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Basics of Blockchain in Real Estate

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Blockchain technology has already disrupted several industries, including online payment processing and data storage. However, many experts believe that blockchain specialists have only scratched the surface of what the technology can do. Blockchains in real estate have already influenced how some investors, buyers, sellers, and professionals behave. Blockchains will likely have an even greater impact in the near future. This full guide will explore the current state of blockchain in real estate and how it might evolve over the next several years.

Understanding the Basics of Blockchain Technology

Before you can understand the evolving influence of blockchain in real estate, you need to grasp the technology’s basic features. Blockchain technology is a peer-to-peer, decentralized ledger that records interactions on a network. Since blockchains were originally built to track cryptocurrency exchanges, it might help to use an example from that industry.

When someone purchases a crypto coin like Ethereum, the transaction is recorded in ledgers stored on thousands of devices around the world. The record can provide a lot of information, including how much the person spent, how much Ethereum they received, and when the transaction happened.

The decentralized nature of blockchains gives them significant benefits over other types of records. Imagine a bank that keeps all of its account information in one database. A hacker could break into that database and find all the information needed to commit fraud. The criminal might even alter records to change the amount of money in accounts. The bank might never know precisely how the accounts were altered.

It becomes nearly impossible to change the information in a blockchain. Once a block of information is created and added to the chain, it remains there. Even if someone found a way to change the information on one device, the blockchain would self-correct when it connected with other devices on the network. As long as most of the devices on the distributed network agree on a piece of data, that’s the data all ledgers will choose.

Applying Blockchains to Real Estate

Blockchains can do more than record financial transactions. They can apply to any type of asset transaction, including those that happen in real estate. Let’s say you want to invest in a property, but you don’t have enough money to buy it on your own. A real estate investment platform could turn the asset into multiple tokens. When you purchase a token, the network creates a block of information and adds it to the chain of transactions to show that you own a piece of the investment property.

Once you tokenize property ownership, you can buy and sell investments much more easily. The blockchain will always keep an accurate record of who owns the token that represents ownership in the real estate. If you ever want to cash in on your investment, you would just sell your token to someone else.

Everyone involved in the blockchain network can look at exchanges, making every step of the process more transparent and efficient.

Currently, you can find out who owns properties by using databases like ProspectNow. In the near future, though, you might get much of the same information from decentralized ledgers.

More Benefits of Tokenization

Additionally, you and other investors have the option to split your tokens into a larger number. For example, if five people purchase an investment property together for $500,000, they might use blockchain in real estate to create five tokens. Each investor would own one token to prove their stake in the property.

Over time, the values of those tokens could grow. If the property gets assessed at $1 million, the tokens will have values of at least $200,000 each. The owners might decide they want to get a large return on their investment. They don’t want to lose all their passive income from the property, though.

They solve this problem by turning each $200,000 coin into two $100,000 coins. At that point, they can each sell one coin to collect $100,000 per person. The individuals would lose half of their stake in the investment, but they would have an easy, traceable way to generate quick returns.

Of course, one of the investors could choose to buy tokens from the ones who want to sell. Eventually, one person could own the entire property. That level of flexibility is why so many real estate professionals find blockchain technology so interesting.

The Future of Blockchain in Residential and Commercial Real Estate

Blockchain technology has been used since the late 2000s. It has evolved considerably since then, and no one knows how it will change over the next several years. However, experts do know the potential of blockchain technology in industries like real estate.

More Accurate Records From Blockchain in Real Estate

Most lenders require borrowers to pay for title insurance when they purchase property. Title insurance helps protect lenders and buyers from ownership claims. If someone claims that they own the property and the seller didn’t have the right to sell it to you, the insurance covers legal costs.

Professionals already perform title and lien searches before finalizing contracts. Unfortunately, you don’t always find every piece of information you need to determine whether someone has an ownership claim.

Adding blockchains to real estate could change that. Consider what would happen when a developer builds a new home. The seller would create a block that is added to the blockchain, proving that the developer owns the property. When a buyer purchases the property, that information would be added to the blockchain. Several years from now, the owner might decide to sell the home to someone else. That exchange would also be placed into the blockchain.

With blockchain in real estate, you get a transparent view of ownership that starts with the building’s construction.

Blockchain Technology Enables Smart Contracts

The option to create smart contracts is one of the most exciting features of blockchain in real estate and other industries. Smart contracts are tiny applications that exist in the blockchain. These applications are built on if/then logic that says, “If X happens, then Y happens.” It automates business processes and helps ensure that everyone abides by the contract’s stipulations.

Smart contracts can have numerous uses in real estate. If you own a rental property, you could use a smart contract with instructions that say, “If the potential renter has a good credit score and passes a background check, they have the opportunity to pay a deposit.” From there, the instructions could say, “If the renter pays the deposit, they can move in within one week.” It’s a straightforward, logic-based system that doesn’t take up much of the property owner’s time.

Just like paper contracts, you can reuse smart contract templates to further streamline the process.

Everyone involved also benefits from having easy access to the rental agreement. Contracts never get lost because they’re distributed throughout a network of devices. If you ever encounter a dispute, you can pull up the agreement, read all the details, and determine whether someone has violated the contract.

Smart contracts can also play critical roles in buying and selling property by creating a step-by-step process for exchanging ownership as long as all parties involved hold up their ends of the agreement.

At this early stage of blockchain technology, it’s difficult to know how it will influence real estate. Consider that blockchains could also introduce investors to opportunities in the metaverse. Right now, virtual real estate feels like a novelty. A decade from now, though, early investors might find they made smart decisions by purchasing plots of land before the 3D internet became mainstream.

More Efficient, Affordable Funding Options

If you want to purchase a home or invest in commercial real estate, you might need to borrow money to complete the transaction. Getting approval from a broker can feel like a complicated, drawn-out process. They ask for documents so they can assess your risk level. Then, they might ask for more information. From the borrower’s perspective, the final decision doesn’t always seem like it’s based on logic. It’s a murky, secretive process that most people don’t look forward to.

Using more blockchain in real estate could make it easier and more affordable for buyers and investors to get the funding they need.

In some cases, buyers might find they can avoid traditional lending institutions like banks and credit unions. Blockchains were originally designed for exchanging digital currency, so there’s a good chance that platforms will create crowdfunding options that let a lot of investors offer money for loans. You wouldn’t have to get $500,000 approved by one broker. Instead, you might need your application approved by 5,000 investors willing to let you borrow $10,000 each. In exchange, they would receive interest or fees.

If you decide to use a traditional financial institution or a private broker, blockchain technology could improve the application approval process by making it more transparent and efficient. When you submit documents that prove your income, history of paying bills on time, and other factors that influence your approval and interest rate, that information becomes part of the blockchain. No one has to search for the documents because the information is all kept together as connected pieces of data.

You might even see greater transparency in how lenders make decisions. That’s especially true of lenders that use smart contracts that automate processes and base decisions on data.

Are There Negative Consequences to Blockchain in Real Estate?

Most criticisms of blockchain technology focus on cryptocurrencies. When it comes to bitcoin, many people worry about the massive amount of energy needed to generate new coins. Generating bitcoin requires about 150 terawatt-hours of electricity per year. That’s approximately the same amount of electricity consumed by Argentina, which has a population of 45 million people.

Not all blockchain uses have this problem, though. Bitcoin was designed so that only 21 million coins can ever exist. As more coins are produced, the mathematical equations that computers must solve to generate new ones become increasingly difficult. In other words, each new bitcoin requires slightly more power than the one before it. Eventually, bitcoin miners might abandon their role in the industry because the electricity needed to create a coin costs more than the value of the coin.

Blockchain in real estate doesn’t necessarily need to rely on this strategy. Instead, most of the ledgers could run in the backgrounds of computers, servers, and mobile devices already operating. The increased efficiency of accessing decentralized ledgers instead of relying on traditional databases might even mean blockchain in real estate lowers the amount of electricity consumed.

Other criticisms focus on the unknown factors of implementing a relatively new technology in real estate. Some people worry about blockchain’s security, accuracy, and accessibility. These are valid concerns because no one knows how blockchain technology will change over time. Currently, these issues don’t seem like big problems. As long as developers prioritize these potential issues, blockchain in real estate could revolutionize the industry without creating new challenges.

How ProspectNow Can Help You Succeed

ProspectNow is committed to giving professionals the data and tools they need to succeed in real estate. In 2021, ProspectNow launched Chainlink node on mainnet. The Chainlink node makes it possible for agents using blockchains in real estate to access accurate data about residential and commercial property in the ProspectNow database. 

Of course, you also benefit from other ProspectNow features, including predictive analytics driven by artificial intelligence and machine learning. With ProspectNow’s predictive analytics, you can identify off-market properties that will likely sell within the next 12 months. You also get access to accurate contact information, even when an LLC owns property that interests you.

Experience how ProspectNow can contribute to your success using blockchain in real estate by signing up for a free trial today!

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