Blockchain Technology and the Impacts on Real Estate Markets

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Blockchain Technology and the Impacts on Real Estate Markets Name: Course: Date:

2 Blockchain Technology and the Impacts on Real Estate Markets Blockchain technology refers to a system that ensures secure maintenance and permanent storage of digital list of transactions, contracts, records, or other information across a network of computers (Corluka & Lindh, 2017). The power of the blockchain technology relies on automated execution of transaction as well as the capability of forming fractional ownership in real estate property through the use of tokens. The basic idea behind this technology is that it offers an independent, verifiable, and trustworthy transaction records (Pankratov, Grigoryev, & Pankratov, 2020). It operates in four significant ways that include impose a set of rules to justify the occurrence of a transaction, secure each verified data record, and combine them through the use of cryptographic techniques. Lastly, the blockchain technology adds the recorded data to the ledger and have them distributed across computer network. 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 have been significantly impacted by the adoption of this new technology 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 addresses some of the challenges associated with the full adoption of the 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

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

The technology eliminates the need of middlemen, lengthy approval process, as well as title searches. The database used in this technology has the ability to 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 safekeeping of such property records as surveys, deeds, as well as other transaction

4 details (Nijland & Veuger, (2019). Buyers and sellers will not be worried of losing or having their valuable data or information fall into the wrong hands anymore.

4. Costs reductions The use of the 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 of doing away with intermediaries is a significant step towards achieving transparency in real estate dealings. In the use of this technology, every information is digitally and immutably recorded thus 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 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

5 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 managed offline through manual paperwork (Pankratov, Grigoryev, & Pankratov, 2020). The whole property management process can be carried out in a secure and transparent manner 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 enforcing of leases, purchases, and sales agreements that facilitate real estate transactions.

2. Title Management 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

6 management issues through the development of immutable digital records of land titles (Wouda & Opdenakker, 2019). It simplifies property title management and ensures transparency through the reduction of title fraud as well as the need for insurance. With this technology, individuals can develop secure digital land title records to get a trusted, verifiable, 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 as well as 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 the use of blockchain technology, which permits listing of property on a single decentralized database. The distribution of data cross a peer-to-peer 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 an access to more reliable data at a considerably lower cost.

4. Financing and Payment Systems The current modes of financing and payment for property transactions are considerable 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 a property if financed through a mortgage. Currently,

7 it takes about 30 to 60 days to obtain a mortgage approval for residential properties. It means that more time may be required to get an approval for a commercial real estate given that the process is more complex than that of a real estate (Wouda & Opdenakker, 2019). The utilization of the blockchain technology can significantly simply and makes this process more transparent. For instance, verifiable digital identities for properties can help to reduce loan documentation time to ensure quick mortgage approval process v. Both the lender and the borrower can also use the technology to execute an immutable smart contract-based loan document that can be accessed by all the involved legal parties. 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 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 bockchainbased solution will reduce the chance for manual errors, enhance data security, lower costs, and increase efficiency (Corluka & Lindh, 2017). For instance, the digital identity of a real estate property can consolidate such information as performance metrics, financial and legal status, tenant profile, and vacancy. It streamlines the process of property titles transfer while adding some layers of security.

6. Real Estate Investing

8 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 the 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 the 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 the 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).

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

2. Scaling

9 Millions of transactions are carried out in the real estate industry every year. Thus, there is great need for networks with the ability to handle large transaction volumes efficiently and faster. Nonetheless, Bitcoin can only handle 5 transaction 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 bottleneck.

3. Interoperability There are various blockchains that 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 as a significant challenge in the world of blockchain technology.

For instance, a rental firm may want to use the public Ethereum blockchain for 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 choses 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. Nonetheless, to fully address the interoperability issue, blockchain platforms will be required to introduce shared standards.

10 4. Widespread adoption Given that blockchain is currently considered as an emerging technology, many individuals across the globe do not have full knowledge of what it is, how it operates, as well as 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 enterprises in the real estate industry consider to take advantage of the technology’s capabilities, and adopt it fully in their daily to day operations. Early adopters of the blockchain technology may find some competitive edge in the market over their industry rivals. The technology can act as a signifcnat 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 the applications of blockchain technology, and a lot of questions are yet to be answered as people continue to learn how to use this decentralized technology. In this paper, the various benefits of blockchain technology, including enhanced liquidity, speedy transaction process, 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 have been significantly impacted by the technology as property management, title management, property search process, payment systems, and real estate investing have also been discussed in detail.

11 The technology’s challenges that have discussed in this study relates 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. Currently, many industry leaders and governments are exploring and implementing the applications of 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.

12 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.