Recently, there’s been a discussion about “cryptocurrency,” with names like “Bitcoin” generating news in the banking and real estate sectors. However, most people are still unaware of cryptocurrency’s fundamentals. It is a strange and somewhat hazy idea. Even fewer people comprehend how cryptocurrencies will affect real estate investing in the future.
Consider cryptocurrencies, in essence, as an alternate kind of money. It is a digital or virtual money that can be exchanged in the same way that dollars, pounds, euros, or yen are.
However, bitcoin is fully digital and only exists in electronic form, in contrast to these other types of money, which also have some physical representation (bills, coins, etc.). To exchange cryptocurrency between users and avoid counterfeiting, public and private “keys” that resemble identity numbers are utilized.
The fact that cryptocurrencies are fundamentally unregulated is one of their distinctive qualities. Cryptocurrency cannot be printed or issued by a central bank or any other organization. One of the main draws for individuals who use cryptocurrencies is that they may be used without any sort of government control or interference due to their decentralized structure.
In this essay, we examine the growing use of cryptocurrencies in the real estate industry and how this trend might change in the future.
What Impact Is Blockchain Having on Real Estate Right Now?
In a nutshell, blockchain technology serves as the foundation for the cryptocurrency system. It offers a collection of immutable, time-stamped data that a group of computers handles as opposed to a single one. A collection of data blocks that are all encrypted and connected using cryptographic methods is referred to as a “blockchain.” This makes data fraud extremely challenging.
The blockchain network is distinct from the central banking system because it lacks a centralized authority
Information on a blockchain is accessible to everyone, making it a very transparent method of data sharing for all parties.
Let’s utilize an easy case in point. You’d like to purchase a plane ticket. You must use a credit card and pay a processing fee for them to facilitate the transaction to do. Blockchain technology enables the entire ticketing process to be carried out directly between the airline and the passenger, saving both parties money. A block is added to a blockchain of tickets by the airline ticket. The blockchain is a one-of-a-kind record that has been time-stamped for enhanced security and is independently verified.
The final ticket’s blockchain serves as a record of all transactions for that airline route or even the entire airline network, which includes a list of all tickets ever sold. The transaction can be completed more quickly thanks to blockchain technology, which substitutes all processes and companies that operate as middlemen and allows free transactions.
In terms of enabling crowdfunding-based fractionalized ownership of the real estate, blockchain is currently where “FinTech” and commercial real estate meet.
Blockchain has paved the way for easier and quicker real estate transactions. Although technology is still in its early stages, smart contracts (also known as automated contracts) and tokenization will increasingly be employed with blockchain. Read more to find out more about these ideas.
A Change in Real Estate Investing?
Future real estate investments may be fundamentally transformed by blockchain technology. For instance, the entrance hurdles to the commercial real estate market are infamously high. There are substantial financial commitments, and not all investors have equal access to information. We observe this every day, as some investors gain access to off-market transactions before others, reducing the number of investment options available to the general public or, at the very least, giving those who have information an advantage.
Additionally, commercial real estate is, by definition, illiquid
Real estate shares are not as quickly bought and sold as other assets traded on the open market.
Blockchain offers an answer to problems like these. blockchain, for instance, offers a decentralized system in which any data saved inside a blockchain is accessible to other network members. Its lack of ownership by a single organization increases transparency. Additionally, blockchain data is immutable and cannot be altered, making this a very secure method of conducting business.
This might revolutionize real estate investing in a few different ways. The first relates to real estate crowdfunding: more owners would be willing to invest in crowdfunded real estate projects since data would be more freely available and secure thanks to blockchain technology. This lowers the entry barrier for those without the money to invest alone.
As a result, a second opportunity—fractional ownership—becomes available. Blockchain usage will make investors more open to fractional ownership. As a whole, fractionalization is not a novel idea. Selling shares on a fractional basis is similar to selling stock to several buyers. This is already evident in real estate funds. Blockchain is a technology that will allow for even more fractionalization of commercial real estate, more specifically, cryptocurrencies.
How Is Blockchain Used In Real Estate Right Now?
As was already mentioned, the real estate sector has not yet implemented blockchain to a large extent. There haven’t been any known transactions that used only cryptocurrency or the blockchain. Instead, blockchain-based trades have nonetheless placed a significant emphasis on conventional procedures.
Despite this, certain transactions are now beginning to rely on blockchain technology. For instance, smart contracts enable contracts to self-execute automatically when specific requirements are met. Those conditions are outlined in intelligent contracts’ blockchain-embedded instructions. The process repeats itself until all tasks are accomplished, and the contract may be performed. The second set of instructions is triggered when the first set of instructions is finished.
A few businesses already use blockchain technology in the real estate industry
For instance, a real estate portal like PropertyClub leverages blockchain technology to assist investors in finding, purchasing, selling, and marketing CRE properties. The business transacts in real estate utilizing smart contracts, with payment processing handled by cryptocurrencies like Bitcoin. Another company in this industry is ManageGo. Property managers can process payments and answer requests for repairs and maintenance more quickly with the help of ManageGo’s ledger-backed software. Last but not least, RealBlocks is an illustration of a fintech business that uses blockchain to assist investors in purchasing fractional interest in certain assets and/or larger portfolios.
Why Is Real Estate Changing Due To Blockchain?
Blockchain is transforming real estate for several reasons, many of which we’ve already covered. Blockchain, for instance, uses highly secure, unchangeable data to make commercial real estate transactions decentralized and more transparent. Blockchain is one way that artificial intelligence is changing commercial real estate.
As already said, smart contracts are one way blockchain is altering the real estate industry. The most obvious advantage is that they assist in removing transactional mediators (i.e., lower commissions and fees). By enabling self-signature once specific milestones are reached, they also accelerate real estate deals. Blockchain additionally enables the fractionalization of real estate assets, expanding the pool of possible investors who would be motivated to own a section of a building or portfolio jointly.
That being said, blockchain is still mostly unregulated. The absence of blockchain regulation has both advantages and disadvantages. On the one hand, it expedites transactions by cutting down on government red tape and outside intervention. On the other hand, considering the typical scrutiny involved in commercial real estate deals causes some investors to stop (among brokers, real estate advisors, attorneys, government agencies, and the like).
Can An Issuer Of Equity Crowdfunding Sell Its Own Securities?
Unprecedented commercial real estate crowdfunding is now possible because of regulatory changes. Sponsors are no longer limited to seeking capital contributions from people they personally know; they can now do so from a broader range of investors. This has created new opportunities for crowdfunding issuers interested in selling their own securities.
Real estate fractionalization is nothing new. The funds pool resources to be invested in a single asset or a bigger portfolio use this similar principle. This fractionalization is made possible by blockchain, which is effectively a technological fix for fractionalization.
Fractionalization is possible on blockchain, even in the absence of cryptocurrencies. For example, a corporation that sells fractional ownership in airlines. The majority of individuals do not desire or are unable to afford to possess an airplane. Instead, many people purchase shares (often tied to specific time blocks) that allow them to utilize the planes at specific times. In this scenario, a group of people would collectively purchase airplane shares. They track the utilization of the aircraft in a computer system and register ownership on the blockchain. The computer system is automatic; whenever a user of the aircraft logs on their blockchain, a record of the debt owed to the group of owners is created. Then a ledger is disseminated in accordance with all accounts, and all documents are recorded using blockchain.
The same principle applies when a crowdfunding issuer is looking for investment in a deal. They would give the owner fractionalized shares of the property in exchange for a specific investment sum. All information would be recorded on a blockchain, and as needed, the remainder of the ownership group would receive updates and briefings.
Does this imply that you can sell off your fractional ownership at any point and recover your investment thanks to blockchain and property fractionalization?
We still don’t know how liquid property shares will be until blockchain use picks up. Simply put, blockchain enables sponsors to finance their assets unrestrictedly by using a different currency. For instance, an investor might use Bitcoin to buy a specific share of a property, but as Bitcoin is unregulated, its value is subject to wild swings in both directions. It might be more or less difficult for someone to sell their fractional ownership part in property depending on the price of Bitcoin at that time.
What Motivates The Real Estate Industry’s Desire For Digital Technology?
Costs associated with commercial real estate transactions are already excessively expensive. For instance, a title search is required for every transaction. Each new owner must pay the same amount that all prior owners paid in order to perform a historical inventory of ownership records and ensure that there are no title encumbrances. In ten or twenty years, it is theoretically possible to digitize and encrypt all property-related records into a blockchain, which would reduce transaction costs by making the entire chain of titles more easily accessible to users and obviating the need for the repetitive research currently required to ensure title.
In fact, with this method, all property records might be digitalized. Take the construction of a new building as an example. The blockchain might store all of the architectural documents, engineering drawings, appliance instructions, and more. Therefore, those resources will be easily accessible if one or more owners (in a scenario of fractionalized ownership) want or need access to them. This will shorten transaction times and lower fees, making it possible for more investors to participate.
What Part Will Blockchain Technology Play In Real Estate In The Future?
All real estate transactions will likely be made more efficient by the usage of blockchain technology. Currently, both residential and commercial real estate transactions might take months to complete. One of the leading causes of real estate being viewed as an illiquid asset is this. As some experts predict, the transaction process might shorten from months to days or even hours if blockchain enables comprehensive, resilient, and extremely precise accounting and recordkeeping.
In a case with fractional ownership, we can see how this can develop. Many small investors will find it considerably simpler to buy shares of larger properties or portfolios as a result. Because those shares will be easier to trade, more investors may be ready to purchase a fractionalized stake in a deal, given the increasing illiquidity. Even corporate owners may be prepared to sell stock in projects to third parties on a fractional basis, changing the dynamic from corporate ownership to more fractionalized structures.
Of course, upcoming rules will determine whether this strategy is successful. Both blockchain technology and cryptocurrencies are now very unregulated. There have been instances, such as initial coin offers (“ICOs”) for cryptocurrencies, that turned out to be frauds. Investors bought coins in the mistaken belief that they would receive bitcoin in return, only to discover that the organization behind the offering had all but vanished. Some investors have refrained from entering this world of bitcoin or blockchain investing due to a lack of regulation. Although a lack of regulations exactly encourages more efficiency, for some who want the outside inspection, it also serves as a mental barrier.
How Will Blockchain Affect Real Estate Transactions?
The three main ways we see blockchain affecting real estate transactions are as follows:
Speed: Due diligence in commercial real estate deals frequently takes months, both before signing a purchase and sale agreement and then throughout the time between P&S and closure. Information will be more easily accessible, and transactions will proceed much more quickly. Think about a property closing where money needs to be wired. In the United States, this may take at least 24 hours. Transfers across borders can take up to a week. Transfers can happen instantly with blockchain.
Security: Because blockchain code cannot be modified, it offers a fantastic accounting tool for all related operations and financial transactions. The security of the blockchain will continue to increase as more data is added.
Anonymity: To keep track of transactions and maintain records, blockchain uses sophisticated coding. People have what is referred to as a “wallet,” which is actually a piece of software that keeps track of their public and private “keys” and connects to other blockchains so that users may check their balances, send money, and conduct other transactions. Consider a key to be comparable to a computer’s IP address. For those who don’t wish to be easily identified, these keys offer a high level of anonymity. Certain real estate investors prefer this secrecy. Others would feel safer knowing the other parties engaged in a transaction. Although there are methods for investors to reveal their names (and for others to search keys for identities), this represents yet another possible barrier to the widespread use of blockchain in real estate.
What Is The Biggest Opportunity Currently For Real Estate And Blockchain?
The largest potential for real estate developers and investors right now is to stay current with technological developments. Less governmental regulation and better systemic trust are now the major barriers.
Consider that for a second.
Not very long ago, ‘wet’ signatures were used to perform every contract. A contract would be printed on paper, signed with a pen, and then exchanged among the parties involved in the transaction. Frequently, the same documents would be signed twice so that each main may have their own copy. Documents can now be signed digitally on a computer screen or smartphone and then sent to recipients via email or other digital channels.
Once it started to be used and trusted more frequently, there was little to no legislation regarding it, simply widespread acceptance. It would be preferable to conclude that the system is safe, common, easy, cheap, and time-efficient rather than trying to explain the technology behind it in order to convince someone to use it instead of paper.
A system, product, or investment is sold on its advantages rather than the technology that underpins it.
The largest chance for blockchain in the real estate sector is to stop trying to define the technology – even as I have done in this essay – and focus on the advantages: Sell equity in your transactions (as you already do), carry out legal agreements electronically (as you already do), and trade information (as you already do), but do it in a way that is quicker, less expensive, and more secure than ever.
The biggest opportunity for you, according to my podcast guest, Professor Andrew Baum of Oxford University, one of the world’s foremost authorities on the blockchain, is to find a new blockchain startup that is just getting started. Don’t invest in them just yet, but instead share your knowledge of CRE and observe what they are doing so that, when the time is right, you’ll be in a prime position to profit from what will unavoidably be a next generation revolution in our industry.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.