who were effectively purchasing fractional shares of a property to afford homeownership.

In the commercial side of real estate, crowdfunding continues to make headway in new markets. In some cases, whole development projects are being crowdfunded, such as the case of the Chateau de la Mothe-Chandeniers, a crumbling 13th-century castle in the west of France. Through an online crowdfunding project, more than 13,000 strangers have banded together to buy the property and restore it.

However, such solutions are limited and inefficient. Blockchain technology could lead to fractional property ownership that’s as simple as buying or selling stocks online. VentureBeat notes there are both legal and practical limitations to selling or giving away, say, 0.03 percent of your property. However, that may not always be the case.

Already, startup firms including Brickvest and Property Partner are said to be looking into non-blockchain methods to make fractional ownership a reality. Investopedia reports the firm ATLANT is building a platform based on blockchain technology and will allow property owners to tokenize real estate assets and let buyers purchase a percentage stake in a property.

Another application could be similar to the U.K. government’s “shared ownership” program. The program helps first-time buyers afford a home purchase by “staircasing” the purchase. Buyers purchase a fraction of the property and pay rent on the remaining value, gradually buying more equity as they are able.

Blockchain Automation and the Uncertain Future of the Middle-Man

In some ways, the future is already here. In October, an apartment in the Ukraine became the first property to be bought and sold using blockchain, according to Newsweek. Propy, a real estate startup and decentralized title registry, facilitated a reportedly easy sale in “an industry traditionally fraught with red tape and bureaucracy,” noted Natalia Karayaneva, CEO of Propy. Karayaneva told Newsweek her firm planned to expand into real estate markets in California, Vermont, and Dubai in 2018.

Of course, reducing red tape and bureaucracy in the real estate industry necessarily means disrupting business as usual. Blockchain technology could reduce the need for intermediaries, from brokerage services, to title search and property appraisal services, insurance, and even one day potentially minimizing the now central role of mortgage lenders in property transactions.

Many such changes could make current functions of such third parties obsolete through automation, though new human resource needs may arise as a result. Automation may even bring down the costs of real estate transactions, such as professional fees, commissions, lender fees, and even taxes.

Blockchain Presents an Opportunity

The global real estate market is said to be worth a staggering $217 trillion. At present, the industry is dominated by large corporations and well-to-do property owners. However, blockchain technology could have a big effect on the industry over the next few decades. Efficiency and speed considerations could improve the industry in the very short term, and fractional and incremental purchasing programs could expand ownership to new markets. In the long run, this technology could very well change the nature of the business, though regulations and the industry itself will have to change before that becomes a real possibility. In the meantime, blockchain technology remains an exciting and promising opportunity for businesses and homebuyers.