As we embark on 2019, the crypto fever seems to have died down, but the question remains about whether or not the real estate industry will finally realize the potential of new technologies, such as distributed ledgers, blockchains, and tokens. The stage might be set for adoption of these alternative forms of ownership for the property industry. Although home sales are predicted to slow, Millennials as a whole are entering their home-purchasing age (on average, 29 years old). This creates numerous opportunities for the real estate industry to bring itself into the 21st century, taking advantage of entirely new generational expectations that technologies be leveraged in every aspect of life in order to increase convenience, efficiency, and access to markets. We are nearly a millennium on from the Domesday Book of William the Conqueror, and yet our real estate transactions are still pedantically recorded in essentially the same anachronistic way.
Using technology, we can invest in the development of a water well in a village in sub-Saharan Africa, yet we have trillions of dollars of investable real estate which is inaccessible to the majority of potential investors. Even something as simple as purchasing a house is an onerous exercise in paper-shuffling between parties. If blockchain and distributed ledger technology is to become as much a part of our property landscape as the internet has compared to fifteen years ago, then we are likely to see some big changes.
Recording Deeds and Titles on the Distributed Ledger
Distributed ledgers are perfectly suited to the application of recording real estate deeds and associated rights. Every detail of a piece of real estate can now be recorded, accurately, immutably, and securely in a digital format such as a blockchain which can then be easily accessed and shared. From the first recording of the land title until the last grantor’s possession, the property’s title can be accurately recorded. All the deeds, easements, servitudes, covenants, metes and bounds, surveys, plats, leasehold estates, riparian rights, and even future interests can all be stored in one place, in perpetuity. This would eliminate the need for Grantor-Grantee Indexes, dramatically reduce errors in deed recording and allow for nearly instantaneously title verification.
Don’t get me wrong, transferring all the existing records and chain of titles recorded in every recorder’s and register’s offices is a daunting task. But this process has already begun in many cities, with the scanning and digitizing of existing records. Some title claims may not be recorded in those existing records, as they fall outside the scope of recording acts (i.e., adverse possession, implied easements, oral boundary agreements, etc.) but this is precisely where utilizing the blockchain for these records would shine: by more easily allowing all interested parties to amend the blockchain with information relating to the property.
Tokenization of Real Estate Assets
The global real estate market is estimated to be valued at over $200 trillion, three times the global stock market (valued at just over $70 trillion), with approximately twenty percent of that value in residential properties in North America. Yet while nearly everyone has easy access to buy and sell equities in the stock market, the value of real estate assets has remained illiquid, locked-up and available only to those who have a sizeable amount of funds available to commit to an individual property. If the digital representation of ownership was possible through tokenization of ownership rights themselves, or of the equity or debt which is issued in order to fund the purchase of the real estate, those assets would be more easily transferable.
By digitizing an asset, it is much easier to issue ownership rights, record those rights, and buy and sell those rights—plus, the rights to that asset can be easily fractionalized. Thus, a developer who is seeking to purchase and redevelop a building for $5 million can now issue and sell tokens which represent fractional ownership of that building. Instead of one investor having to raise $5 million, the developer can have 100 investors purchase a token at $50,000 each without incurring much more administration costs.
This doesn’t mean that tokenization doesn’t create regulatory hurdles to jump. Since these offerings are seen as a security, firms are now specializing on building-in all of the necessary regulatory and compliance rules required by regulators, directly into the software code of the token itself. Depending on the type of the offer, this helps reduce the risk borne by the issuer, and ensures that only vetted and/or accredited investors are able to purchase the tokens (and also prevents the tokens from being sold before the expiration of a lockup period, or being sold to someone on a money-laundering watchlist, etc.). By reducing the barrier to entry for investors to gain access to the real estate asset market, and increasing the available pool of buyers of those assets, there is a tremendous opportunity to access an untapped source of capital and investors. Some real estate firms have already begun issuing tokens, such as Oxygen Hospitality, which issued a $10 million note in conjunction with their acquisition and redevelopment of a hotel property in Palm Springs.FOOTNOTE: Footnote
Closing on the Blockchain
We all know how time-consuming and laborious it is to purchase a property. Seemingly endless shuffling of documents back and forth, among countless parties, each one charging a fee and getting their piece of the pie. Real estate brokers, lawyers, title agents, title insurers, home inspectors, surveyors, escrow agents, mortgage brokers, notaries, and more, all have to review and approve the deed, certificates, and mortgage documents. While to outsiders this might appear to be nothing more than futile busy-work, those experienced in the real estate industry understand the importance of all these steps. But, just because these steps are important does not mean there isn’t a more efficient and secure way to perform them. We can now have the entire real estate purchase and sale process, and associated documentation, all recorded in one single, immutable, shareable, and secure blockchain “file.” Instead of a months-long paper shuffling exercise, all the parties involved can instantly see, in real-time, if certain requirements have been met by the other party, if documentation has been verified, funds approved, and the entire process completed. The closing process can be distilled into just a week or two, saving time and money for all—while providing security and transparency.
Finally, after nearly a millennium, we can move beyond the ancient method of recording title. This would help us tap into the value of real estate that has historically been out of reach for the average investor. I would also streamline the onerous closing process we all dread. Getting to a place where something as important as property ownership is recorded digitally is a long process, but the benefit of it outweighs the cost by a long shot.