Below is a list of the 3 ways Blockchain will impact the Commercial Real Estate Market:
1. Expediting the process
The traditional real estate market is not known for being quick and easy. Real estate transactions have always been cumbersome, complicated and expensive because of middlemen. These middlemen exist because they hold information that you can’t access or have skills/ licenses you don’t have but are required to operate in the existing property transaction ecosystem. For instance, currently most buyers and sellers make use of escrow and title companies for third-party verification; this serves as a safety net to make sure both parties keep their end of the deal, as well as to reduce the risk of fraud.
While important, this third-party verification comes at a cost and adds extra time to the process. With blockchain, the middleman (in this case the escrow company) could effectively be cut out. By using a blockchain distributed database to prove authenticity, property owners could legitimately transfer ownership immediately without paying for third-party verification.
“Blockchain will enable every property, everywhere, to have a corresponding digital address that contains occupancy, finance, legal, building performance, and physical attributes that conveys perpetually and maintains all historical transactions. Additionally, the data will be immediately available online and correlate across all properties. The speed to transact will be shortened from days/weeks/months to minutes or seconds.”– Jason Ray, Nov 2, 2015.
2. Reducing fraud
One of the main reasons buyers and sellers have traditionally used escrow and third-party verifications is to reduce the chances of either party getting burned by real estate fraud. Real estate fraud costs unwitting buyers millions of dollars each year and is aggravated by buyers or sellers who want to make a quick deal and are consequently willing to forego safety measures. It’s perpetrated by petty thieves on $500 sub-leases up to the world’s largest banks and mortgage lenders doing hundreds of millions of dollars in transactions.
“By offering a 100 percent incorruptible resource, whereby the sender and recipient of funds was logged, and where “digital ownership certificates” for properties are saved, the blockchain would effectively make forged ownership documents and false listings a thing of the past. The unique “digital ownership certificates” would be almost impossible to replicate, and would be directly linked to one property in the system, making selling or advertising properties you don’t own almost impossible.” - Don Oparah, February 6, 2016
3. Offering total transparency
The power of blockchain is its programmability. For instance, you can code it to play a movie, develop a smart contract (such as a programmable escrow) or create a digital ID for a person, company or real estate asset. Properties could effectively be given their own digital identities, which would include the chain of ownership, a documented list of repairs and refurbishments and projected costs associated with owning and running the property.
Escrows could have three private keys, where at least two are required for release. The tenant and landlord would each have one private key and a third one is given to a neutral third party (Arbitrator). For the security deposit to be spent, two out of the three people will need to use their private key. The funds are locked in crypto-escrow for the duration of the lease.
“Using a smart contract avoids the potential for one party to perform while the other refuses or fails to perform. Using a smart contract, the seller, Party A, and buyer, Party B, can agree to the same transaction, but structure it differently. Party A will agree to pay an amount of virtual currency to Party B, and Party B will agree to transmit the title to the property in a specialized type of coin on the blockchain. When Party A transfers the virtual currency to Party B, this action serves as the triggering event for Party B, which then automatically sends the specialized coin which signifies the title to the condominium at issue to Party A. The transfer is then complete, and Party A’s ownership of the condominium is verifiable through a publically available record on the blockchain.” – Drew Hinkes, July 29, 2014
With Blockchain technology still in its infancy, this CRE transformation is not going to happen overnight. It will take innovative and forward-thinking real estate firms to lead the way and convince the masses that blockchain is the correct path to take. Regardless of the road ahead, this new failsafe technology could make the transaction process streamlined, safe and transparent.
ABOUT THE AUTHOR
Bernard Hoefsmit is a Program Manager and Strategist with a specialty in IWMS. He is responsible for a wide range of assignments covering complex real estate technology strategies and IWMS implementations, outsourcing strategies, business process re-engineering projects in the Americas, Europe and Asia. Mr. Hoefsmit also received the Master of Real Estate honor program from Corenet Global and has written point of views about “Improving return on assets in corporate real estate”, “Increasing shareholder value through integrated workplace management system solutions” and “Implementing real estate cost takeout strategies.”