United States: Proptech: Is It The Future Of Real Estate?

Last Updated: July 31 2019
Article by Tony Alfonso

Following the significant impact that new technologies are having on the financial sector (commonly referred to as fintech), the real estate industry has now become a focus of disruptive technologies which are claiming to change how real estate is purchased, developed and sold. Players in the real estate industry have become increasingly focused on the impact that proptech will have on real estate. However, in order to determine the potential impact of proptech, the industry first needs to have a clear understanding of exactly what proptech means. Although proptech is often defined as real property technology or technology that is focused on the real estate industry, the definition could be expanded to refer to innovative technologies, processes, standards and uses which are transforming the real estate industry. By taking advantage of proptech, companies can make more profit, while also having a positive impact on the community.

One of the main concerns that many companies have is whether proptech is simply the latest buzz word or whether proptech will have a lasting impact on the industry. Therefore, many companies have not been early adopters in incorporating proptech into their businesses. Given the potential reputational risk associated with using new technologies and its potential effect on legacy systems, one can understand why real estate companies are cautious about adopting proptech. Additionally, blockchain and other new technologies raise concerns about the potential legal consequences which may result from adopting software that may not be fully compliant with existing legal requirements.

Digitizing real estate assets: The impact of blockchain

Blockchain is one of the most talked-about proptech technologies that will impact the real estate industry. Blockchain is a distributed ledger or database which contains a record of information, and, in relation to real estate, works as follows: once a transaction occurs and the parties have satisfied all conditions for completion of the transaction, it is then verified by the network of computers or nodes on the blockchain. If a transaction is verified by the network, then a new block for the transaction is added to the blockchain and everyone on the blockchain can view the block containing specific information related to the transaction.

The blockchain verifies transactions using complex cryptographic technology. A common industry misunderstanding about blockchain is that it suffers the same negative perceptions as cryptocurrencies, like bitcoin. Blockchain is not the same as bitcoin: it is only the technology that makes bitcoin and other cryptocurrencies work. There are many different potential uses of blockchain technology in the real estate industry that go well beyond the creation of tokens and other cryptocurrencies.

An important use of blockchain is the digitization of real estate assets, which can occur in two important ways. First, using blockchain, real estate owners can create part-ownership interests in real estate assets through issuance of tokens, which can then be sold to third parties. The tokens simply refer to a digital representation of a typical share in a company which is recorded on the blockchain. Once the tokens are created, the owner of the real estate asset can raise capital through the sale of the tokens using blockchain. All of the information related to the sale and ownership of the tokens is digitally recorded on the blockchain and preserved so that it is fully transparent and available to third parties. Additionally, creation of secondary markets for the sale of the real estate tokens can provide liquidity for owners of the tokens to easily sell tokens for one project and purchase tokens in another real estate asset. The process of digitizing the real estate assets through the creation and sale of tokens will provide real estate owners and developers with access to new domestic and global markets that were previously unavailable due to the barriers inherent in the traditional process of raising capital.

The next critical step in digitizing real estate assets relates to the deed recording process. This has historically been subject to a significant amount of counterparty risk, which is lessened by the title insurance industry which creates insurance to trust and certainty in real estate transactions. However, by moving towards a digital recording process, blockchain can verify real estate transactions and maintain an immutable and transparent record of the transfer of real property. This information will be available to all third parties who have access to the blockchain. In order to change the process as little as possible, the deed that is digitally recorded on the blockchain can be prepared using the same form and can be physically recorded in the current local recording office just as it is now. Once the deed is recorded it can then be digitally uploaded onto the blockchain. A critical aspect of digitizing the recording process will be to create a consensus of what constitutes a valid conveyance. However, digitally recording the transaction on the blockchain can be an important way of reducing counterparty risk. Capital markets and lenders rely heavily on title insurance in underwriting traditional acquisition and construction loans as well as in securitizations of mortgaged backed loans. Although the title insurance requirements will not completely be replaced by blockchain, perfecting the transfer of title to real property digitally using blockchain can create additional trust in the validity of real estate transactions.

Proptech: Next steps

Although proptech is positioned to help the real estate industry decrease costs and increase efficiency, technology alone is not sufficient to bring significant changes. Traditional real estate industry players and other stakeholders will need to shape the future of the industry through the thoughtful integration of proptech. Although many claim that proptech will disrupt the industry, the reality is that the promise of proptech is more likely to serve as a tool to help industry players create the future of real estate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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