Commercial real estate investors know the investment process takes time. No matter how straightforward an investment may appear, investors must still perform their due diligence. Thorough site inspections, and well-researched environmental and social analysis are vital. Zoning concerns, applicable building codes, and property taxes must also be addressed. So, no wonder it can take months before an investment is finalized. But, does it have to?
What Is Blockchain?
Blockchain technology has the potential to disrupt the commercial real estate market. Although most often associated with cryptocurrencies, blockchain is a digital method for recording transactions and tracking assets – including commercial real estate. It is defined as a shared, immutable ledger that facilitates the process of buying and selling items of value.
Going back to basic accounting, a ledger acts as a central repository for all financial-related transactions for an organization. Each transaction is a separate entry in the ledger. Blockchain networks such as EXtrance’s online platform function as a ledger, recording transactional information across a distributed network of computers called nodes.
How Does It Work?
When information enters the network, it is recorded in a block on a node. The data block contains the time and sequence of a transaction along with information that securely links the block to the previous block. When the next block of data associated with the transaction enters the network, it is recorded on a node and linked to the previous block, strengthening the overall security of the data.
This implementation creates data blocks linked together in such a way that the chain cannot be altered. If an error occurs, a data block must be generated to correct the error. Blockchain does not allow changes to a previous block making it a single source of truth for any transaction. When this technology is applied to commercial real estate, it can result in:
- Increased Liquidity
- Smart Contracts
- No Go-Between
- Expedited Transactions
- Increased Transparency
- Reduced Costs
Integrating blockchain technology into commercial real estate can disrupt the market and create a competitive advantage for those organizations that embrace the technology.
1. Increased Liquidity
In the virtual world, tokens are a digital representation of ownership. Once an asset becomes a token, it can be bought and sold on the blockchain network. For example, an apartment complex has multiple investors. Each investor’s token contains the percentage of ownership in the complex. If investors want to sell, they can use their tokens.
EXtrance leverages blockchain technology to maximize liquidity. Instead of trying to locate potential buyers and go through the traditionally time-consuming process, investors can list the property on a blockchain network. Interested buyers can respond, and the transaction can complete in moments, not months. All the necessary documentation and required paperwork can be included in the transaction chain.
2. Smart Contracts
Blockchain does more than digitize documents. It enables the use of smart contracts where instructions are included in the block of data. The technology does not complete the transaction until the instructions are fulfilled. Using blockchain to create, authorize, and audit transactions means that multiple parties can participate in a transaction from anywhere in the world. With its level of transparency, blockchain minimizes the likelihood of disputes.
Smart contracts can also promote fractional ownership. With blockchain technology, multiple investors can participate in commercial property through tokenization of the asset’s value. As investors purchase fractions of commercial real estate, they are issued tokens equal to the value of their investment. These tokens become negotiable items of value within the blockchain network.
3. No Go-Between
Real estate transactions often involve a “go-between” or intermediary who adds to investment complexity. They can lengthen the process and add to the expense through commissions and fees. Using blockchain platforms enables buyers and sellers to negotiate directly. They can embed instructions that the technology can audit to ensure that all parties meet their contractual obligations before finalizing a transaction.
Blockchain can perform an escrow function. It can hold property titles until payment is made. Unlike escrow agencies, the technology can release the holds simultaneously, making for faster processing times. And, the technology doesn’t charge fees or commissions!
EXtrance’s investment platform uses strong contractual capabilities. Investors can draft, modify, and finalize binding contracts without fear of unauthorized manipulation. Its investment tracking features ensure an audit trail for all transactions.
4. Expedited Transactions
Eliminating intermediaries and automating processes means blockchain networks can process transactions faster than more conventional transaction-processing methods. Smart contracts and digitized documents keep critical information in a single chain, so they can be reviewed and approved quickly. There’s no need to have the paperwork go from one agency to the next which increases processing time. Tokenization makes transaction processing even faster by eliminating third-party involvement.
5. Reduced Costs
Automating financial processes reduces labor costs associated with commercial real estate transactions. Automation can reduce errors and improve efficiency. Using digitized documents eliminates duplication and printing costs. Courier services are no longer required. Fewer intermediaries reduce commissions and fees paid to third parties.
6. Increased Transparency
EXtrance used blockchain to provide the transparency that is often lacking in limited partnerships. All transaction-related data blocks are accessible by all parties involved in the transaction. There are no separate files or multiple sources of information. Everyone is working from the same set of documents.
This transparency leads to trust among entities that have no prior relationship. With this trust, parties engage in commercial real estate transactions that would have required an intermediary. Different parties are willing to conduct business with individuals they have never met because of the technology.
Disruption Capabilities of Blockchain Integration
Blockchain has the potential to change how real estate investments are made. It can change the investor’s journey from a lengthy process involving intermediaries to a swift process with only interested investors. The technology means more liquidity for investors along with more secure transactions.
The commercial real estate market only needs to look at the financial services sector to see the disruption blockchain technology can have. Major financial institutions such as JP Morgan Chase and Bank of America have found that blockchain helps deliver value to their investors. Early adopters see decentralized ledgers as providing faster payments and lowering fees.
Deloitte suggests that a blockchain-based infrastructure will change how global finance and trade operate. They envision a competitive landscape where blockchain adopters realize
- Greater efficiencies
- Lower costs
- New revenue opportunities
Those organizations that ignore the technology may find themselves struggling to meet market expectations.
Are You Ready for Disruption?
EXtrance’s blockchain platform enables investors to move quickly and securely. Without the need for intermediaries, individuals looking to invest in commercial real estate bypass fees and commissions without sacrificing control. If you are ready to invest in commercial real estate, we encourage you to contact EXtrance today.