Smart contracts real estate is gaining momentum as new ways are developed for investing in property and streamlining traditional functions.
What you will learn
Real estate can be exchanged as a non-fungible token.
Smart contracts enable fractionalized ownership of real estate.
A smart contract could allow someone to get royalties on secondary sales of a home.
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When most people think of NFTs, they imagine a funky avatar or a colorful piece of digital art. But non-fungible tokens are much more than a whacked-out profile picture. Today, NFTs are being used to trade real-world assets. Take your home, for example. Yes, smart contracts real estate is becoming a thing.
In 2021, the global real estate market was valued at $3.69 trillion. From 2022 to 2030, the market is expected to grow 5.2% a year. One of the largest global industries, the housing market is also one of the most complicated.
Buying, renting, selling, leasing, property development — real estate transactions are complex and sluggish. Mired with documents, broker fees, and agents, the housing market has a high barrier to entry with convoluted, time-consuming processes.
Blockchain networks, smart contracts, and NFTs are forging a new path for the real estate industry. Using real-world applications, we’ll explore in this article how smart contracts serve the growing blockchain-based real estate market.
Your house is not a digital image or a saved Tweet. It’s a real, tangible place where you eat breakfast each day. So how could you sell or rent it on a blockchain network?
Your house is a unique, unexchangeable item. In other words, it’s non-fungible. Tokenizing real estate assets, or any real-world item, means creating a digital receipt for it. Your house receives a fingerprint (a hash), a token name and symbol, and its information is stored with blockchain technology. That’s an NFT, a non-fungible token.
If you wanted to sell your now-tokenized home, you’d work with a buyer to create a smart contract of sale.
Smart contracts are digital contracts that execute “if/then” functions automatically. If you pay your rent on time, then your lease is renewed for the following month. If both parties agree and sign, then the settlement is paid out. If the seller receives payment, then ownership of the asset is automatically moved to the buyer.
Smart contracts and NFTs exist on the blockchain, meaning that they are held immutable through distributed ledger technology. The relevant parties build and design the document, and when it’s agreed to, the contract is publicly stored and accessible. In addition, it can't be tampered with.
Property ownership and other information can safely be stored on the blockchain, creating greater transparency for all interested parties. NFTs can consolidate all the data on renovations, transaction history, land registry, structural surveys, titles, and deeds for the properties. Instead of waiting for the buyer, seller, broker, or bank to give access to this information, people could reference this tool at any time.
With verified digital identities — for the buyer, the seller, and the property itself — payments can theoretically be as simple and speedy as a few clicks on the computer. From the weeks, months, or years of waiting for transaction finalization in traditional real estate, it could now occur in a few digital seconds.
Smart contracts are not immune to security threats or hacks. When choosing a vendor, choose one that protects its data’s cybersecurity through vulnerability scanners, security audits, and pentests, for example. Once transferred through a reliable vendor, this data is irrefutable proof of ownership. Fully transparent on the blockchain, data on the real estate asset are distributed and secure.
Because of smart contracts’ automatic execution, the fear surrounding title transfers is alleviated. Sellers don’t want to transfer the title until the payment is received in full. Buyers don’t want to provide full payment until the title is transferred. The traditional real estate industry uses payment brokers and notaries to mediate this process, lengthening the timeline of the sale and increasing costs for the transaction. Using smart contracts, this process is streamlined and transaction time and fees are reduced.
Beyond purchases, other tasks can be automated through smart contract use. Mortgage applications, real estate records, and other relevant data can be automatically uploaded and stored on the blockchain without interference or hassle.
Fractional ownership is one of the most exciting developments blockchain can offer the real estate market. By dividing a deed into multiple tokens for joint investors, owners can sell or trade fractions of ownership instead of their full ownership. This could decrease the high barrier to entry that plagues the real estate market, increase liquidity in the market, and simplify complicated investment plans for real estate assets.
Through fractional ownership, business partners could co-invest in their storefront, freelancers could buy their own office space in a coworking building, or newlyweds could draft joint mortgages for their new home.
Blockchain offers a trustworthy network in which to draft contracts, upload information, and digitize assets. By storing relevant legal documents, acting as a payment broker, even functioning as a listing agent, blockchain expedites and reduces fees in real estate management by removing middlemen.
Real estate agents do still have room to contribute to this blockchain-based system. They can still connect buyers and sellers, perhaps more quickly than ever. People will still need help finding the right home, negotiating prices, and forming contingency plans. Whoever first tokenizes the home, be it the owner, builder, agent, or company, could even include royalty fees for secondary sales in the smart contract of the home listing.
From the short-term rental market to commercial real estate, here’s how different companies are adapting to meet this new technology.
A real estate company based out of California, Propy offers property auctions on the blockchain. Its first NFT property sale was an apartment in Ukraine in 2021. The company says on its website that it has processed $4 billion in transactions for consumers and agents. As a homeowner, you can register your deed with property in exchange for their native token. This token is a DeFi asset and can be borrowed against, much like traditional borrowing against homes. Well suited for international sales, the Propy app allows for easy collaboration between sellers and buyers regardless of location. It also offers a program for realtors to become “Crypto Certified” and have an edge in their local market.
Renting or buying in NYC? PropertyClub began in 2018 and uses the blockchain for secure, tokenized transactions in the city. With over 10,000 listings, they offer services for all sides of property exchange, assisting with marketing and refined housing searches. For consumer convenience, they use a variety of cryptocurrencies like Bitcoin or their native coin.
Launching soon, Rent Peacefully will use Ethereum-based smart contracts to draft and validate rental lease arrangements. Each tenant and renter will have their own private blockchain key with which to sign rental agreements. That signature will be immutable and publicly visible in the Ethereum network. This system will handle maintenance requests, payment deposits, mediation, and arbitration.
Ideal for fractional ownership, Meridio (now Consensys) is another New York-based real estate company that caters to commercial property owners. By selling digital shares of real estate, Meridio connects property owners looking to partially liquidate with corporate or small-scale investors. By tokenizing real estate assets, Meridio can sell investors a share of real estate property for as little as $1,000. That would be impossible in existing systems. But with emerging technology around contract processes, the housing market will soon be more accessible than ever before.
For more information on smart contract use cases and new developments in blockchain technologies, follow Hedera’s Learning Center.