Today we are talking about how the blockchain is going to affect the real estate industry.
When people hear blockchain they think it is a synonym for Bitcoin, but the blockchain is actually the technology that Bitcoin and other cryptocurrencies are built on.
Blockchain is a distributed ledger. Instead of information being stored on one central computer (that can easily be hacked), it’s stored on thousands of computers around the world. (If you wanted, you could download it on your computer and be part of the network!) Last year, the office of the Cook County recorder of deeds participated in a pilot project. It explored the barriers to adopting blockchain, and the potential gains from overcoming those barriers.
Basically Bitcoin is to blockchain what email is to the Internet. It’s one aspect of the technology, and its use helped it gain widespread adaptation.
So you might be thinking why is this important to me?
Well, whether you are a renter, a real estate agent or want to own a portion of commercial real estate, the blockchain is going to change how all of those transactions occur.
Current issues in the real estate industry today are bureaucracy, mistakes in public record, lack of transparency, fraud, fees, and the amount of time and third parties that are involved in closing on a property.
Bureaucracy & mistakes in public records
Anyone who has waited in line at the DMV knows that government offices are terrible. You will be there all day… Pack a lunch. The assessor’s office or courthouse you register your deed with to prove title was transferred, is no different. Some counties aren’t even at the point where their information is available online yet.
Whether it’s details about where the property lines are, the type of zoning for a property or the title information; mistakes have happened… And when they do, they are expensive. Good luck trying to get the city to fess up if it was their error, by the way.
When you sell a property you transfer title to a new owner. Title is the legal ownership of the property. The deed is the legal document that transfers title from one person to another. You have to make sure title is free and clear of encumbrances. That is why people buy title insurance.
Title Insurance protects you from flaws or gaps in the real property title, but it’s the only type of insurance you have to buy to prevent you from public record errors. Owning property can get really confusing when a divorce happens, a company owns a property, or a couple owns but weren’t married and one person dies.
In a case like a divorce, one spouse would have to sign a quit claim deed to pass their right to title to another party. This doesn’t make any representations or guarantees as to the validity of such title, interest, or claim. You want a warranty deed when you transfer a title. That verifies that the grantor promises the title is clear of any claims. So even if you have a warranty deed, you still buy title insurance in case there were mistakes from previous owners. Loopholes in Illinois law allow property owners to not report valid claims against a property.
Having information about the property and who actually has the title on the blockchain will save people a lot of time and money doing title searches. Plus, it may eliminate the need for title insurance in the future once we take public recording from government agencies to a decentralized, censorship resistant public platform like the blockchain. The other exciting part is that improvements to the property, permits, related loans and even construction companies that did the work might be embedded in the data block for that property.
Real estate is one of the best ways to build wealth. And there are some creative scammers that try and get in on the action. There are quite a few types of real estate fraud that take place involving wire transfers. Many real estate companies have been formed recently with tokens to monetize this transition. But one of the most impressive is Propy.
Propy has a global strategy to help use blockchain technology and Smart Contracts to help with the fees, time, and especially fraud that can accompany any real estate deal – especially ones across borders. It’s a stressful enough process when you live near the property and can go to the inspections and closing in person. It’s very different when you live out of state or out of the country. Escrow companies have been reaching out to Propy to help prevent fraud cases that are not covered by Title Insurance.
How Do Smart Contracts Work?
Currently there is a gatekeeper called the MLS. The multiple listing service. This is a database that realtors pay a yearly fee to be a part of to get access to the listings being bought and sold. The MLS then partners with sites like Zillow and Trulia for residential properties and LoopNet and Costar for commercial properties.
If you want your property to be seen by other buyers and their realtors, you pay the agent usually 6% of the sales price to sell and list your property on the MLS. The 6% isn’t a set price. It could be more or less, but likely 3% goes to the other agent. They then split that with their managing broker.
So this is expensive and exclusive. Unless you’re working with a realtor you don’t get to access the information in the MLS cartel. This is unfortunate if you have a bad agent that doesn’t share all the information with you listed in the agent notes. The blockchain will allow records to be available to everyone. This can include the current price, what the unit sold for, and even information about utilities.
That’s really important even if you are renting. Older buildings windows tend to leak heat. Your $1,500 price range might become $1,700 in the winter once the heating bill comes.
Blockchain technology and Smart Contracts may eliminate the use of realtors, or at least reduce their role and their fees in the transaction. That’s bad for me, I just renewed my license!
Crowdfunding & Fractional Ownership
Another huge way the blockchain is changing real estate is crowdfunding and offering tokens that represent fractional ownership of real property. Companies have tried to crowd fund real estate before, but the issue was always the liquidity of the ownership.
If I buy a house with another person and they want to sell in a year and I don’t want to, I either have to buy him out or wait until that person does want to sell. Depending on the price of the property, I may not be able to buy him out. Having a token allows owners to trade the tokens out for fiat or other properties in the portfolio, offering liquidity with less liability.
New companies are having ICOs- initial coin offerings, backed by real estate. Now you get a token that represents the percentage of ownership you have in that piece of property. You receive rental income and dividends in proportion to that ownership. ICOs are trying to open these opportunities to more people that can’t afford down payments, closing costs, repairs, taxes, insurance… The American Dream of owning a home, comes with a lot of stipulations.
Some projects working on the real estate space
Focused on international real estate deals. Initially Propy’s registry will mirror official land registry records. Ultimately Propy’s vision is that jurisdictions will adopt Propy as their ledger of record so that the official transfer of property on the property registry constitutes legal transfer of the property. The Wall Street Journal and other mainstream media outlets have been reporting on their vision. They are making progress on their lofty goals.
Atlant launched March 2018 and they are working with partnering with government blockchains as well. They will also offer a peer-to-peer (P2P) rental services, competing with AirBnB. The property managers will take care of everything, and in return will take a cut of the rent money collected. If the investors are ever unhappy with how the company is managing their building, they can start a vote with other token holders to replace them.
Imbrex- Formerly known as Rex MLS:
Imbrex is a global, community-owned real estate portal and real estate data marketplace. Users earn rewards for participating data and can monetize their information through advertising and selling through Imbrex’s online marketplace.
On Imbrex, users are paid for curating spam and and keeping the database clean and up to date. In addition, users can add to the available information stack by creating special feeds like comparable properties, recent sales, tax, zoning, anti-spam and then sell this information to other users in the network.
RentBerry wants to leverage blockchain technology to ensure seamless rental experience and help tenants unfreeze millions of dollars tied up in rental deposits by allowing RentBerry community members to become cosigners. They are working to improve the current process with an open and transparent application process, instant rent payments, internationally valid tenant and landlord scores. (Excluded from United States, China (except for Hong Kong, Macau, and Taiwan), South Korea, Cuba, Iran, North Korea, Syria, Crimea Region)