Cryptocurrency, a digital form of money, has affected our daily lives and our global economy in incredibly impactful ways. From buying goods and services online from around the world, to trading various types of cryptocurrency just like traditional stocks, this technological phenomenon continues to become part of more and more industries.
All this digital money needs to be kept track of, otherwise the whole concept would collapse. That’s where Blockchain comes in. Not only is it the backbone of cryptocurrency, the nature of its technology is being applied in new areas at a rapid rate, including the commercial real estate industry.
What Is Blockchain?
Block chain technology essentially serves as a traditional bank ledger for modern cryptocurrency. Record keeping is critical to financial transactions, and blockchain serves as a public and permanent online ledger that tracks digital payments like buying, selling and trading.
This permanent ledger of transactions is instantly distributed across a network of computers connected to the blockchain. Why is this important? It allows for the record of all transactions to be publicly available to everyone and stored in multiple locations all at once. This, in turn, creates a sense of transparency and security which is essentially impossible to hack.
One example of blockchain technology in action is a Bitcoin block. The block includes Bitcoin information like the sender, the receiver, and the number of Bitcoins being transferred. Having this information in a safe, public, unhackable space in the form of a digital record has infinite applications for business transactions that require a safe, secure, trackable, and recordable way to send funds. Commercial real estate is one such business.
What Is Commercial Real Estate?
Commercial real estate (CRE) refers to retail centers, hotels, office buildings, and warehouses. Residential multi-family buildings with five or more separate living units are also considered commercial properties.
Commercial property transactions are complicated. They require sale transaction processes that involve multiple stakeholders like lenders, buyers, sellers, title companies, municipalities, and more. All the necessary paperwork for CRE transactions can be overwhelming.
Things like digital signing services and remote closing technologies have changed how CRE owners and buyers complete sales. By adding convenience to the sale transaction’s key processes, technology has made it easier than ever to buy and sell CRE.
How And Why Blockchain Works In Commercial Real Estate
Blockchain technology has recently made the move toward convenience in real estate to an entirely different level. The nature of the technology is ideally suited to the industry, offering transparency, automation, security, and more.
Unnecessary tasks and expenses can be eliminated with smart contracts (more on this in the next section). In addition, safety, security, speed, and trust are all enhanced with the database blockchain offers during commercial real estate transactions.
This may seem like a glimpse into the future, but it’s happening right now. Properties have already been bought and sold using Bitcoin and other cryptocurrencies. Some feel it can bring significant value, which means broader adaptation is likely.
Here, we will dive into these features and discuss how they revolutionize the commercial real estate industry, bringing significant potential for CRE industry disruption.
Safe, secure, transparent sales transactions are what Blockchain was built for, so the applications to CRE are easy to see. At the core of this application are Blockchain-based smart contracts.
These new-aged, technologically advanced solutions use a series of computer protocols that can facilitate, negotiate, document, and even enforce the terms of a contract. They do this all without using third-party paid intermediaries. These are traditionally part of every commercial real estate sale transaction, and nowadays, are perhaps unnecessary.
For example, in a traditional real estate transaction, you would usually need to take forms to a notary, wait for them to verify the accuracy of the contracts and signatures, and then pay them a fee. With a smart contract, all of the information needed (bank account information, identity verification information, etc.) is only available to authorized people and can be put into the smart contract without the use of a notary. The fewer industry participants you need to pay during property transactions, the more cost savings you can achieve.
Smart contracts can also enforce the rules governing a transaction digitally using if/then conditions within the code written into the technology. This means that if one condition is met, then another step in the process moves forward. For example, Blockchain technology could automatically release funds from a buyer to a seller only after the final loan approval and the property’s title is cleared.
This makes real estate sales faster, safer, and cheaper than traditional contracts. It’s no wonder Blockchain platform integration is disrupting long-held notions about commercial real estate sales transactions.
Commercial Real Estate Investing
Using a smart contract is just one of the existing inefficiencies in long-standing commercial real estate sale transaction processes. Using the Blockchain platform can eliminate such inefficiencies and change the real estate investing game as well.
One key feature of cryptocurrency and the platforms Blockchain supports is the ability for investments to be fractionalized. In traditional real estate, it could become cumbersome to buy a property with other people to split up the cost. Crypto is made for this, making price barriers for investors smaller with the ability to invest only a fraction of the usual amount needed to buy a CRE income property.
Blockchain adoption in real estate investment also improves the liquidity of real estate assets. Usually, you need to go through hiring a commercial agent, preparing the property for sale, and marketing it to possible buyers. With Blockchain technology, the easy transmission of funding and the rest of the components of the sale process, make these properties much easier and quicker to sell. This is great news if you are looking for some fast cash.
Blockchain technology provides an advanced database, something CRE lacks during the transaction process. Traditionally, information has been siloed, with the seller, buyer, title company, lender, and other participants in the transaction holding various pieces of information. When one person needs information from another, they would usually ask for and receive it via email.
With Blockchain technology, all the data is in one place where everyone who is permitted can access it. All relevant parties can even modify the database, with every action they take being monitored and transparently documented.
This is similar to current databases in CRE, like a multiple listing service (MLS). MLS is a web-based database of available properties that a group of commercial agents can access. Blockchain allows for this type of transparent information sharing beyond the property search and throughout the entire transaction.
Increased Security And Trust
CRE transactions require a great deal of trust. There are significant assets in the form of property and cash at stake, often between people who have never met before the transaction. This means trust is not only essential but also in short supply.
Blockchain technology creates more transparency for sensitive documents, signatures, and funds. It also uses digital identities that are connected to the real identities of all parties in a CRE transaction. This cuts down on the possibility of nefarious activities like phishing scams. Phishing scams occur when an outside third party impersonates a transaction member, like a title company, to receive funds or sensitive personal information.
When property and cash change hands, cybercriminals often use tactics like phishing scams to try and take advantage. When using blockchain, there are fewer parties involved and a secure record of everything going on, which means the success rate for cybercrimes diminishes.
The irreversible, transparent ledger of activities and funds Blockchain technology offers also increases trust in the integrity of the CRE process. Everything is recorded, nothing can be deleted or reversed, and all parties involved can see what's happening in real-time.
Speed When Executing Transactions
Speaking of real-time, that’s the speed of CRE transactions with Blockchain technology. There’s no waiting in between events, like what happens when a lender sends funds to a title company, with such funds sitting there until the title company sees them.
As a result, the loan being funded can trigger immediate transfer from the buyer to the seller with blockchain technology.
Summary: With Blockchain-Based Solutions In CRE, The Sky’s The Limit
Core CRE operations have remained the same for a very long time, but that’s changing with Blockchain. Traditionally property ownership, the property search process, property leasing, financing leasing and management, and all the other aspects of this industry have been mainly controlled by CRE companies and financial institutions. New technology like Blockchain is changing this.
Now, buyers and sellers can toss out many of the current systems and industry players and communicate directly to complete the sale of a property. The decision-making process is more consumer-centric, with buyers and sellers playing a more significant role than industry insiders.
Blockchain platforms drive transparency with a decentralized system and a distributed ledger. They increase safety in sale transactions and offer convenience and speed never seen before.The value proposition Blockchain brings in commercial real estate is clear, and it appears it will only continue to have a broader impact on the industry. Whether you are looking to grow your current real estate business or start a real estate business from scratch, understanding how Blockchain technology is changing the industry will set you up for success.