As a partner of a real estate investment firm, the concept of tokenizing real estate is both intriguing and a source of exploration for what is possible in the future. The digitization of land deeds and other documents has brought improvements in this area. For example, in some countries of the world like the Philippines, in the not-too-distant past there was a case in which several city halls or town halls burned down their land ownership offices. was reported to have been used to create fake titles. Illegal sellers have even resold properties with false titles without the real owner’s knowledge.
There are already two potential sources of fraud. One is uncertainty about the legitimacy of land ownership. Second, there is no good way to identify the origin of land titles, as there is no paper trail of title transfer.
Enter the blockchain. The promise of blockchain is that all transactions, such as transfers of ownership, are recorded at the same time, synchronized across multiple global servers, and visible to everyone. If someone tries to impersonate a fake digital title, the system will detect it. This is because most other servers don’t have that bogus digital title in their records. While it is possible for him to have a 51% majority attack on every server, it would be very difficult, expensive and likely not worth it. It’s easy to detect, especially if the blockchain is already highly decentralized.
For example, if John has farmland tokenized on the blockchain, his ownership will be recorded as the latest status. When he decides to sell his property to Alex, the new transfer transaction is recorded on many servers around the world. When John mistakenly decides he wants to resell the land to Bill, the blockchain validator detects that Alex is already the new owner and rejects the transaction as bogus.
Contrast with traditional land titles. Bill is unaware that John was sold to Alex, so he may fall for John’s fraudulent schemes. With blockchain, software code (audited and open to the public) protects new buyers. You don’t have to believe only in the inherent goodness of human beings. Blockchain allows buyers and sellers to interact directly without a trusted third party.
Another possibility opened up by tokenization is the ability to partially own expensive property. While this is possible with traditional centralized land ownership, it is more cumbersome to do so. Fractional titles allow a group of friends to buy a property together, but if one (or a couple) of them changes their mind or needs money, they can opt out of traditional land titles. It’s easier to dynamically adjust group ownership instead of transferring. Every time the group ownership configuration changes, the latest status of the blockchain is reflected on all servers.
In the future, we could automate the use of smart contracts to do things like invalidating keys for people whose condo leases are no longer up-to-date. New tenants can exercise their right of entry into the property.
Real estate is often considered an illiquid asset class. It’s hard to buy and sell. However, tokenizing on the blockchain helps free up liquidity as it can be fractionated. This makes it affordable for many people who otherwise could not afford to buy a particular property, potentially creating more buyers and sellers.
It should be emphasized that blockchain does not completely eliminate fraud. The redundancy of simply keeping records of transactions makes it harder for people with evil motives to do their thing.