A new trend that has come up recently is to tokenize real estate (or the company that owns the real estate) using blockchain tokens. Think of a blockchain as a redundant set of ledgers or records kept in many places digitally. Instead of a paper land title kept in a centralized safety deposit box or a safe, you can have your proof of ownership as a digital record, redundantly stored in many places. Thieves would need to alter the majority of the redundant digital records kept in thousands of servers globally, instead of just stealing one title from a centralized repository.
Let’s assume you have a large idle piece of land that you’d like to improve to make it commercially attractive. This improvement can be some type of construction like an access road to the property. One option to finance it is to take out a mortgage on the property, which means that the bank gives you a loan but takes your land title as an encumbered collateral just in case you default. This is the traditional way to do it, but it does take some time to arrange it.
It also becomes impractical if the loan you need is much smaller than the market value of the property, whose entire title you need to assign to the bank. A bank loan approval may take some time, and unfortunately you want the improvements done immediately for an expected commercial opportunity.
You could subdivide the land into subunits of ownership, so that people who can’t normally afford to buy acres of land can buy a smaller parcel. So if you want to subdivide your property into one hundred subunits, you can simply issue one hundred crypto tokens or NFTs as proof of ownership. Buyers of a token would then own one percent of that property, and so on. Though to be accurate, the token represents ownership in the holding company that owns the real estate.
You can also do this in the traditional world but it is harder. If you think about it, subdivisions are actually fractionalized large tracts of land that have been developed and chopped into cheaper smaller lots. But selling these lots might take some time, maybe measured in years. When real estate is tokenized as a security, the buyer and seller liquidity increases because the deal flow is already there in the markets.
What this does is convert your property, which used to be illiquid, into a liquid asset that can easily be traded on exchanges specially setup for this purpose. All transactions are recorded, so that the provenance of these ownership transfers are available for everyone to view.
Plus, since these tokens are securitized and approved by the SEC (or whatever government agency is in charge), these are regulated under the law. Reporting requirements are also clear and available. Because blockchain is transparent, buyer and seller activity is always visible online. It is always clear who owns what.
In addition, unlike the typical cryptos you hear about in the news, securitized tokens will require KYC/AML to identify each buyer as an investor. Unless the buyer fulfills this, the transaction will not be approved. This adds a layer of security that ensures that sellers do not sell to some unknown buyer in some remote part of the world who is anonymous.
Although traditional banks might not give you a mortgage if you do this, there are places called crypto exchanges that will gladly take your securitized token and allow you to take out loans in crypto, normally stablecoins, that you can use to finance whatever activity you need to do on the property. Likewise the holders of these securitized tokens can also loan these out, subject to regulations in each country.
While Baby Boomers and even Millennials might not be keen on this, most market observers agree that Gen Z is especially keen on crypto and blockchain. It is their future. These youngsters, raised on the idea of buying game assets, will increasingly want tokenized assets as they start to develop their fortunes. Plus when you fractionalize the ownership digitally, it becomes easier to sell because of the lower price points.
Slow deal flow is not a problem if you plan to live in that property, but if you are using it as an investment, the real estate is not liquid. Tokenizing the property reduces this problem.
While it might be hard for some to imagine a world without brokers, contract lawyers, and the like, this is what companies in the space are working on. Activities that used to require trusted third parties can now be done by code and so-called smart contracts.
Digitized tokenized assets like real estate on the blockchain are the future. You can now own a fraction of that European castle you’ve always dreamed of.