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Thoughts on the impact of blockchain on the future of real estate transactions

February 25, 2020 by Daniel S. Gonzales 2 Comments

real estate investmentEarlier this month, I enjoyed the distinct pleasure of attending the ninth annual Real Estate and Law (REAL) Symposium  held at Stanford Law School.  The REAL Symposium is a joint program presented by the Real Property Law Section of the California Lawyers Association, which was formerly part of the State Bar of California, and Stanford Professionals in Real Estate (“SPIRE”), an alumni organization of approximately 3,000 members engaged in work in the real estate industry.  Each year, this gathering takes on some of the most meaningful and noteworthy questions facing real estate professionals today.

This year’s Symposium featured a panel discussion of one of the most promising, yet controversial and misunderstood, technologies to emerge in recent years—blockchain—and its potential impact on the business of real estate.  While the more sensational aspects of blockchain’s use with cryptocurrency (digital assets) have been fodder for the popular press over the years, it is still a tool that features practical, functional aspects with less glamorous, yet still important, benefits for the ways in which people will be able to do business in the future.  The blockchain panel enjoyed a lively discussion with Symposium attendees, shattering misconceptions and detailing the intricacies of the application of blockchain to real estate, particularly in two fields:  Title insurance and real estate investment.

Before proceeding, many of you may not be familiar with how blockchain works, despite its notoriety.  I find it useful to think of it a secure means of tracking transactions by the use of shared, verified ledgers among pseudonymous users.  Regardless of how you come to grips with understanding it, however, the key fact to remember is that blockchain is ultimately an automated record keeping system with features that allow users in a peer-to-peer network to transfer valuables with the confidence that their worth will be ascertainable and unmodifiable.

The title insurance industry would seem to be one that lends itself easily to this type of automation.  The traditional use of grantor/grantee indexes to track property titles, as well as the roles that human error and intentional wrongdoing have played in creating confusion in the chain of title through “wild deeds” and similar misadventures, appear ripe for the improvement that would be generated through the use of computational logic.  Indeed, First American and Old Republic, two of the largest title insurers in the country, have embarked on a joint effort to bring blockchain to their title insurance practices, as a way of making the process of recording and verifying real estate titles more efficient, self-evident, and secure.  Still, while some observers have speculated that blockchain will mean the end of the title insurance industry, others are more sanguine about the continued need for title insurers in the real estate market.

With regard to real estate investment, high acquisition costs of real property, illiquidity, and management complexities have served as barriers to entry in the market, discouraging many potential investors from direct ownership of real property.  I have written previously in this blog about the multiple challenges that face co-owners of real estate, especially when it comes to highly-appreciated property.  While real estate investment trusts (REITs) and Delaware Statutory Trusts, among other real estate investment vehicles, are passive investments and do not require active management, and have bridged the gap to some extent, these products (other than public REITs) remain illiquid and are held much less commonly than, for example, shares of stock.

With the advent of blockchain, however, many observers expect to see greater opportunities for low-barrier investment in real estate, as a result of the ease of transferring partial interests (“tokenization”) of real estate by secure online transactions.  There are a number of startup companies now in this space, and this sector is expected to continue to grow as familiarity with blockchain and its functions increases.  Ultimately, these type of investment transactions and the use of “smart contracts” in which performance and confirmation of performance operate automatically, are anticipated to have a significant impact on the real estate investment sphere.

Filed Under: investment opportunities, investment properties

Reader Interactions

Comments

  1. Bill Harrington says

    February 26, 2020 at 4:59 pm

    Daniel, I’d like to learn more about real estate “tokenization”. Sounds very interesting.
    Bill

    Reply
    • Daniel G. says

      May 18, 2020 at 8:53 am

      Thanks for the question, Bill. Tokenization is definitely more of a cutting edge type of investment, but it does hold promise as a way to invest in real estate while avoiding some of the more “hands on” aspects of ownership. It appears to still be evolving, which may increase your risk, so that is something to keep in mind also. If you haven’t done so already, you may want to explore the links provided in the article.

      Reply

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Helping you avoid risk, maximize profit, and protect your long term real estate appreciation

Mr. Gonzales is in private practice, providing representation, advice and counsel in complex real estate, corporate, and business transactions on behalf of public and private institutions, businesses, and individuals.

This material has been prepared by Daniel S. Gonzales for informational purposes only and does not constitute advertising, a solicitation, or legal advice. Neither delivery nor transmission of this material or the information contained herein is intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship. The reader should not rely upon this information for any purpose without seeking legal advice from a licensed attorney. The information contained in this material is provided only as general information and is not promised or guaranteed to be correct or complete. Daniel S. Gonzales expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this material.

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