In 2011, I uncovered an amazing deal: 7,500 acres of land with almost four miles of virgin white-sand Caribbean beach and 11 miles or so fronting a lagoon. It was perfect for land banking for future development. I went back and forth with the seller for quite a while…and he eventually dropped his asking price to an unbelievable $340,000.
But even at that price, I described it as a lottery-ticket buy…
You see, I’d checked the property title out. It was, quite frankly, a mess. The original title deed had “disappeared.” The details had been re-entered into the public registry some years later, at a time when a slew of folks registered properties that they didn’t own.
When I visited the registry to have a look at the title, I was handed a huge, dusty book. And the page that was supposed to have the most recent land transfer had been ripped out.
That’s why I described it as a lottery-ticket buy. It was a fantastic price…but with a lot of potential pitfalls, a gamble that could go very wrong.
For my taste, it was way too risky.
So, when I heard that blockchain had the potential to eliminate this type of risk, I paid close attention.
You’re probably most familiar with blockchain as the record-keeping technology behind cryptocurrencies like Bitcoin. But it’s also touted to become the next big thing in real estate. Blockchain could change how we buy property, conduct our due diligence, track titles, and more.
It holds the promise of removing middlemen, speeding up processes, and cutting costs in real estate transactions. And, with smart contracts, it can automate a lot of routine, time-consuming, and costly stuff.
Let me begin by saying that the technology behind blockchain isn’t easy to understand. To get a good grasp of it, you need a rudimentary knowledge of cryptography and game theory. Like many folks, my eyes glaze over when someone starts explaining the detail to me. But I’ve been digging down and talking with blockchain experts, because I want to get a really good handle on how this technology can benefit real estate buyers like you and me.
Next to impossible for a hacker to tamper with.
At its simplest, a blockchain is a database that can store any kind of data. The data is secured by being distributed across a large network of computers. That makes it next to impossible for a hacker to tamper with it—they would need to control the majority of the computer power in the network.
Say I want to transfer $10 you. Each computer on the blockchain would need to verify that I was the owner of the $10 and that my unique identifying key was used to send the $10 to you. Once you received the $10, each computer then confirms that you are the new owner. Our transaction would be recorded to a “block” and added to the blockchain.
But this technology isn’t limited to finance. Like I say, blockchain has the potential to fundamentally change many aspects of the real estate world…
Let’s look at some of the applications I’m most excited about:
Due Diligence Made Easy
Once information is on a blockchain, it can’t be tampered with or altered, and it can be consolidated all in one place. This makes some of the legwork of the due diligence process much easier.
The secure, online process can increase efficiency, lower costs, enhance data security, and reduce the chance of manual errors.
For example, a real estate property’s digital identity could include information such as financial and legal status, tenant profiles, and performance metrics. The Swedish land authority are already making significant strides towards making this a reality. They plan to digitize contracts for sale and authenticate property mortgages using blockchain technology.
This new solution should streamline the process of transferring property titles, while adding security. Every party involved in the process, including the buyer, seller, real estate agent, bank, and land registry, will have their own digital identities. Using a single application, they can securely send and sign official documents using blockchain-verified smart contracts, with full transparency and proof of verification for every step of the process.
With property profiles publicly available on a blockchain, undertaking a valuation becomes much safer and easier. Future buyers benefit even more as information on the property’s history becomes more robust. The Bank of China now processes 85% of real estate appraisals using its own private blockchain.
Buying Tokenized Real Estate
Last year, a luxury Manhattan condo development went on sale through the Ethereum blockchain using a process known as “tokenization.”
This means the real estate property is now represented by a sum of “tokens” available for purchase on the blockchain. Each token represents a small portion of the value of the property, allowing anyone—even small investors—to buy a share of prime Manhattan real estate. This was something that, until recently, wasn’t possible.
Earlier this year, a villa in France went on sale using the same method. The property was divided into 100,000 individual tokens that can now be traded for as little as $7.20 each.
There are a number of exciting benefits.
Tokenization has heralded a new way of buying, holding, and storing assets, and there are a number of exciting benefits.
First, tokenization lowers the barrier to entry for real estate investors. Now, first-time investors don’t need to save a hefty deposit or secure a mortgage to buy a property. They can simply buy as many tokens as their budget allows.
On the other side of the coin, owners can choose to sell their property through tokenization, gaining access to a much larger market and cutting out broker costs. Likewise, developers trying to secure financing can host a pre-construction token sale for new projects, removing the pressure to find more traditional means of financing the project.
In fact, the role of middlemen can be reduced—if not eliminated—across the board, as deals can be processed directly on the blockchain, with little need for intermediaries, such as lawyers. This will significantly lower costs.
It also means that owners can trade their share of a property through online token exchanges, simply and quickly.
When I first heard about this, the question that immediately popped up in my mind was: With all those owners, who actually manages the property? Well, this can vary, as no two token offerings are the same. When there’s a portfolio of properties, it might be the portfolio manager who makes the decisions. With individual properties, it gets a little more complicated.
One solution is to allow token holders to vote on matters regarding the property via dedicated platforms. The more stake you have in a property, the more voting power you have.
If you’ve ever bought in a condo block or private community, you’ll know how tricky it can be to get owners to agree on things like expenditures and maintenance. With the potential for hundreds or even thousands of owners of one villa, that could become a nightmare. But it’s too early to say how this process will play out in real life.
Land Title Management
According to the American Land Title Association, errors are found in 25% of all real estate titles. Buyers spend a huge amount of money—and a significant investment in time—to ensure that the property they’re buying has good, clear title.
Right now, across the world, land registers are being moved to blockchains. While there is still room for error prior to entering land title details onto a blockchain, once it’s there, the data cannot be changed without the correct authorization. From an investor’s perspective, this is a major benefit.
Rental Property Management
When I research deals on our RETA beat, the potential for short- and long-term rental income is high on my checklist. I want to find properties that can generate as much profit as possible from platforms like Airbnb, VRBO, FlipKey, and Booking.com.
However, all these platforms charge fees—some as high as 20%. With blockchain, these fees can be mitigated by cutting out the middleman and enabling peer-to-peer transactions between owner and renter.
LockTrip is one example of this. As a decentralized and free-to-use travel engine, it allows users to make hotel bookings commission free. Their plan is to offer a similar solution to vacation rentals, which could be a major disruptor for established platforms.
Other blockchain-based platforms already in the works include Lockchain, TravelBlock, CryptoCribs, Zangll, and Atlant.
For members of my real estate investment group, this offers great opportunity. However, I expect adoption on these platforms to be slow and they will still, more than likely, claim fees—possibly 1% to 5%.
In terms of the practicality of managing a rental property, blockchain also shows potential.
Midasium is one of a number of businesses developing a blockchain-based property management system. Through a single application, which uses blockchain smart contracts, they aim to move the entire property management process to a single online platform—from signing lease agreements to managing cashflow to filing maintenance requests.
The smart contract could also be set to automatically send payment of the security deposit back to the tenant once the lease has been terminated.
The list of uses for blockchain is extensive. The technology will no doubt be a game changer in coming years.
Right now, it’s still early days. Blockchain has a long way to go before it becomes a big part of how we invest in real estate. But it’s on its way… Like with the tech boom in the early days of the internet, not every blockchain business will survive. Some will fail, some will fall by the wayside, but a small few just might be destined to be the next Google.
Editor’s Note: Ronan McMahon is executive director of Pangea, IL’s preferred real estate advertising partner. He spends at least six months a year crossing the globe in search of the best real estate deals worldwide.
You can follow his adventures and advice by signing up to his free e-letter, Roving Real Estate Investor at: IntLiving.com/retmag.