The smart contracts concept is the new “thing,” the future, the revolution. Some businesses have already ridden the wave and are now reaping the benefits. The others are hesitant but curious to see what this type of pacing technology can do. In the meantime, the adoption of smart contracts is growing not only in Fintech but in other industries as well. One of the business niches soaking up Blockchain-based innovations the most is real estate.
Smart contracts in real estate haven’t yet become a common practice. However, the number of enterprises willing to try it out and win is growing rapidly. In this editorial, we’ve tried to gather the valid arguments for smart contract introduction in this industry and some of the most vivid success stories proving that tech innovations are for everybody and not just market moguls with multimillion budgets.
- What is a smart contract?
- How the real estate sector benefits from smart contracts adoption
- Examples of smart contracts in real estate business
- Bottom line
What is a smart contract?
Prior to diving into the topic of business advantages, we should spell out the concept of smart contracts for those unfamiliar with it. To keep it terse, a smart contract in real estate (just like in any other business) is a digital programmable counterpart of a well-known paper legal agreement. All the discussed terms are coded into an electronic protocol in a way that any taken action triggers the next step in an “if/then” algorithm.
Here’s how it works. Let’s say, two parties are willing to encase a two-way real estate purchase and sales transaction into a smart agreement. To de-risk the buyer and the seller, the protocol might automatically release funds exclusively if the correspondent land register is successfully added to the database. And until that happens and the discussed conditions have been met, the protocol will not permit the payment transfer.
If you want to know more about how to create a smart contract, check our editorial on this topic. And in this editorial, we will dig deeper into the specifics of utilizing smart contracts for real estate.
How the real estate sector benefits from smart contracts adoption
One of the first questions an entrepreneur might have is why to switch to smart contracts when classic legal agreements have been working perfectly fine for years. Yet, the number of assets the Blockchain-based innovation offers the real estate industry is more than impressive. Here are the most prominent ones.
One of the key benefits of Blockchain is its transparency. The combination of data immutability (can’t be altered in any way after its creation), visibility (every action taken is visible to all the participants), and crowd control (the Blockchain copy is stored on every computer of the relevant network) safeguard it.
Consequently, the history of all transactions is available for every network participant to review. It is impossible to hide the ownership history or asset alterations made.
Higher transaction speed
Real estate arrangements are known to be time-consuming. Transaction finalization may take weeks, months, and even years. A simple smart contract for real estate can eliminate the inconvenience. The red tape and the heel-dragging are replaced by precise and well-thought-out computerization. The transaction is executed automatically, making the process smooth for the potential investors and the property owners.
And if you want to find out more about how Blockchain works, check our editorial on this topic.
Due to the peer-to-peer nature of Blockchain, the real estate transactions processed on the network do not require mediators as traditional deals do. The parties don’t have to spend a pretty penny on an army of lawyers, notaries, and brokers. The number of necessary fees, commissions, and charges may also decrease.
Leveraging smart contracts for real estate helps save costs while giving the buyer and the seller more freedom as the affected partakers alone may determine the final terms of an agreement.
The option of fractional ownership is often critical to a real estate business. It lowers the investment barriers, simplifies the access to the asset, diversifies the investor’s portfolio, and brings other benefits along the way.
Smart contracts in real estate promote fractionalization as any asset can be tokenized and then divided into portions/segments that might be traded individually. At the same time, a smart contract can include more than two partakers (one buyer and one seller), and the number of investors is not strictly limited.
The global real estate market already has examples of solutions for fractionalized investment where the individuals are allowed to buy parts of shares worth USD 100 and more.
Real estate is known for its relatively low liquidity because of many market entry barriers, complicated outreach, difficult and time-consuming transacting, and other reasons.
The adoption of a smart contract for real estate can boost the assets’ liquidity as the transactions will no longer take months to complete, the fractional ownership will facilitate the trading mechanism, and the property will become accessible globally. Ergo, a business owner placing their bets on tokenization and smart contracts contributes to the higher liquidity of an asset.
Blockchain-based technology gains followers and admirers partly because of its impeccable security standards. The crowd control model mentioned earlier is combined with decentralization and data encryption. All of this ensures lower fraud risk and better security compared to traditional legal agreements.
It is not in reason to claim that any smart contract in real estate is immune to hacking. However, if an entrepreneur chooses an experienced IT vendor that sticks to the best security practices (e.g., pentests, security audit, vulnerability scanners, etc.), there will be nothing to worry about in terms of cybersecurity.
Another important aspect any entrepreneur would enjoy is improved backup, which is always important. The thing is, being Blockchain-based, smart contracts reproduce all transactions, so even if something happens with a singular device, the data will still be available via the network. So it’s literally impossible to lose those forever.
Examples of smart contracts in real estate business
Blockchain and smart contracts are perfectly fitting the real estate industry. IT professionals can spend hours describing all the perks that go with it. Still, the business owners want to see the state-of-the-art technology in action. Luckily, in 2022 there are plenty of success stories of businesses that have already given the smart contracts for real estate a try.
A Seattle-based company was founded back in 2017. The platform’s goal is to facilitate peer-to-peer transactions in the American real estate market by introducing smart contracts.
The parties willing to work out an agreement may use the platform to enact and maintain various types of transactions: property sale, purchase, and rent.
SMARTRealty works with different payment methods, including cryptocurrencies and fiat world currencies (USD and EUR). The currency chosen by the paying party is converted into the platform’s own tokens (RLTY) applied to the created contract.
For a smart contract in real estate developed by SMARTRealty to work properly, the partakers must discuss and agree upon all terms. The conditions that can be coded into an agreement may include but aren’t limited to:
- trade amount
- payment deadline
- monthly payment
- duration of a contract
- discounts and penalties
- security deposit
- contract auto-renew, etc.
Once all the terms are cleared and understood, SMARTRealty creates a smart contract that regulates the relationship between the parties. The completion of the variable (e.g., the final payment successfully received) coded into an agreement triggers the contract execution. The partakers may either renew the existing contract or create a new one if needed.
Propy, a company from California, is another example of how the concept of a smart contract for real estate can help industry professionals and individuals reach their goals when it comes to real property assets. It was founded in 2015 in Palo Alto (CA) and since then managed to create a tool that comes in handy for real estate professionals (brokers and agents).
The company utilizes smart contracts for real estate to streamline transaction management. ERC-20 smart contracts, PRO tokens, and Ethereum Blockchain help to record the property transaction data. As a result, all the parties involved in the real estate transaction spend less time discussing details, and coordinating efforts and are closing the deals faster.
And even though the SAAS solutions offered by the company can be considered a perfect fit solely for simpler B2C transactions, it still proves that a smart contract for real estate bring value and positive changes to business owners. And if an entrepreneur or an ambitious startupper requires more complex software, it is a reason to consider a custom Blockchain solution only an experienced dev services provider with a diverse portfolio can deliver.
What’s even more interesting, is that the first-ever smart contract-powered real estate asset transaction was enabled by Propy! It took place in 2017 and helped to sell an apartment in Kyiv (Ukraine) for USD 60 thousand.
The NY-based company launched a real estate marketplace that leverages Blockchain and smart contracts in real estate in 2018. PropertyClub would have been an ordinary website offering property in New York if it didn’t use an unconventional approach to customer interaction.
The marketplace utilizes Blockchain to ensure safe tokenized property exchange and to provide the active users with small crypto rewards for taking active actions (e.g., listings review).
A smart contract in real estate, in this case, is used to conduct digital transactions. To maximize the customers’ convenience the platform operates using a well-known Bitcoin and their own cryptocurrency called Property Club Coin (PPC).
This example is probably, the most interesting one. Mata Capital is a well-established European investment management brand. Since 2015 it grasped the challenge to grow into a company with EUR 1.200 million worth of real estate assets under management.
In 2020 the company partnered with an Ethereum software provider to wrap up a deal that will have a massive influence on the global real estate industry and tokenize more than EUR 350 million worth of assets.
Note that this isn’t the largest real estate tokenization. For example, in 2019, Liquefy announced the tokenization of a luxurious London hotel worth more than USD 600 million. Still, Mata Capital’s project remains one of the most prominent and influential.
To keep the whole process uninterrupted, secure, and hassle-free, the company used an asset management platform and took control over the development and audit of smart contracts for real estate.
Smart contracts adoption brought multiple advantages to the project:
- facilitated asset management processes automation
- helped to establish compliance requirements
- speeded up the KYC/AML confirmation
- simplify payment validation and transaction processing
Why is this case of leveraging the smart contract in real estate more important? Mainly because this is a perfect business case depicting institutional real estate market players successfully adopting Blockchain innovations. Besides, it proves that modern technology can be easy-to-use and can seamlessly bring enterprises and private investors together.
The introduction of a concept of a smart contract for real estate happened years ago. Blockchain technology is no longer a buzzword or a hypothetical magic wand granting the wishes of the chosen ones. In 2022 Blockchain-powered agreements have transformed into well-established and extremely useful tools the real estate market players can benefit from.
Increased transparency, cost-effectiveness, improved security, greater accuracy, clearer communication, and lack of intermediaries are among the most notable advantages any entrepreneur will appreciate.
As the situation in a global Blockchain market shows, smart contracts in real estate have dozens of use patterns and can be applied to B2B and B2C models alike.
If you’re considering the idea of smart contract adoption and incorporating it into your business, you need to obtain a reliable software development partner that will take care of the tech part. Light IT has more than 15 years of experience in the IT industry and will be glad to help you with any Blockchain-related task. All you need to do is to drop us a line and the Light IT experts will provide you with a free estimation for the custom software and a detailed cooperation plan based on your preferences, budget, and desired terms.