The real estate industry is undergoing a digital transformation
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Blockchain technology could have a major effect on the real estate industry, from property purchasing to due diligence to title management. We identify the early adopters and potential impact.
The real estate industry is undergoing a digital transformation.
While historically a “pen and pencil” business — often relying on inefficient and archaic methods for doing business and keeping records — technology has begun to help reshape the expanding global market.
Blockchain technology, especially, is feeding into this transformation (in ways similar to how the emerging tech is disrupting other long-established industries like banking and insurance).
The decentralized-record-keeping technology, which is designed to instill trust in the authenticity of digital transactions, could be used to create efficient solutions for both commercial and residential real estate — from buying property to conducting due diligence to enabling crowd-sourced investments, and more.
Some big incumbents are already betting on the tech: Real estate giant RE/MAX has entered into several partnerships to explore blockchain use cases, while Hilton Worldwide has begun using a blockchain-based property management system.
In this analysis, we dig into how blockchain technology could transform the real estate industry, and the areas where we’re already seeing its impact.
Table of Contents
- Why blockchain tech could benefit the real estate industry
- Areas of real estate being transformed by blockchain technology
- Challenges
- Conclusion
Why blockchain tech could benefit the real estate industry
Blockchain technology offers a form of shared record-keeping which is designed to be difficult to tamper with. Blockchain technology operates through decentralized peer-to-peer platforms, building resilience against the spread of corrupted information and boosting resistance to fraud.
See our explainer for more on how blockchain technology works.
Blockchain technology has the potential to address many challenges within the real estate industry, including:
- Improving trust and transparency: Blockchain technology offers a verifiable and censorship-resistant option for sharing information (such as valuation details).
- Reducing siloed databases: Real estate processes would benefit from secure and tamper-resistant shared databases that compile data and documents from various different stakeholders in one place.
- Making transaction processes more efficient: Most real estate transactions are still conducted through wire transfers and require costly verification processes that can take days to complete. Blockchain-based transactions could enable a streamlined process which delivers quickly and reduces costs.
- Limiting the use of intermediaries: Many intermediaries — from brokers to escrow companies — could be rendered obsolete by blockchain-based approaches, as records could be stored, verified, and transferred using blockchain technology. Removing the need for intermediaries could dramatically reduce costs and save time.
Areas of real estate being transformed by blockchain technology
We consider several areas that could benefit from the use of blockchain technology below, from due diligence to financing systems.
Property Search Process
Currently, the most common method that brokers, owners, buyers, and tenants use to store and access property listings are through third-party platforms such as Zillow.
These platforms tend to be subscription-based and can command high fees from users. Moreover, there is a lack of standardized processes and often poor communication between the platforms.
This causes property data to frequently be inaccurate, dated, or incomplete. Further, the data can be fragmented across multiple listing platforms, which introduces inefficiencies.
Blockchain technology can fix these problems by allowing a property listing to exist on a single decentralized database.
With data distributed across a peer-to-peer network, brokers would be able to have more control over their data, as it would be more difficult for it to be interfered with by any third parties. Market participants could access more reliable data at a lower cost.
Imbrex is a real-world example of a blockchain-based property listing platform.
Imbrex’s real estate marketplace is built on the Ethereum blockchain. Buyers, sellers, and other agents can use the platform for free, earning rewards for contributing data and helping to maintain the marketplace.
Data is encrypted and stored on a blockchain, which means Imbrex does not control it and cannot alter it — contributed data is controlled solely by the listing party.
Imbrex is reportedly planning to launch smart contract-enabled transactions using its own cryptocurrency.
Due Diligence and Financial Evaluation Process
Physical paper documents for proof of identity are still the norm today. This approach requires the commitment of significant time and effort for due diligence and financial verification.
This manual verification process also increases the likelihood of errors and can involve multiple third-party service providers. These factors can be costly and slow down the due diligence process.
Using digital identities on the blockchain, this entire process can be taken online in a secure manner — increasing efficiency, lowering costs, enhancing data security, and reducing the chance of manual errors.
For example, a real estate property’s digital identity could consolidate information such as vacancy, tenant profile, financial and legal status, and performance metrics.
A digital blockchain-based solution is currently being developed by Lantmäteriet, the Swedish land authority, in collaboration with blockchain startup ChromaWay, Swedish telecommunications giant Telia Company, and several real estate enterprises.
Its goal is to digitize contracts for sale and property mortgages that are authenticated by blockchain technology.
This solution streamlines the process of transferring property titles while also adding some layers of security. All parties involved in the process, including the buyer, seller, real estate agent, the buyer’s bank, and the land registry, have their own digital identities.
Each can use a single application to securely send and sign official documents using blockchain-verified smart contracts. All actors can view the associated documents and information, with verification of the steps that have taken place during the process.
ChromaWay announced that it had completed a full transaction on the platform in June 2018.
Other organizations around the world are also making blockchain real estate strides. Bank of China Hong Kong (BOCHK), for example, stated in mid-2018 that it processes 85% of real estate appraisals using its own private blockchain.
BOCHK’s General Manager of Information Technology Rocky Cheng Chung-ngam said, “In the past, banks and [real estate] appraisers had to exchange faxes and emails to produce and deliver physical certificates. Now the process can be done on blockchain in seconds.”
Property Management
Property management is highly complex, with many stakeholders involved — including landlords, property managers, tenants, and vendors.
Most properties are currently managed either offline through manual paperwork, or through multiple software programs that generally don’t integrate well with one another.
Through the use of a single decentralized application that uses blockchain-backed smart contracts, the entire property management process, from signing lease agreements to managing cash flow to filing maintenance requests, can be conducted in a secure and transparent manner.
In residential real estate, for example, a landlord and tenant could digitally sign a smart contract agreement that includes information such as rental value, payment frequency, and details of both the tenant and property.
Based on the agreed upon terms, the smart contract could automatically initiate lease payments from the tenant to the landlord, as well as to any contractors that perform periodic maintenance. Upon termination of the lease, the smart contract could also be set to automatically send payment of the security deposit back to the tenant.
One business developing a blockchain-based property management system is Midasium. The company has built a private blockchain to execute smart contracts.
This allows traditional contracts, such as mortgage agreements and tenancy contracts, to be brought onto a blockchain to establish a history of agreements and financial transactions that can be traced and audited.
All data, except for public information like property location, is confidential and encrypted. The intended goal is a reduction in legal, accounting, and transaction costs, as well as a decreased risk of fraud and corruption.
AQUA is another enterprise that offers a blockchain-based property management system, except its application is specifically for hotel and resort management.
The AQUA PMS application is a blockchain platform designed for inventory management, task management, and maintenance management. The service is seeking to help customers reduce operational costs and response times.
AQUA PMS is currently being used by Hilton Worldwide.
Copyright 2020 CB Information Services, Inc.