Despite their centrality to the economy, real estate transactions have had a somewhat checkered history. For centuries, individuals have been able to perpetuate the fraud by selling properties they don’t actually own or by giving out dubious loans. Traditional means of property registration do not adequately address these problems, especially in an increasingly digital economy. This is troubling news for an industry that is expected to grow from nearly $2.7 trillion in 2020 to more than $3.7 trillion by 2025.
Fortunately, blockchain technology is providing an innovative new way to resolve age-old issues and capitalize on a currently booming real estate market. “Blockchain has the potential to be a major disruptor in every industry it touches,” says Zain Jaffer, Founder, and CEO of Zain Ventures, an investment firm with over $100 million in assets under management. “When it comes to real estate, the introduction of blockchain-enabled smart contracts is poised to solve many problems that once seemed endemic to the industry.”
Smart contracts are like traditional contracts, but they are stored on the blockchain in order to maximize visibility and security. Being stored on the blockchain means that an inalterable ledger denoting its ownership is always accessible through a decentralized network of computers. In the case of, say, tracking vehicle ownership and maintenance history, smart contracts create a thorough and transparent record that minimizes the potential for miscommunication across long chains of buyers and suppliers.
As pieces of code, these contracts can also run different processes at predetermined times when certain conditions are met. This ability can automate many of the complex and time-consuming processes involved in real estate transactions, such as ordering appraisals or notifying certain parties about title transfers, etc. “Automation can help keep the processes and outcomes transparent while also eliminating the need for an intermediary, saving both time and money,” says Jaffer. “This is still a new way of using blockchain, so there are some questions surrounding how to implement it effectively, but I believe that it represents a unique and exciting opportunity.”
Buyer (don’t) beware
Smart contracts have the capacity to make the process of buying and selling properties much easier and faster. “In theory, the code should reduce the need for intermediaries such as banks and lawyers. The contract’s precision enables all parties to be on the same page about any deadline and payments required, resulting in a smoother process that requires less confusing back-and-forth.” Jaffer says. “Moreover, because these codes simply run as they are programmed, they can dramatically reduce the potential for fraud.”
Beyond preventing negative outcomes, smart contracts can also create more positive ones for a broader range of investors than ever before. This is thanks to investment fractionalization, which enables investors to purchase parts of a real estate property, which are represented by tokens and stored on the blockchain for easy and transparent access. In some cases, investors can purchase fractions of properties for as little as $50, vastly increasing the accessibility of the real estate market. This opens up previously unattainable opportunities for smaller investors hoping to get their foot in the door of the industry.
While investing in tandem might sound like a logistical nightmare, smart contracts make investment fractionalization seamless. Once the contract is drawn up to everyone’s satisfaction, there’s no ambiguity—everyone knows exactly what funds and paperwork are expected of them, and when. There’s also a clear record of each milestone being met by each party involved.
“Once the property has been purchased, token holders are able to vote on how to manage the properties they own,” says Jaffer. “This is a boon for investors, allowing them to collectively own properties not just in name but in action. I believe that this technology will prove disruptive to the real estate industry.”
What’s next?
Despite the many clear benefits that come from smart contracts, there are some obstacles. “One of the main issues here is a public trust. The term blockchain has only become a household word over the past few years, and most people only know about it through the lens of cryptocurrency and NFTs,” Jaffer points out. “Many real estate investors may be wary of trusting financial transactions of this size to a technology they may not necessarily understand, but this just demonstrates the need for more public campaigns to raise awareness about how blockchain technology works and why it will revolutionize a variety of industries.”
Another hiccup is that real estate professionals may be hesitant to accept smart contracts. This is because the technology represents an unknown to their field, and there may be some concern that they could take away jobs. While there may be some jobs that can be entirely automated, professionals will always have an important part to play in the buying and selling of properties. Their knowledge will be invaluable in drafting the smart contracts and their expertise will be essential in answering any questions that arise. Smart contracts will simply serve to streamline professionals’ workloads, making them effective tools and productivity aids rather than outright replacements.
Regardless, it is clear that real estate professionals and brokerages will need to change with the times. This may involve shifting business models and gaining a firmer understanding of blockchain technology. Ultimately, Jaffer is optimistic about the future: “For buyers and sellers, it may take some time to adjust to the idea of trusting smart contracts. However, I believe that as this technology evolves and becomes more mainstream, the results will speak for themselves.”
