Tokenizing Real Estate with Blockchain

Blockchain technologies seem to have a solution to most problems, even if the problem is that I need to sell my house fast. The merger between blockchain and real estate promises to simplify and cheapen the process of buying and selling property. This process traditionally involves a sleuth of entities who each take a cut from the deal made between the buyer and seller. The bank, broker, seller, buyer, and local government all are involved in this process, and currently any real estate transaction requires heaps of paperwork and hours of coordination between these entities and individuals.

A seller could, if unwilling to pay these fees, list their property for sale by owner (FSBO), but then she doesn’t have access to the MLS (multiple listing service) that real estate agents use to search for property when they have a new buyer. Notoriously, the MLS is fragmented, walled off, and complex, so navigating it as a seller is a daunting task. However, transferring these property listings to a blockchain would mean opening up access to all the available property for anyone to review. With each listing, the seller could advertise the price of their property as well as any terms and conditions which need to be met upon purchasing.

How is the property secured financially and contractually? Smart contracts. Smart contracts are becoming popular, but they are far from being the standard method of finalising contractual agreements. They are exactly the same as paper contracts, however they are digital. The difference is in how they are implemented and who is involved. Let’s take the platform Kickstarter as an example to demonstrate the difference between paper and smart contracts. Kickstarter is a platform through which product teams can request funding from supporters for their newly-developed products, or products in the making. The platform acts as an intermediary between these supporters and product teams, meaning that both sides have to trust Kickstarter to manage their money safely. If the product teams manage to have their projects successfully funded, they expect Kickstarter to give them their money; on the other hand, supporters want their money to go to the project when it is funded, or get a refund when it hasn’t reached its goals.

Essentially, both sides have to trust Kickstarter if they want to succeed. This opens up each of them to counterparty risk. Smart contracts provide a similar system to facilitate this exchange without the third-party risk. Returning to the real estate example above, if a seller wishes to advertise their property, we can programme a smart contract to facilitate the transaction online. The smart contract is programmed with the seller’s price and other criteria, and only upon the meeting of that criteria can their property be sold. So why should we trust a smart contract? Because smart contracts are located on a blockchain, they are immutable and distributed. Once a smart contract is created, it can never be changed again; and being distributed means that the output of your contract is validated by everyone on the network. If a bad actor decides to tamper with the contract, everyone else on the network is a witness and can invalidate them.

So, seeing as any real estate transaction requires so much paperwork in the form of deeds, contracts, tax records, and other documents required for making the sale, smart contracts could facilitate these transactions more securely and faster. Furthermore, smart contracts could take care of any ongoing real estate transactions such as rental agreements and home warranties, simplifying the process even more.

Another exciting idea within real estate smart contracts is the ability to fractionally own properties. As the owner of an apartment building, you can programme the smart contract which facilitated its sale to invite investors to purchase shares within the building. These new owners now own a share of the property which they can sell at any time, through the same smart contract.

Traditionally, real estate has been concerned with listings, in order to connect buyers and sellers together. However, blockchain and smart contracts are introducing new ways to purchase real estate: real estate can now be tokenized, allowing the sale of properties to be handled like a stock sale on an exchange. Real estate has long been thought of as highly illiquid due to the time it takes for sales to be finalised. However, tokenizing properties opens up the market to more liquidity: properties (or fractions of properties) in the form of tokens can be readily traded on exchanges for fiat, increasing their liquidity.

Buying and selling property is time consuming, risky, complex, and expensive. Solutions on blockchain will save time and money by releasing the resources currently used for registration and settlement. With blockchain and smart contracts, there is hope that these drawbacks are mitigated.