Can Blockchain Revolutionize Real Estate?

Blockchain, the technology behind Bitcoin, has uses well beyond the world of virtual currencies. Its basic function is simple: maintaining a ledger— a list of transactions that is always up to date, almost impossible to tamper with, and does not require a central authority or middleman. As the technology matures and gains wider use, it can dramatically impact real estate, an industry rich in value and rife with information inefficiencies.

Below is a beginner’s guide to the main terms and capabilities associated with Blockchain, and an overview of real estate-related use cases, and some of the early efforts on this front. It is not yet clear if and how these efforts will pan out, but it is high time for real estate professionals to understand the possibilities better.

Blockchain for Dummies

Imagine a group of five friends that maintains an Excel document detailing their debts and obligations to each other. Each time the document is edited, the last person to do so has to send the latest version to the other four. If one of them notices an error, he can correct it and distribute an updated version.

Very quickly, there are dozens of versions of the original file, and it becomes difficult to confirm which one reflects the latest balance. Furthermore, in theory, John can update the document to show that he repaid James, even if he didn’t. This means that the friends have no objective way of knowing the truth —they must trust each other.

Finally, the friends decide to switch from Excel to Google Docs. Now there is always only one web-based version of the file, and all updates happen in real-time and are visible to all. It is also easy to trace every edit to its owner and confirm transactions as soon as they occur. This is a major improvement, but it relies on Google’s (paid) services to maintain the file on its servers, runs the risk of the central file being corrupt or inaccessible, and still does not provide any certainty that the transactions reflected in the document really took place.

Blockchain technology takes this logic to the next level by having no central mediator that can impose costs or act in a careless or corrupt fashion. Transactions occur only once they are logged in the ledger — so, by definition, any transactions reflected in the ledger necessarily took place. The reliability of the ledger means individuals can transact without having to trust each other. In fact, the counter-parties don’t need to know each other at all.

Bitcoin, the world’s most popular cryptocurrency, relies on Blockchain technology to keep track of transactions and the balance in each holder’s “wallet”.

Real Problems, Virtual Promises

Real estate markets are plagued with inefficiencies: A significant investment of time and money is required to complete every transaction — even when leasing, let alone during acquisitions; Despite involving assets that don’t move and seldom change hands, there are high costs to verifying ownership; Assets are illiquid and often restrict entry and exit to specific milestones; Critical data is often kept on paper documents that only specialist expediters can trace; There are misaligned interests between participants and their agents; and Transaction timing is often driven to by non-economic considerations such as relocation for work, kids moving out, divorce, or death.

Experiments are underway to use Blockchain for property deeds and title transfers in the US, Sweden, and the Republic of Georgia. Companies such as Ubitquity, Chromaway, Velox.re, and Bitfury aspire to expedite and reduce the cost of transactions, minimize fraud, and eliminate the need for costly title checks and title insurance. Note that in many developing countries, real estate title is not only difficult to ascertain but is sometimes non-existent: Many “owners” do not have any formal rights over their assets.

On the financing front, Atlant promises lower processing fees for rental payments, verified reviews for short and long-term rental listings, and the ability to trade “shares” in individual real estate assets. FundPlaces allows small investors to invest securely in real estate assets; Propy aims to create a cheap and easy way to acquire real estate across borders; REIDao“tokenizes” real estate assets in order to enable owners to sell small shares or use them as collateral; and SALTprovides instant loans against Bitcoin collateral.

In the Netherlands, an experiment is underway to use Blockchain to create a directory of lease agreements and, in the future, to monitor rental payments. Having a ledger of verified leases and payments doesn’t only reduce operating costs; it also makes it easier for buyers of commercial assets to get a real-time view rent roll and other financials.

REX is building a property listings platform that uses a unique incentive structure to encourage participants to keep the data on the site up to date. In the future, the company plans to allow users to create “smart contracts” that trigger specific actions once a set of conditions are met — for example, automatically distribute dividends based on pre-agreed dates or hurdles.

On the operations side, Blockchain can be used to keep track of anything from important documents to containers, to track energy usage and trade excess capacity with neighbors, to facilitate shared ownership of IoT devices, and to manage permissions for smart locks.

The Bottom Line of the Ledger

Blockchain technology is likely to have a profound impact on the real estate industry. For that to happen, governments will have to provide clear guidance concerning the validity, legality, and taxation of different actions. For example, Blockchain can make it attainable for retail investors to buy and sell small shares of specific assets, but the Security and Exchange Commission might still limit such sales only to larger accredited investors.

Ironically, Blockchain’s rise may benefit from a crisis that will reign in the speculative investment in crypto-denominated ventures. China’s imminent crackdown on digital coin offerings might help cool things down. A more rational fundraising process will encourage the involvement of real estate professionals who are interested and capable of solving real problems.

No matter how long it takes, Blockchain’s promise to real estate is likely to be fulfilled. As for the timing… I wouldn’t bet my bottom dollar. Or Bitcoin.