With cryptocurrency prices hitting all-time highs in late 2021, blockchain technology is once again dominating the news headlines. At times like this, it’s a good idea to take a step back and look beyond the speculation surrounding crypto price actions. As the world continues to move increasingly digital, people are beginning to recognize the potential uses of blockchain-powered digital assets like NFTs (non-fungible tokens) and the impacts that they could have on industries such as real estate.
In an industry that is often the target of innovators, what real estate professionals should know about this technology is straightforward: Blockchains are simply a new way of thinking about how information regarding a transaction—any transaction—could be stored and shared. In their most basic form, blockchains are systems that maintain an ever-growing list of records or transactions—a list that is stored not in one location, but across a network of computers.
These transactions could represent nearly anything, such as the deposits and withdrawals you make at your bank, the acquisition of a piece of art, or the real estate records that are created when a property is purchased, refinanced, or sold. What makes these systems different from a regular database, however, is that records added to this list are permanent, available to all parties involved, and therefore easily auditable.
Ideas in action
While this technology can sometimes be difficult to understand, the basic idea behind blockchains is not. A blockchain provides an independent, verifiable, and trustworthy record of events and transactions. In real estate, this technology could be used to provide the single source of truth for a given property or transaction.
Imagine a verifiable record of a property’s past ownership. Having access to this could enable the various parties to a pending deal—who typically don’t know each other—to trust that the seller has true ownership of that property and to see without any question that there are no claims against the property. This would clearly have massive implications on the title industry. Having a clear and undisputed history of record is incredibly important. While this may be possible without a blockchain, using this technology can help make these kinds of processes far more efficient and effective than they are today.
Verifiable. They utilize an established and accepted method to digitally sign and audit transactions.
Current impact
While this technology has the potential to be completely transformative in real estate, adoption has been slow. Today, we’re seeing just two applications successfully gaining traction: as an investment portfolio diversification and as an alternative payment method.
You may be wondering, “But what is a cryptocurrency?” A cryptocurrency—or, simply, crypto—is a type of proprietary digital asset that “lives” on a blockchain. With the global market cap of cryptocurrencies growing from $500 billion to $2.5 trillion over the past 12 months alone, extraordinary amounts of new wealth have been created thanks to crypto. Now we are seeing many of these cryptocurrency investors diversifying out of their digital asset holdings and into physical real estate.
Beyond portfolio diversification, we’re also seeing a few hundred luxury real estate transactions each year being completed purely using cryptocurrencies like Bitcoin or Ether. In tech hubs like San Francisco and Miami, many agents are becoming specialists in facilitating this new type of property purchase method.
In addition to facilitating purchases and accepting rent, escrow, or down payments in cryptocurrency, this new technology could reduce settlement times to just seconds instead of days and eliminate the need for money wires, all while costing only pennies in transaction fees, even for international buyers. While the rate of adoption is slow so far in real estate, it has been accelerating in adjacent industries such as finance and lending. In 2021, UWM, the second largest mortgage lender in the United States, temporarily accepted Bitcoin for mortgage payments as part of a pilot program.
Future impact
Even though some industries have yet to fully embrace this new technology, there are many opportunities for blockchain to be utilized within the real estate industry in the near future.
- Title. In terms of recording ownership of property, there’s a potential impact on the world of title insurance. Blockchains could provide an indisputable and instantly verifiable proof of who owns a property.
- Fractional property ownership. By utilizing blockchain technology, it becomes possible to allow multiple parties to more easily own fractions of a single property, as opposed to today’s model, which is primarily based upon a single party owning it. This can increase accessibility to real estate by lowering the minimum amount of capital needed to get exposure to real estate as an asset class, while also allowing property owners to sell partial equity, providing greater access to liquidity. This is distinct from a real estate investment trust (REIT), which may create more opportunities for retail investors to gain exposure to the performance of the real estate sector but falls short of granting investors any actual ownership of the underlying investment properties. We are seeing this model become more popular in second-home markets, and it can be more easily managed using the blockchain.
- NFTs. Non-fungible tokens, or NFTs, have been used mostly to sell and represent digital art, where they act as an indisputable certificate of authenticity. But even though NFTs are primarily used to represent items in the digital world, it doesn’t mean they couldn’t be used to represent physical products, including real property. NFTs could be used to represent physical real estate assets on a blockchain, opening property investment opportunities to many more people. Recently, Sotheby’s auction house sold multiple NFTs for tens of millions of dollars.
- Decentralized finance (De-Fi). De-Fi has been referred to as “Wallstreet 2.0 on the blockchain.” For both institutional and retail customers, most of the traditional financial goods and services that depended on intermediary third parties such as banks and investment firms can now be accessed directly using innovations like smart contracts on blockchain protocols. Common aspects of real estate transactions like lending, borrowing, refinancing, and getting access to liquidity could all become equally open to anyone in the world. This is already becoming possible today without the need for backing by any central bank, relying instead on pieces of code and secure De-Fi protocols. It’s even possible to use your own cryptocurrency as collateral to issue yourself a negative-interest rate loan. De-Fi combined with NFTs or property titles on a blockchain could open the gates to tremendous financial opportunity for those who own real estate.
Despite the number of opportunities that it presents, it will likely be years before we see blockchain fully enter the real estate industry in the United States, though other countries may certainly reach that stage sooner. The technology is still gaining maturity. It’s challenging to find the necessary talent to build these new applications, and there are still many regulatory hurdles ahead.
An important point for real estate professionals to understand is that many of these powerful impacts will likely never be visible directly to the consumer, brokerage, or individual agent; they will simply become integrated into the underlying technology supporting the transactions that fuel the industry. Just as it isn’t necessary to be familiar on a deeply technical level with how the internet works in order to successfully use social media, blockchains will be providing value mostly behind the scenes.
The takeaways
While certain components of the blockchain technology like NFTs and cryptocurrencies have recently reached mainstream status, their impact on the real estate industry is still far out on the horizon. We’re still in the early days of this new era, but there is no doubt that blockchain will impact the real estate industry in the years ahead. Whether it’s the ability to have an independent, immutable, and verifiable record of the title of each property or new financial tools available to homeowners powered by decentralized finance, the ways in which blockchain technology will become an important part of our industry will only increase.
Source: “Recording History: An Introduction To Blockchain Technology For Real Estate Professionals“
