It’s no secret that real estate ownership has been reserved for the upper class in the past. To get any type of ownership in real estate, you would need to plunk down tens or hundreds of thousands of dollars on an asset you may or may not know much about. If you didn’t have enough money to invest in an entire property, you wouldn’t be able to invest at all.
However, advancements in Web 3.0 technology, alongside tokenization in blockchain technology have made fractional ownership of properties a possibility, making it easy to buy and sell real estate, without owning a whole property. This article will explore fractional ownership of Real Estate powered by blockchain technology.
What Is Fractional Ownership?
Fractional ownership, also known as shared equity, has become popular in recent years. It is a tenet of tokenization, where multiple investors can purchase partial shares in an indivisible asset (such as a property), allowing for greater diversification than would be possible if each individual owner were required to pay the full amount to own a property.
When investing in a fractionalized asset, each investor holds their individual deeds with respect to their stake in the entire worth of the asset, as well as the potential income it generates (due to appreciation or dividends). This structure allows more people to participate in a single property without spending millions of dollars on their own. This is especially helpful for younger investors who might not have enough capital saved up to invest in a traditional piece of property but still want exposure to real estate. The same goes for older generations, who might not have time left on their side but still want access to appreciating assets. In short, fractional ownership can be used by anyone looking to invest in real estate with no barriers preventing them from doing so.
How Blockchain Helps With Fractional Ownership Of Real Estate
The blockchain has been called irreversible, secure, and an enormously big deal. With its uses expanding far beyond cryptocurrency, it is being used to facilitate fractional real estate ownership through decentralized ledgers.
The blockchain is an incorruptible digital ledger that records information in a distributed network instead of on one central server. Because transactions are recorded in chronological order, they cannot be tampered with or changed; they are completely transparent. Hence, this transparency can be used to document transactions without expensive third-party verification; therefore, with blockchain technology assets' history, including sales, purchases, and transfers can easily be tracked. Hence, individuals can easily estimate the value and demand of an asset on-chain.
Blockchain technology also allows for improved efficiency and accuracy by eliminating costly intermediaries (such as escrow agents), since transactions are approved with smart contracts that automatically trigger, as long as a set criterion is met; hence, buyers and sellers of Real Estate will incur smaller transaction fees.
Blockchain security is optimal for recording property titles and other types of assets where security matters most. Since there is no centralized database, hackers have no single target to attack; even if they penetrate one node, they still won't be able to corrupt a majority of data. In addition, blockchains are inherently resistant to data modification because once data has been written into a block, it becomes permanent and immutable.
Benefits Of Fractional Ownership Via Blockchain Technology
Reduce unnecessary third-party fees: Smart contracts are built into the assets themselves using cryptocurrency and blockchain technology. It's a significant advantage since smart contracts allow the seller and buyer to save money on transaction costs that can easily be settled via smart contracts.
The open-source ledger of blockchain technology also allows the buyer to validate the seller's ownership and eliminates the requirement for the buyer to pay a title fee. In addition, the seller may use the same ledger to check the buyer's finances, which eliminates the requirement for an escrow account. Overall, removing unneeded intermediaries from the process might save tens of thousands of dollars on each transaction.
Accelerate the timeline of deals: With so many intermediaries and legal formalities, a real-estate deal might take weeks or months to complete. While the buyer's money is in escrow and the seller awaits the transfer, both sides are losing money. Smart contracts that regulate these transactions can speed up closings and enhance total cash flow for the economy. Contractors will start being paid sooner to remodel, which means they will buy materials faster, lumber yards will order more inventory, and so on.
Drawbacks Of Fractional Ownership
Lesser Control: One of the most significant drawbacks of fractional ownership is that you may not have as much control over the property as you would with sole ownership. For example, if you own a quarter share of a property, you would only have a say in 25% of the property's choices. This might be an issue if you disagree with the other owners on how to manage the property.
Selling May Be More Difficult Than Buying: Another disadvantage of fractional ownership is that selling your piece of the property might be more difficult than selling the entire property, especially if the asset isn't in high demand; hence, the little demand in the market may be more appealing to full properties instead of fractional shares. Hence, owners of fractions may need to accept a lower price than what their share is worth.
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