How blockchain will democratize the real estate industry

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Presently, depending on where you live, you have to overcome different legal, financial and cultural hurdles if you want to invest in real estate in your locality. If you want to buy land or property in some other country, the odds are even greater.

However, Michael Arrington, the founder of famous tech publication TechCrunch, recently purchased a flat in Ukraine without setting foot in the country, signing a single piece of paper, or meeting with local authorities.

What made the transaction possible was blockchain, the distributed ledger that made its fame with bitcoin. As it has proven in other industries, blockchain can transform the real estate market and make it more transparent, affordable and reachable to everyone.

How blockchain can solve the problems of real estate ownership

Traditionally, we rely on trusted third parties to register and transfer the ownership of land and real estate property. In the U.S., the task is given to local courthouses and city halls. In the UK, it’s the Land Registry, a government-owned body. In less developed countries, tribal leaders define how land is distributed among citizens.

This model poses several problems. Documents are often non digitized, hard to reach, even harder to update, and sometimes lost in time. In some cases documents don’t even exist and agreements are made verbally between tribal leaders. If one of them decides to take back their word, there’s no evidence to prove them wrong. Even in documented systems, if someone destroys or tampers with a land claim, there’s no way to prove them wrong.

Blockchain solves this problem with transparency and public knowledge. Every record stored on the blockchain (i.e. a parcel of land being transferred from one party to another) is validated and replicated on thousands of computers. Once a the ownership of an asset is confirmed and stored on the blockchain, no one can deny its existence. Neither can they change it because they would have to change the records across all the network, which is virtually impossible. Meanwhile, mathematical equations and cryptography make sure that the sequence of records can’t be changed either.

Ownership of blockchain assets is tied to encryption keys. Only the person holding the private key to a blockchain address will be able to transfer its assets to another person.

This model obviates the need for a central authority or third-party broker. That’s why Arrington was able to buy the Ukraine flat from the comfort of his home in the U.S. He used Propy, a blockchain platform for buying and selling real estate property. He sent $60,000 worth of ethereum (ETH) to a smart contract, and in exchange, the token representing the flat was transferred to his address.

Innovating real estate investment with blockchain

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Beyond ownership, blockchain also makes it much easier to invest in real estate. Currently, you  either have to be so rich that you could buy an entire property, or you have to invest through real estate investment trusts (REITs), organizations that operate like mutual funds for real estate. But REITs have their own rules, are mostly non-transparent, and will take their own huge cut from your revenue.

In contrast, blockchain enables the tokenization of property. This is the idea that Bitproperty, a blockchain startup, is exploring. The proposition is simple. With Bitproperty, you break down a real estate property (or part of it) into a number of digital tokens, each representing an equal fraction of the property’s value. Property tokens can be bought or sold on the blockchain like any other cryptocurrency, in a secure, peer-to-peer fashion.

With tokens, it becomes possible to make partial investments in real estate without the need to rely on an REIT. This opens up the market to a larger number of investors. Moreover, smart contracts will automatically distribute and transfer any dividends earned from property investments. For instance, if 20 people have purchased the tokens of an apartment building, they will automatically receive the revenue generated from renting the property, based on the amount of tokens they hold.

Another benefit of investment platforms such as Bitproperty is the possibilities to fund construction projects. In the past year, initial coin offerings (ICOs), a funding mechanism based on the blockchain, helped startups raise billions of dollars for their projects. Bitproperty helps construction project managers to use a similar method to fund their projects. Instead of going after large investors, project managers can crowdfund their projects by listing them on Bitproperty and issuing and selling tokens on the blockchain.

With these innovations, blockchain presents the opportunity to democratize the real estate industry, a market that has a lot of potential but has previously been available to a limited audience.

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