If you are a blockchain and cryptocurrency enthusiast and stay up to date with the latest news in the web3 world, then you may have heard of the concept of asset tokens. And it’s not just limited to art and artists but also covers other areas like real estate. Real estate asset tokenization involves converting real estate assets into virtual real estate tokens, which can then be sold on the virtual marketplace. This is a faster and less expensive process with Omatech Web3 to track Web3’s practical application in the real estate industry!
However, there is more to what web3 real estate can offer. This article explores the scope and benefits of tokenization and web3 in real estate.
- Web3 and real estate
- How is web3 in real estate a superior alternative?
- Web3 in real estate: practical applications
- Benefits of tokenization of real estate properties
- Virtual real estate
Web3 and real estate
Web3 real estate unveils a new world of financial autonomy, transparency and asset ownership to people. Web3 technologies and concepts, like blockchain, NFTs, metaverse, and cryptocurrencies, can change the face of real estate. Web3 presents a decentralized ledger and open-source information management framework called blockchain for every type of transaction to be registered on. It streamlines data management and brings transparency, security and accuracy to the table.
The shift from web 2.0 to web3 marks technological advancements that involve the development of decentralized, readily accessible, permanent transaction ledgers, transparent ownership documentation and asset tokenization protocols. Such solutions and services built on web3 can improve and enhance the real estate domain far beyond its current capabilities. They also help investors prove ownership, estimate risk directly and coherently without external hindrances, and handle liquidity.
How is web3 in real estate a superior alternative?
Web3 in real estate proves handy in many ways due to its advantages over traditional real estate. Utilizing blockchain, NFTs and other web3 technologies, it establishes a decentralized ecosystem eliminating the need for third parties. This can tremendously reduce the extra cost investors spend on brokers, realtors and bankers. Every human intervention in a conventional real estate deal will be substituted by immutable codes that leave no room for negotiations or alterations. It is also devoid of tedious paperwork.
Web3 real estate is going to revolutionize traditional real estate investing in the following ways:
Blockchain-based smart contracts
A smart contract is a self-executing contract that defines the terms of an agreement between a buyer and a seller. These terms or conditions are represented by codes and are stored on distributed and decentralized blockchain networks. Registering agreements, offer sheets, letters of intent, and closing documents can all be turned into digitized smart contracts that are trackable and irreversible.
Smart contracts can remarkably speed up the whole transaction process by eliminating interventions by bankers, brokers, and lawyers.
Transparent and secure property listing services
Most available property listing services today are privately owned, and many do not even have a centralized database for cross-referencing. Besides, people still utilize old and inefficient methods to keep track of transactions and other records, which also necessitates that users pay massive subscription fees.
Nevertheless, relocating such property listing services to a decentralized blockchain-based server results in a uniform and secure database. Utilizing the Decentralized Finance (DeFi) services of web3, users can engage in unbiased investments wherein each transaction detail is immutably recorded and kept safe. It also ensures that no third party meddles with the database, inflates prices, or enters fraudulent information into the system.
Accessible property investment
The real estate infrastructure so far has been exclusionary and time-consuming. Whether a studio apartment or a commercial property, investing in real estate means involving multiple parties. Even before considering getting into real estate investments, you must ensure you have ample funds. However, blockchain technology makes real estate investments more approachable for interested people.
Leveraging the blockchain technology of web3, several people can together purchase the tokens of a specific property and co-own it. The tokenization feature of blockchain facilitates fractional or partial ownership of an asset, promoting higher liquidity in real estate. Even though fractionalization in real estate is nothing new, web3 streamlines the process and attracts a larger group of potential investors. Anyone can, thus, easily buy and sell their shares cheaper and faster.
Web3 in real estate: practical applications
The advantages of web3 real estate over traditional real estate are abundant. Web3 in real estate offers several use cases and practical applications, which are:
Property ownership through NFTs
Non-fungible tokens, or NFTs, are extremely popular nowadays. However, unlike what many think, applications of it are not limited to art and artists. They can also be efficiently used in real estate by tokenizing properties.
Although tokenizing real estate properties has a multitude of use cases, its primary use case is providing ownership rights. As each property is unique and cannot be traded or exchanged for another property, they are non-fungible and, thus, can be converted to a non-fungible token. These tokens can then be traded without the intervention of any rent-seeking third party. The record of the transactions is stored on the immutable blockchain ledger, which offers access to the legal documents indicating ownership. Unlike a traditional document, which can be stolen, manipulated, edited or even destroyed, a document stored on the blockchain is tamper-proof.
Large-scale property management companies often experience inefficient surveillance of their global portfolios, and several smaller transactions from different countries go overlooked. Web3 promotes secure data sharing and simplifies rental collections and remittances to property owners, enhancing operational efficiency.
Web3 in property management is a significant time and cost saver and promotes better decision-making by generating richer data. The underlying blockchain technology provides an individual version of verified information, real-time payment settlement, secure data sharing and immutable transaction monitoring.
Loan and mortgage securitization
Loan origination and underwriting are still unstandardized and depend mostly on paper documentation. The pen-and-paper method followed in the traditional real estate infrastructure raises several security concerns and scopes for data manipulation. Other common issues in the ecosystem include double pledging of assets, asset services based on outdated data and cash reconciliations across lifecycle events, often resulting in settlement delays that impact investor capital flow.
Loans and mortgages can be digitized utilizing web3. It can be programmed to contain appropriate data like ownership rights and loan payment history, diminishing the chances of outdated data. It helps improve future servicing decisions. Using smart contracts, payments can be collected and distributed to beneficiary holders and broadcast real-time updates to regulators. This streamlines lifecycle management and builds confidence in secondary markets by offering investors proof of asset performance.
Land and property registries
Land titles and property ownership records that rely on paper documentation are vulnerable to mismanagement, loss and fraud. Moreover, property transfers in traditional real estate demand several lengthy and costly legal procedures.
Web3 substitutes outdated paper documentation with digitally registered details on blockchain. The upside of recording data on the immutable ledger called blockchain is that it is decentralized, distributed and transparent. Thus, the data entered into a blockchain cannot be manipulated, deleted or lost, which ensures maximum security. Web3 in real estate also facilitates speedy peer-to-peer property transfers, thanks to the process of real estate asset tokenization.
Investor and tenant identity
Blockchain-based digital identities in web3 are gaining huge attention among multiple industries and domains. It is the same in real estate properties too. It streamlines background checks of tenants and investors via blockchain-based Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, reducing costs and increasing security.
Decentralized identities permit investors and clients to prove ownership of properties when creating required documents like credit history and proof of insurance or identity. Moreover, it enables anyone to produce essential documents without carrying them around.
Benefits of tokenization of real estate properties
In the world of blockchains, the process of generating a virtual token to represent a real-world property is referred to as tokenization. This allows people interested in real estate properties to engage in transactions virtually using tokens without the need for outdated and tedious paper documents. The created token represents the ownership of the asset it backs, a right to share in profits that stems from the usage of the asset, a debt interest that the asset acquires, an equity interest in a legal entity owning that asset and more.
Tokenization of real estate properties offers numerous advantages, such as
- Liquidity – The present real estate investments are mostly illiquid. Tokenizing real estate assets can make buying and selling properties easier.
- Less cost of entry – If a buyer lacks sufficient capital to purchase the whole real estate unit or token, they can buy fractional tokens, which cost less. Fractionalization is possible because the code underneath the token allows it to be subdivided.
- Standardized transactions – Transactions initiated by smart contracts in web3 leaves no room for negotiation. Smart contracts are standardized, wherein the terms are implemented automatically, decreasing transaction costs considerably.
- The global pool of investment – Tokenization makes the pool of potential investors global, as anyone with sufficient fund and an internet connection can engage in real estate investments worldwide.
Some of the use cases of real estate tokenization include:
With tokenization, you can purchase a token representing 100% ownership of a house or property worth, say, $200,000. However, fractionalization takes this one step further. Instead of one token representing the entire ownership, fractionalization allows the property value to be divided into separate chunks, say ten tokens worth 20,000 each. This means that people can now have fractional or micro-ownership of real estate.
Real estate investments in many countries require a minimum down payment percentage ranging from 5% to 20%. If a $1,000,000 real estate property has a 20% down payment, the buyer needs to produce $200,000. As it is a huge sum, investors often need to wait to gather the capital or have multiple investors pool their funds. With fractionalization, the down payment of $200,000 can be broken down into tokens worth $20,000 each, giving you real estate exposure in your investment portfolio.
Thus, fractional investment reduces the barrier to entry into real estate investment. What was once dominated by wealthy and corporate giants is made accessible to the masses via web3.
Trading tokens on exchanges
So, you can tokenize real estate, similar to owning shares and equities; now, what if you can trade these tokens on an exchange?
Selling a real estate property would, traditionally, take you a month to many months. However, if properties are converted to tokens, they can be seamlessly traded via exchanges offering liquidity as equities trading online. This liquidity allows investors or anyone to see the real-time value of a real estate asset. Moreover, since tokenization and its trading are done on the blockchain, it offers maximum transparency. Any real estate asset’s transaction history will be public information that can help you with due diligence.
With smart contracts, all accounting entries would correspond to the exchange of digital values, which are then recorded on the blockchain making the transfer visible and immutable. Thus, anything purchased on the blockchain increases trust and provides greater transparency.
Virtual real estate
Virtual or metaverse real estate is the next big thing in the real estate world. With tech giants and big firms competing to own metaverse lands, it is undoubtedly going to be a game changer, marking a massive shift to web3. Metaverse real estate involves different parcels of land in a virtual universe that people can buy, sell, trade or even rent. It is a huge investment opportunity for investors as metaverse lands are currently in high demand and might gain even more prominence in the times to come. A Citi GPS report states that the metaverse market can attract up to five billion users and has the potential to be worth $8-$13 trillion by 2030.
Metaverse real estate can be bought in popular platforms like the Sandbox, Decentraland and Somnium Space by paying in cryptocurrencies. People can buy the metaverse lands and customize them to their needs by building on them anything they wish or renting them to others. There are also metaverse rental spaces available, like the Metavesal, that anyone can rent to conduct metaverse meetings, functions and more.
Web3 in real estate solves the inefficiencies and inaccuracies of real estate, offering much faster and more efficient transactions. It diminishes the involvement of intermediaries like realtors, lawyers and banks in real estate transactions. Once a step of the process is complete, the next step is automatically triggered without human intervention, thanks to smart contracts, which can help make listings, payments and legal documents. As a result, investors can save significant money and time by reducing fees for these services and have smoother transactions.
Web3 is, thus, undoubtedly going to disrupt the real estate infrastructure and bring revolutionary changes. It can eliminate the unwanted and add the essentials to reduce the present entry barriers to real estate investment.
If you are ready to implement web3 in your real estate business, we are here to help you. Consult our blockchain and web3 experts and know the feasibility of your idea to make your business future-ready.