Blockchain Technology and the Impacts on Real Estate Markets

1 Blockchain Technology and the Impacts on Real Estate Markets Blockchain technology refers to a system that ensures secure maintenance and permanent storage of a digital list of transactions, contracts, records, or other information across a network of computers. The power of blockchain technology relies on automated execution of the transaction and the capability to form fractional ownership in real estate property through the use of tokens. The basic idea behind this technology is that it offers independent, verifiable, and trustworthy transaction records. It operates in four significant ways: impose a set of rules to justify the occurrence of a transaction, secure each verified data record, and combine them through cryptographic techniques. Lastly, blockchain technology adds the recorded data to the ledger and has them distributed across the computer network.

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2 Eventually, every network participant can access the new transaction detail without any problem (Pankratov, Grigoryev, & Pankratov, 2020). No recorded data can be removed or altered once added into the systems’ ledger. In this paper, the benefits of blockchain technology in real estate will be discussed. The real estate areas that the adoption of this new technology has significantly impacted will also be addressed. Lastly, there exist various challenges associated with the adoption of any new technology in any given industry. Thus, this paper will also address some of the challenges associated with the full adoption of blockchain technology in the real estate industry.

How Blockchain Technology can Benefit the Real Estate Industry With the advancement of technology in almost every industry across the globe, the adoption of blockchain technology will be a significant plus to the real estate industry (Pankratov, Grigoryev, & Pankratov, 2020). The technology can be instrumental in eliminating some of the traditional biggest problems experienced in the real estate industry. As a secure, transparent, and efficient system, blockchain technology will bring various utilities into the real estate market. Some of the technology’s benefits that the industry can take advantage of include; 1. Enhanced liquidity Despite being considered an illiquid asset for many years, real estate can be liquidated because of cryptocurrencies. The use of tokens makes real estate readily tradable instead of having sales being concluded after long periods of time. Thus, an individual selling his or her home will not have to take too long waiting for a buyer who can acquire the whole property to get some value from its sale (Wouda & Opdenakker, 2019).

2. Speedy transaction process

3 The use of blockchain technology can significantly help to accelerate the whole process.

The technology eliminates the need for middlemen, lengthy approval process, as well as title searches. The database used in this technology can verify the validity of homeownership quickly and promotes faster title transfer without the need of a third party (Wouda & Opdenakker, 2019).

3. Security of stored online data The use of this technology allows for immutable data storage. Immutable data storage ensures the safekeeping of such property records as surveys, deeds, and other transaction details (Nijland & Veuger, (2019). Buyers and sellers will not be worried about losing or having their valuable data or information falling into the wrong hands anymore.

4. Costs reductions The use of blockchain technology will significantly reduce the costs associated with real estate, which are always too high. Blockchain technology will minimize costs through the elimination of such fees as loan fees, registration fees, taxes, inspection costs, and commissions (Nijland & Veuger, 2019). The automation of the property investment processes reduces all the costs of carrying them out.

5. Improving transparency The technology's ability to do away with intermediaries is a significant step towards achieving transparency in real estate dealings. In this technology, every piece of information is digitally and immutably recorded, making it difficult to tamper with (Garcia-Teruel, 2020).

6. Availability of crucial information Blockchain technology operates as a decentralized system. Thus, the technology does away with individual control over each facet of the industry, including information. Blockchain

4 technology results in the development of trust and allows every participant to have access to valid ad trustworthy information that can be verified (Pankratov, Grigoryev, & Pankratov, 2020).

Real Estate Areas Impacted by Blockchain Technology The introduction of blockchain technology has significantly impacted the real estate industry (Pankratov, Grigoryev, & Pankratov, 2020). The technology has eliminated such traditional real estate industry’s biggest problems as prolonged transaction speed, lack of liquidity, very high fees, lack of transparency, as well as limited access by people. Some of the areas in the industry impacted by the technology include: 1. Property Management Property management is a complex process that includes various stakeholders like vendors, tenants, property managers, and landlords. Currently, most properties are managed through multiple software programs that do not integrate well with each other or are managed offline through manual paperwork (Pankratov, Grigoryev, & Pankratov, 2020). The whole property management process can be carried out securely and transparently through the utilization of a single decentralized application that employs the use of blockchain-backed smart contracts (Wouda & Opdenakker, 2019). For instance, a landlord and tenant in a residential real estate can digitally sign a smart contract agreement with specific information regarding payment frequency, rental value, and other details. According to the agreed-upon terms, the smart contract automatically initiates lease payments from the tenant to the landlord in addition to other contractors charged with carrying out periodic maintenance (Corluka & Lindh, 2017). The use of smart contracts ensures quick enforcement of leases, purchases, and sales agreements that facilitate real estate transactions.

2. Title Management

5 The current paper-based nature of property titles creates opportunities for errors and fraud. A property title can only be transferred to a buyer once the title is rendered free of any defect. Thus, property owners normally incur high legal fees to ensure that their property titles are accurate and authentic (Pankratov, Grigoryev, & Pankratov, 2020). Homeowners across the globe risk losing a lot through title fraud. The use of blockchain technology eliminates such title management issues through the development of immutable digital records of land titles (Wouda & Opdenakker, 2019). It simplifies property title management and ensures transparency by reducing title fraud and the need for insurance. With this technology, individuals can develop secure digital land title records to get a trusted, verifiable, and proof of property ownership.

3. Property Search Process Third-party platforms are currently the most common method used by tenants, buyers, owners, and brokers to store and access property listings. In addition to requiring users to subscribe, such platforms command high fees from the users. The platforms are also characterized by poor communication between them and the users and inadequate standardized processes that result in inaccurate or incomplete property data (Wouda & Opdenakker, 2019).

Moreover, the property data can be fragmented in various listing platforms hence making it inefficient. Such problems can be eliminated through blockchain technology, which permits the listing of property on a single decentralized database. The distribution of data across a peer-topeer network enables brokers to have more control over their data as third-parties find it difficult to interfere with the data (Nijland & Veuger, 2019). The technology gives market participants access to more reliable data at a considerably lower cost.

4. Financing and Payment Systems

6 The current modes of financing and payment for property transactions are considerably slow, expensive, and opaque because of the inclusion of various intermediaries and extensive documentation required (Nijland & Veuger, 2019). Such issues are primarily experienced when international transactions are required and the property is financed through a mortgage.

Currently, it takes about 30 to 60 days to obtain mortgage approval for residential properties. It means that more time may be required to get approval for commercial real estate, given that the process is more complex than that of real estate (Wouda & Opdenakker, 2019). The utilization of blockchain technology can significantly simplify and makes this process more transparent. For instance, verifiable digital identities for properties can reduce loan documentation time to ensure a quick mortgage approval process. Both the lender and the borrower can also use the technology to execute an immutable smart contract-based loan document that all the involved legal parties can access. The utilization of this technology can save the country’s mortgage loan industry a lot of money in expenses annually (Corluka & Lindh, 2017).

5. Due Diligence and Financial Evaluation Process Most industry players are currently using physical paper documents for proof of identity.

This practice demands a significant amount of time and effort for due diligence and financial verification (Nijland & Veuger, (2019). Apart from requiring multiple third-party service providers, this manual verification process may also result in errors, which may prove to be costly and adversely affect the due diligence process. This whole process can be taken online in a secure manner through the use of blockchain technology’s digital identities. A digital blockchain-based solution will reduce the chance for manual errors, enhance data security, lower costs, and increase efficiency (Corluka & Lindh, 2017). For instance, a real estate property's digital identity can consolidate such information like the performance metrics, financial and legal

7 status, tenant profile, and vacancy. It streamlines the process of property title transfer while adding some layers of security.

6. Real Estate Investing Real estate investing has largely been left for individuals with the ability to get large sums of capital. Further, it normally entails such expensive intermediaries as fund managers, thus making it difficult for many to enter (Nijland & Veuger, 2019). Nonetheless, the emergence of blockchain technology has significantly disrupted real estate investing by decentralizing the process through tokenization and crowdsourcing. Tokenization of real estate has eliminated the risk of fraud in addition to making it possible for property to be owned by various individuals with a stake in potential returns (Corluka & Lindh, 2017).

Challenges of Blockchain Technology in Real Estate Market Despite its promising ability to help solve some of the traditional real estate industry’s problems, the emergence of blockchain technology poses some significant challenges. The technology is still in its early stages, and transitioning to this yet-to-mature invention comes with its own set of challenges. The following are the challenges associated with the full adoption of blockchain technology.

1. Regulation One of the significant challenges facing the adoption of any new technology concerns navigating complex regional regulations around the world (Garcia-Teruel, 2020). Blockchain technology is not exempted. For instance, not all countries and states acknowledge smart contracts as legally binding documents. Thus, this may be a big challenge to parties that have no knowledge of this, especially when the contract is for a sizable investment (Garcia-Teruel, 2020).

8 The regulatory challenges associated with blockchain technology are preventing many businesses and real estate firms from adopting it.

2. Scaling Millions of transactions are carried out in the real estate industry every year. Thus, there is a great need for networks to handle large transaction volumes efficiently and faster.

Nonetheless, Bitcoin can only handle 5 transactions per second while Ethereum only about 15 transactions. On the other hand, Visa holds that it has the ability to process more than 24,000 transactions every second (Nijland & Veuger, (2019). Large real estate enterprises across the globe in need of ultra-fast processing times may face a lot of challenges caused by transaction bottlenecks.

3. Interoperability Various blockchains exist in the market today. Most of these blockchains cannot communicate or work efficiently with each other. This lack of interoperability or standardization is considered a significant challenge in the world of blockchain technology. For instance, a rental firm may want to use the public Ethereum blockchain for the execution of lease contracts but would want to store rent rolls and tenant data on a private blockchain. Or an organization may start to use one blockchain solution and, in the course of its operation, comes across a better solution that can effectively meet its needs and chose to transition. To ensure the protection of the previous transaction histories, the second blockchain may be needed to reference the initial blockchain. However, lack of interoperability makes this not possible. Companies like Interdger are currently working to find a solution to this kind of challenge. The organization aims at developing a protocol that can allow individuals to make payments between blockchain networks. It will be beneficial to have a solution that allows for cross-blockchain transactions.

9 Nonetheless, to fully address the interoperability issue, blockchain platforms will be required to introduce shared standards.

4. Widespread adoption Blockchain is currently considered an emerging technology; many individuals across the globe do not have full knowledge of what it is, how it operates, and its uses and benefits to the real estate industry. The technology's widespread adoption is yet to be achieved, given that many organizations have not fully explored the potential capabilities of blockchain technology. It could still take some time before most of the real estate industry enterprises consider taking advantage of the technology's capabilities and adopting it fully in their daily-to-day operations. Early adopters of blockchain technology may find some competitive edge in the market over their industry rivals. The technology can act as a significant source of competitive advantage and create opportunities for the emergence of new industry trailblazers.

Conclusion Blockchain technology promises to have a significant impact on the real market across the globe. The industry is undergoing a digital transformation, and there is a long road ahead before this new technology matures. Firms and businesses are still experimenting with blockchain technology applications, and a lot of questions are yet to be answered as people continue to learn how to use this decentralized technology. In this paper, blockchain technology's various benefits, including enhanced liquidity, speedy transaction process, the security of stored online data, costs reduction, improved transparency, and availability of crucial information, have been discussed. In addition, such areas of real estate that the technology has significantly impacted as property management, title management, property search process, payment systems, and real estate investing have also been discussed in detail. The technology's challenges that

10 have been discussed in this study relate to regulation, scaling, interoperability, and widespread adoption.

Furthermore, blockchain technology must strive to overcome the perceived negative image resulting from the speculative cryptocurrency bubbles, with some projects turning into outright fraud. Nonetheless, it is evident that this emerging technology will cause significant disruption in many industries across the globe, with real estate not being an exception. Many industry leaders and governments are currently exploring and implementing this new technology in real estate. Such kind of developments will make this old industry to be among the first ones to have a taste of the decentralized digital world before the rest.

11 References Corluka, D., & Lindh, U. (2017). Blockchain: a new technology that will transform the real estate market. Retrieved from https://www.diva-portal.org/smash/record.jsf? pid=diva2%3A1124675&dswid=9727 Garcia-Teruel, R. M. (2020). Legal challenges and opportunities of blockchain technology in the real estate sector. Journal of Property, Planning and Environmental Law. Nijland, M., & Veuger, J. (2019). Influence of blockchain in the real estate sector. International Journal of Applied Science, 2(2), p22-p22.

Pankratov, E., Grigoryev, V., & Pankratov, O. (2020, June). The blockchain technology in real estate sector: Experience and prospects. In IOP Conference Series: Materials Science and Engineering (Vol. 869, No. 6, p. 062010). IOP Publishing.

Wouda, H. P., & Opdenakker, R. (2019). Blockchain technology in commercial real estate transactions. Journal of Property Investment & Finance.