When we think about real estate, our minds immediately jump to an exhausting long period of excessive paperwork, legalities, third-party negotiation costs, and a slow process of transaction. Not to mention, our minds also get extra alerts for fraud and stealing. Therefore, we can’t help but wonder if there could be an easy way to do the buying and selling of property without taking the traditional route of outdated real estate business. If you also feel the same, then here we present how smart contracts can revolutionize the global real estate business. 

The Rise of Real Estate on Blockchain

According to recent studies, it has been found that an estimated $1.6 trillion is lost every year due to manual handling and an inaccurate traditional system of transactions in real estate. Therefore, experts in the financial area are exploring the possibility of smart contracts to tokenize the asset property. This unlocks a great potential for investors and property owners. In this blog post, we will take a deeper look into the role of smart contracts in real estate tokenization to streamline the transaction process and achieve enhanced security. 

Tokenization in Blockchain

When we talk about NFT, we do not simply point to its behavior of representing funky digital art but also its ability to represent real-world items such as land. NFT is a digital proof of the ownership of a specific piece of value that can be recorded, moved, or stored in blockchain. Now here comes the concept of fungible and nonfungible assets. 

For example, for a chunk of gold, you may create a fungible token and that can be transferred to as many people as you want. Considering the total value of all tokens will always represent the amount of gold in possession. On the other hand, if you own a property you may need to create a nonfungible token which is indivisible. These nonfungible tokens will be unique unlike the fungible tokens, which can be replaced by any token of the same value. The NFTs in this case serve as a digital certificate proving the ownership of an indivisible unique entity and can be deemed as the digital twin of that physical asset.

Smart Contracts in Real Estate

The power of self-executing smart contracts plays a crucial role in the tokenization of real-world assets. They can enforce the terms of the agreement between parties without involving any third-party interaction and form a high penalty for the violation of rules. Similar to other applications, real estate also uses the general concept of blockchain. Let’s give a little glance at the execution of smart contracts among real estate buyers and sellers. 

In this context, a smart contract will act as a protocol of transaction(marketplace), which warrants the correct execution of the agreement. Once all the requirements are set in a contract, it automatically conducts the deal.

In this example, Bob wants to sell his property, therefore he creates a bid for his property using a smart contract. The smart contract finds an appropriate match and links the buyer to the seller. It also digitizes the property and transfers the ownership of the property in exchange for the asset value of the property. The moment a smart contract is set, it remains immutable till the transaction has been recorded to the blockchain forever. 

Furthermore, smart contracts are quick and easy to handle without paying any extra fee, unlike intermediaries in traditional systems. It also eliminates all the threat factors of fraud and complexity by pushing every requirement to code. Recently it has been reported by Forbes that an anonymous buyer has paid $23 million, entirely in cryptocurrency, for a penthouse in Miami. The deal in estimation took less than 10 days. With such a huge value transaction, we could consider this an instant deal.

Now that we have a brief understanding of transaction flow in real estate, let’s dig a bit into the advantages of smart contracts in real estate and the value they add on a global level.

Advantages of Smart Contracts in Real Estate

1- No Intermediaries 

We all know for a fact that real estate transactions are incredibly costlier because of intermediaries. The closing deal always reaches a crazy value including all brokers, lawyers, and other involved individuals. This is where smart contracts show their magic. They replace the lengthy and tedious process of buying or selling a property using rules defined by code. A smart contract can remove the need to depend on intermediaries the constant back-and-forth interaction with banks and the long waiting period for mortgage approval. This in return reduces the cost of relying on banks and brokers every time a transaction takes place. 

2- Transparency and Security

In the real estate business, a significant value of financial assets and sensitive information is at stake. Any small mistake could lead to fraud or a cyber attack. However, if we take this system to blockchain we can easily leverage the cryptographic schemes of blockchain to ensure the security and integrity of transactions. This way we can mitigate the risk of fraud and ensure high security in property dealings. 

Not only security, but transparency is also a critical factor in the real estate world. Any opacity or misinformation could lead to mistrust and disputes among the parties. Since blockchain is a decentralized tamper-proof ledger, we can ensure that all the parties will have a consensus on the right information, transaction rules, and obligations. This way we can achieve high accountability among all the parties involved in an agreement. 

3- Easy Accessibility

Blockchain offers an alternative way for the complex process of property investments.  For example, projects like Parcl can help to gain customized exposure to real estate by investing in the location the buyers prefer. This becomes possible with the help of synthetic assets and smart contracts.

4- Cost 

By removing intermediaries and third parties, smart contracts can significantly reduce the costs associated with real estate transactions. By automating processes and streamlining agreements between parties, smart contracts eliminate the overhead costs related to manual paperwork. This reduction in expenses, including the smart contract audit cost, lowers the barrier for individuals to enter the market and explore opportunities in the real estate world.

5- Speed and Efficiency

The traditional system of real estate incorporates huge waiting periods caused by paperwork, negotiation periods, and legal work. Oftentimes this complex and lengthy period leads to inaccuracy and mistakes during dealing. However, with smart contracts tasks that are meant to take weeks if not months can be resolved in a matter of minutes. This significantly reduces the resources and time needed to reach a deal. Additionally, all the legal work, lease agreement, and investment dealing could be handled automatically by the predefined code, decreasing the chances of error during the deal. 

6- Improving Property Management

Property management is a tiring process that includes communication between tenants, lease renewal, maintenance of the property, and other related tasks. Smart contracts on blockchain can streamline all these processes by providing services like maintenance requests, and tenant communication. This reduces the management overhead and increases operating efficiency. 

7- Automating Rental Agreements 

Similar to property management, rental agreements also require the timely renewal of the lease and handling of renting payments and security deposits. With smart contracts all these tasks can be turned into programmable obligations and the payments can be triggered in the form of cryptocurrency. Smart contracts can also be utilized to file penalties in case of property damage. 

Smart Contracts Use Cases in Real Estate

Property Ownership Transfer

Traditional ways of property ownership are obsolete and create obscure communication between the buyer and seller. The sellers often feel insecure about the transfer of property before receiving the payment and similarly, the buyer feels hesitant about sending the money first. This creates a huge barrier to the transfer of real estate property. With smart contracts, we can mitigate the trust issues by encoding all the agreements to code form so that no party can fraud. Therefore, using smart contracts we are able to bring down the overall vagueness of the real estate business and create a seamless interaction between both parties. 

Real Estate Investments

The slow process of real estate transactions is a heavy blocker for real estate investments. For example, there is a property that is predicted to go up sometime. Hence, you might want to purchase the property for a short period of time and sell it immediately when the prices are high. However, the slow process of real estate could let you miss the opportunity to benefit from the high prices. 

With ‍the tokenized fractional ownership attribute of smart contracts, the investors can immediately buy or sell the property and make a huge margin of profit from it. 

Identity Management for Real Estate

In real estate, most of the fraud happens because of poor control of data privacy. The identity management system built on smart contracts can secure the private data of buyers and sellers such as emails, bank accounts, and contact information. The user can define, which information could be accessed by the other party and hence we can be assured of data privacy. 

Conclusion 

Smart contracts are transforming the real estate sector by reducing costs, enhancing transparency, and streamlining transactions. They eliminate intermediaries, boost security, and simplify property management, paving the way for faster and more efficient real estate deals.

At BlockApex, we specialize in smart contract auditing and development, ensuring your transactions are secure and seamless. Ready to revolutionize your real estate transactions? Discover how BlockApex can help you integrate smart contracts. Contact us today to get started!