This post is about rental real estate tokens that allow fractional ownership. we will analyse problems and solutions provided by real estate tokenization from a real estate investor prospective.
List of real estate tokens
| Name | Platform | Standard |
|---|---|---|
| contracoin | Ethereum | ERC-20 |
| home3 | Ethereum | ERC-20 |
| propbase | aptos | |
| propichain | Ethereum | ERC-20/ERC-721 |
| usp token | Ethereum | ERC-1400 |
Problem 1 : Paperwork - Legal complexity
Problem 2 : Limited liquidity
Problem 3 : Financial barrier to entry
Problem 4 : Centralized control - Limited transparency
Problem 5 : Costly and lenthy transaction
Problem 6 : Geographic limitations
Problem 7 : Diversification
Problem 8 : Payments - cross-border payments
Problem 1: Paperwork - Legal complexity
| Paperwork | Blockchain |
|---|---|
| Manual | digital |
| Bureaucracy | opportunity |
| human errors | automatic |
Title verification
Title verification is performed by title search companies and include verification of:
- deeds
- tax liens
- land records
- court judgments
Regulatory compliance
in the united states and under the Dodd–Frank Wall Street Reform and Consumer Protection Act, principal residence loans must go through a licensed mortgage originator.
Each country has it's language (korean, italian) and set of laws (national, local). in adition to that every lawyer has it's own contracts models resulting from his background, this create a lot of specific contexts that complicate reading, understanding and transaction.
Blockchain standards seeks a common ground for real estate transactions by using algorythms and database logical models.
Token standards
| Standard | Interchangeable | Name | |
|---|---|---|---|
| contracts | ERC-20 | yes | Fungible tokens |
| property ownership | ERC-721 | no | NFTs |
Propichain diagram show a possible transition from a contract drafting to database tables
Problem 2 : Limited liquidity
The question here is simple: will you sell your property with losses if you need cash urgently? That's a stressfull situation!
Real estate is less risky than stocks for example, because market prices are less volatile, but liquidity is a serious problem for owners in real estate, the transaction times are typicaly slow and sometimes very slow.
Tokenization gives access to increased liquidity, if you can trade your token into cash instantly through a crypto eschange, that's a significant change.
Problem 3 : Financial barrier to entry
| Paperwork | Blockchain |
|---|---|
| ownership | fractional ownership |
| fiat money | cryptocurrencies |
| finance | DeFi |
| cheapest $160k | starting from $1 |
Real estate rental is known for being a lucrative business providing owners with a confortable passive income. you can start small and invest in small and low cost property!!!! RIGHT? The truth is probably NO.
returns in real estate rental depend on the quality of the property, if you want to get a suficcient income to cover your hidden costs, you have to invest in high quality properties.
It's a financilal barrier, because few in the world can afford to buy a us$2M property. So here comes tokenization that allow fractional ownership, instead of investing in a cheap and low quality property, you can buy a fraction in a high quality real estate asset.
How a property is tokenized?
The real estate asset is held by a company called SPV or special purpose vehicules, the company shares are than represented by tokens in the blockchain
Problem 4 : Centralized control - Limited transparency
| Paperwork | Blockchain |
|---|---|
| centralized control | decentralized distributed ledger |
| gov land registeries | decentralized system |
| fraud | transparency |
transparency
property fraud through identity theft and forged documents are common in real estate transaction.
Decentralized distributed ledger
The questions here are:
- Who holds the transaction records?
- Who can view or modify the transaction records?
Actually a property records are held in (for example) 4 databases:
- Deeds database,
- Tax administration database,
- Government land registration database,
- Court judgments database,
Each of those database have records about the property, they are not related and they are under single central control by each organization. It's very clear that there is space for errors, mismatch or fraud.
For a tokenized property and from a rental real estate investor, all this problems are avoided by investing in the tokens that represent the special purpose vehicles company shares.
Problem 5 : Costly and lenthy transaction
| Paperwork | Blockchain |
|---|---|
| lenthy | fast |
| high costs | cheap |
efficiency
An investor will have to deal with numerous intermediaries:
- Brokers
- Lawyers
- Middleman
- Escrow agents
and there is always some hidden fees like:
- administrative fees
- inspection charges
- processing costs
- Notary costs
if you compare all of the above with buying a coin in a crypto exchange with a click of a botton, it is a huge short cut.
Problem 6 : Geographic limitations
Location is very important in real estate, the gap in returns is important from a city to an other and from a country to a other. economies can be subject to slow or sudden crisis like war or political unrest can turn a property useless. that's why upper middle class and wealthy investors are looking to diversify their portfolio and invest in several markets.
if transaction is complicated for locals investing in local real estate, no need to say that for foreigner, the international transaction process bring more complexity.
Problem 7 : Diversification
| Paperwork | Blockchain |
|---|---|
| single property | assets portfolio |
| 1 location | several markets |
There is many types of real estate:
- vacation
- residential
- offices
- industrial
- retail
- hotels
- healthcare
- rural investment
Those assets can have different locations, returns, risks. With tokenization you can access real estate portfolio diversification, if an asset category fail to deliver profitability in a specific category like offices for reasons like a pandemic, you can still balance your income with residential assets.
Problem 8 : Payments - cross-border payments
| Paperwork | Blockchain |
|---|---|
| complicated | automatically |
| fees | no cost |
Basicaly you can not open a bank account in some countries and if you live in country that have a chronic foreign trade dificit, the chances are that you will not be able to shop what you want online with your annual transfer ceiling. And even if it's not the case, the complicated banking process will take time and money from you.
Because of the high value of properties, the money transfer fees can cost a lot. for an international property buyer it's not really the right time, because there's already many other middlemans who are asking for their fees to be payed at the same time.
Transacting with crypto can facilitate a lot of complicated processes, the smart contract introduced by the blockchain will also help with rental payments automation and transparency
Conclusion:
The use of the decentralized distributed ledger concept and blockchain API is a significant evolution of the actual architecture, and there is a clear alternative to the schema of technologies like govtech, e-banking and proptech operating in silos.
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