Here's How Decentralization Is Changing Every Part Of The Real Estate Industry

The real estate industry has been booming in recent years, especially in the U.S. So much so in fact, that some are beginning to worry that we may well be on the precipice of a potential market crash fueled by overvaluation. In June of 2018, CoreLogic Inc. CLGX reported that more than half of US housing markets were considered to be “overvalued” in April. At the same time, there have been plenty of incorrect predictions of supposedly coming market crashes in the past and given the current boom, there’s a good chance that a potential “crash” is likely just a reduction of the rate of growth and prices to more normal levels. While the chances of an outright “crash” aren’t as likely as some fear mongers may predict, there are new advances in the real estate industry we’ve never seen before that may prove to be crucial in keeping it stable. The name of the game in 2017 and 2018 is decentralization, and here’s why.

Lending Process

Arguably one of the biggest disruptors in the real estate industry in a long time is the advent of peer-to-peer (P2P) lending. The concept of P2P lending on its own is nothing new, but involving the strategy for large purchases like a home (often the single largest purchase most consumers will ever make in their lifetime) is a game changer in many situations.

Consumers have a variety of choices in the P2P lending world when getting approved for a mortgage and they all tend to carry the same benefits (and drawbacks) over the traditional mortgage process. Because borrowers are borrowing from a group of lenders, not a traditional financial institution (read: bank), there are some great benefits including:

• P2P lenders typically approve people with lower credit scores
• Interest rates on P2P loans are often lower than those from a traditional lender
• Service fees are typically lower than those from traditional lenders

All of these benefits can be offered to consumers because of decentralization. P2P groups don’t have the same overhead costs that traditional lenders are burdened with, meaning lower service fees for borrowers. In addition, these P2P lending platforms are able to cut out the financial middleman (meaning cost savings for borrowers again) and because the lending strategy is often treated as a portfolio of mixed debt obligations, rather than individual loans, these lenders are looking for a range of creditworthy borrowers to balance risk and reward.

The combination of these different factors can mean good things for those looking to borrow; however, there are drawbacks attached as well. Those borrowing via P2P lending sources should know that the process may take longer than a traditional, centralized approach to lending (though certainly not always), and that the penalties and collection fees for those who don’t pay on time are typically steeper than traditional loan sources. For lenders there’s the obvious drawback of risk.

While there aren’t as many options as traditional loan sources, P2P lenders have been growing in popularity recently. SoFi is one example of a P2P lending platform that’s been tremendously successful in recent years. However, bringing the decentralization a step further, there are now blockchain-based initiatives creating P2P lending systems with no third-party controlling the process. Lendoit, a decentralized blockchain-based platform, is leveraging the the advantages of smart contracts to ensure a true P2P experience with no intermediaries required. Other examples include the widely-known ETHLend and SALT lending platforms as well.

Real Estate Data

Another section of the real estate industry often overlooked is the world of real estate data. Big data plays an ever-increasing role in the decision making process of not only institutional investors, but of individual buyers and sellers as well. However, the current systems in place for accessing, buying, and selling industry data are not efficient.

The Real Estate Standards Organization (RESO) is a not-for-profit standards trade organization that is working to change that. With the current data models in the real estate industry, there’s no interconnectability with the data collected. Because of that, accessing and using a diverse set of real estate data is increasingly difficult for investors, buyers, and sellers. RESO, which is decentralized in that it calls for open, consensus-based standards to be implemented is working towards fixing those problems.

Like the increase in P2P lending, there are also blockchain-based solutions coming to the real estate data industry. With the inherently decentralized nature of blockchain technology, it’s a perfect fit for the sector of the economy to develop a trustless platform that enables standardized data to be bought, sold, and provided within the industry. ReBloc one of the blockchain-based startups making that happen by creating a decentralized platform solving the current data issues and bottlenecks. ReBloc is crafting a marketplace for real estate industry data to not only be bought, sold, and accessed, but for data to be validated and checked for accuracy as well, all in a standardized format.

Transactions

Lastly, another major impact decentralization will have in real estate is in the transaction process. With the advent of smart contracts, blockchain technology is able to effectively facilitate the end of escrow as we know it. Rather than placing trust in a third-party, the entire process of receiving and releasing funds, along with important documentation and titles of ownership, can all be processed by an impartial, fully automated contract.

Matthew Murphy is the Global Vice President at Renren and with the “Forbes Real Estate Council,” he sees the implementation of smart contracts and decentralization in the title and funds aspect of the industry as a transformative power in 2018. According to Murphy:

“The blockchain does not require there to be trust between two parties to conduct business. Each user has a unique identity on the blockchain via cryptography, which means consumer financial information can be shared securely with other parties during transactions. One person can send funds to another person that won’t release until the transaction is formally completed….It makes information more accessible, cuts out middlemen and reduces the risk of fraud and theft.”

Future Implications

With decentralization, especially via blockchain technology, every step of the real estate process is ripe for disruption. Given the current pain points in the industry, serious wide scale implementation of various decentralized initiatives could radically transform the way business is conducted. In addition to providing trustless frameworks for P2P interactions, every step of the real estate buying, selling, and acquiring process is currently still victim to market inefficiencies, meaning greater expenses. With a decentralized approach, the market will be able to operate more efficiently and offer the best value for all parties involved.