Can the blockchain improve the way real estate property is bought, sold, or rented? Does it actually have a problem needing a solution? Let’s take a look at the numbers.
Today, the real estate market is thriving. The total amount of houses sold solely in the US market in 2017 is more than 5.51 million, more than in any of the previous years. At the same time, the prices of real estate also climbed higher. In 2016 you could have bought a house for $233,800 on average. In 2017 that price was $247,200, and in 2018 that price was $273,800. That’s a five percent increase every year!
The prices rise because, according to experts, the US is underbuilt. There are 1-2 million fewer units than there should be based on population growth. We take the US as an example, but there’s the same situation in every country with a growing population – China, Germany, United Kingdom, India, Canada, etc.
Big problems need solutions
If people always need houses to live in, then the industry feels great, right? But in reality, there’s a lot of medium and large-scale problems that exist only because there wasn’t any appropriate technical solution for them, and the blockchain can become such a solution. It can help with:
- Too many middlemen involved in the process, high fees.
- The lack of transparency about the property objects.
- The difficulty of making property deals for inexperienced buyers.
We’ll look into each of these problems below.
While the rise of prices is good for real estate agents, who get 6% from each deal, it’s not so good for buyers and sellers who would rather prefer to eliminate these middlemen. How much would a buyer save if they don’t pay it? If an average house costs $273,800 today, then it’s $16,428 saved on agent fees; essentially a small fortune! This is where the blockchain comes in handy, allowing people to make deals directly between two parties in a trustless environment.
The transparency problem of the real estate market is the lack of info for buyers about the quality of the sold objects. Buyers often have to rely on databases of real estate agencies during the decision-making process and then decide just by looking at advertising booklets. They don’t have full information about its history, because these agencies have no incentive to share their databases with anyone, competitors or customers alike. That could also be a reason for the decline of investments in REITs (real estate investment trusts), funds that are similar to mutual funds, but specialized in real estate, which also lack transparency in their structure.
Deloitte, a global consulting firm, points out that the role of technology in the real estate market will grow over time. Its report “Blockchain for Real Estate,” states, “The transparency issue is a long-standing, pre-blockchain obstacle in the real estate sector, and remains a tough nut to crack,” but it believes that the situation will change over time, because competition will force everyone to become more transparent. Thus, the blockchain role will also increase.
The last of our three problems is the difficulty of accessing the market for inexperienced investors. Brian Wallace, CEO of NowSourcing, wrote that 71% of Americans wish that real estate investment was easier, and 66% of Americans believe flipping houses is a great way to make money. If only somebody would have given them an easy way to invest, all of this potential money could have blown into the real estate market.
There is already a bunch of attempts to create a blockchain-based real estate platform, and we’re going to mention a few here. But the main focus here is on Max Crowdfund, because it seems like a very promising project, having all the features needed for any kind of dealing with real estate – be it buying a house, trying to pick a cozy place to rent, or issuing tokenized shares for investors by real estate investment funds.
What is Max Crowdfund?
Max Crowdfund is a platform that potentially solves all real-estate-related tasks, which we can divide in two basic groups:
- Managing real estate funds – Creating them and buying and selling tokens of these funds, to make indirect investments in real estate, helping gather all the necessary documents to comply with regulations.
- Real estate property for retail investors – Listing, connecting buyers, and sellers, recording all necessary information about deals and the qualities of objects.
Why is the blockchain even needed for these tasks? It looks like it could be enough to use a traditional database and concentrate on marketing to make it popular. But that’s not why. The main point of using the blockchain here is to make it an immutable ledger that can’t be changed by anyone retrospectively, because in every open system with unbiased info and reviews there is always a high chance that there would be some dishonest participants who would want this unbiased information to be deleted if it doesn’t suit their agenda. Also, it makes Max Crowdfund less dependent on its development team because all activity on the platform should happen without its involvement, thus no legal troubles. We’ll see below why the blockchain, or more specifically the Ardor blockchain that Max Crowdfund is based on, is such a convenient instrument for real estate management.
Why does Max Crowdfund use Ardor instead of, for example, Ethereum? Being a Proof-of-Stake system, Ardor is able to potentially handle 100 transactions per second or maybe even more (although, this has yet to be tested), which is important for a potentially popular platform that Max Crowdfund could become, because global token trading requires high throughput, and let’s not forget that Ardor may also host other projects such as network capacity.
Real estate funds and their legal status
Let’s start with real estate funds. Why is Max Crowdfund‘s solution a big leap forward for small real estate companies? Currently, only the biggest real estate investment trusts are listed on large exchanges. It’s hard to get a REIT listed, which is why these funds often have difficulties with getting enough investments to maintain themselves. Max Crowdfund facilitates the creation of such funds, allowing any company related to real estate investments to issue its shares in the form of tokens, sell them as the shares in the mutual fund to any interested investors, or even pay dividends from the property income to its token holders. But wait, what about the regulators and the whole issue with security tokens? There’s a solution for this, too. The Ardor blockchain incorporates a complex system for issuing tokens that can be transferred only between verified accounts. Ardor allows for the creation of subchains with different security levels, for different types of investors.
- Clearance level 1 requires providing only basic identity information, and it allows one to buy MPG tokens, the native Max Crowdfund utility token, and most importantly, list, buy, sell, or rent a property.
- Clearance level 2 requires full KYC verification. Level 2 users can buy shares of funds listed on the platforms according to their corresponding jurisdictions. For example, German users would be able to buy shares of German-based funds.
- Clearance level 3 is for qualified investors. They should send documents, confirming their status, and they can invest in any funds they want to.
These security levels allow each user to gain access to only the necessary parts of the platform. When anybody needs to list his or her property for sale on Max Crowdfund, it serves like a message board, so there’s no need for the user to provide too much information, and the whole listing process should be fast. But if another user wants to invest his or her money, he/she must provide more information because the platform must be compliant with the law, hence all the required KYC and AML procedures, but this shouldn’t be a surprise for users.
In addition, Max Crowdfund develops an automated system, a template for each jurisdiction, that could be used to register a real estate fund with less paperwork than usual.
Using such a permissioned blockchain structure is a win-win for everyone: real estate funds can get a listing on potentially liquid trading exchanges, get new investors, and they can evade problems with the laws revolving around security, because all investors should pass KYC and AML procedures. Investors get an opportunity to invest their money in a transparent fund, with all information about its property objects recorded on the blockchain. The platform acts as a middleman in some instances, such as KYC and AML procedures, but in all other cases, especially data management, it stays decentralized. In the future, Max Crowdfund has the potential to become a big database with information about every property in any country.
Retail Real Estate Management
Private property management is another function of the Max Crowdfund platform. As we already know, to list or rent a property, its users only need a Clearance 1 Level. For each listing of property for sale or for rent, a certain amount of MPG tokens should be paid out. All tokens received as a fee by the platform will be burned; this will decrease the amount of tokens in circulation and increase the value of the remaining ones.
All events regarding selling, purchasing, renting, or even listing a property are recorded on the blockchain. Every ticket created on the platform, for example, an agreement between a tenant and a manager, is also recorded on blockchain. Also any user can leave a review of a property. Good or bad, it doesn’t matter, no one will be able to remove them.
It’s worth noting that it has a serious advantage against all real estate agencies – using Max Crowdfund, users shouldn’t have to pay a high agent fee. Every seller should be interested in leaving a detailed and honest description of a property, thus facilitating the choice for the buyer or tenant.
Initial Token Offering
To fund the development of the platform, Max Crowdfund is conducting an initial token offering (ITO). It’s the same thing as an ICO, but it offers utility tokens instead of coins and it shouldn’t have any problems with the SEC or similar institutions around the world.
The ITO of Max Crowdfund is a bit innovative. All gathered funds will be used to build a real estate portfolio and then the rent of these property objects will go to funding further development of the project. That’s a pretty smart way to finance the project, because projects usually tend to run out of money, for example, many projects that were raising funds in ETH at price of $800 six months ago now suffer from heavy losses, and it’s unclear how they could fund their development after such a drop.
On the contrary, real estate investments are pretty safe and conservative, and can allow the project to keep running for many years, not being dependant on a volatile crypto market. Max Crowdfund has plans to use a part of these profits from real estate to buy back tokens on the open market and burn them, thus decreasing the amount of tokens in circulation. The same goes for the MPG tokens received by the platform as a fee for various services.
A decentralized regulatory-compliant platform, which facilitates any kind of deals with real estate, has the necessary tools for funds and investors and can attract many serious companies and people when it goes live. But what about its competitors? The real estate market is a big one, and many developers would like to get a piece of this pie.
The Propy project has conducted its ICO in 2017. It proposed a registry for property purchases, that mirrors the official Land Registry, as well as a web-based listing platform. Their goal is to propose a blockchain-based property registration, with no need for additional paperwork. So far, there’s a slight use of smart contracts to send/receive documents, but most work is done the old-fashioned way: somebody has to deliver the documents to the official recording office, and it currently only works in US.
Leaseum Partners is a real estate investment firm from UK that has plans to raise $250 million during its closed ITO and buy commercial real estate in New York; about 6-10 buildings to be specific. Their tokens are considered as a security, thus mandating that they can only be sold to accredited investors. All Leaseum Partners investors will receive dividends from the acquired property. This project isn’t very complex: it’s an investment fund, and the tokens issued here only represent a share of ownership.
Harbor is a blockchain startup from San Francisco that is backed by the famous investor Peter Thiel. Currently, it has raised more than $40 million. Harbor develops its own token standard, R-Token (the Regulated Token), based on the ERC-20 protocol, but it has enforced regulatory compliance at the token level. This allows one to tokenize real estate and trade it freely, but it restricts trading to only verified accounts. However, it doesn’t have any marketplace to look for information about this traded real estate, being more about the process of tokenization and trading, not about choice and transparency.
Can we call Max Crowdfund a solid project with a serious potential? Definitely. It features everything related to real estate, from creating investment funds that can facilitate access to real estate investment for small retail investors, to the ordinary renting and selling of property. It could have a chance to be considered legal because its developers care about the most tricky part with blockchain investments – regulatory compliance.
Many of its competitors offer the same features, but none of them offer it all-in-one. Moreover, the project is being developed by two companies who have many properties under management, operate property funds and rent out property portfolios. As such they can transfer their own assets and funds first to ensure all is working like it should prior to opening the platform for third parties. If they can attract regular users who would fill its property objects database even further it would give it huge potential value and it could get some share of a market, and that would be pretty solid.