Why Hasn’t Real Estate Already Been Brought On-Chain?
Detailing what's required for a market to function.
Last week we discussed what inspired the creation of Theopetra—housing costs and rent spiraling out of control, limited ability for government to fix the problem, and an opportunity to use new technology to create solutions. This week we’re going to explore why previous attempts to apply blockchain solutions to real estate have fallen short and what will be required to succeed.
You may have seen some of the early attempts to bridge the gap between the worlds of real estate and cryptocurrency. Usually, these are heavy on blockchain buzzwords but light on innovative solutions that address the core problem. Most of these attempts fall into one of two categories, but both categories fall well short of changing the game.
The first broad category of “blockchain real estate solution” is where an organization/protocol purchases property—then divides ownership of the property into lots of small pieces and issues a token to represent those pieces of fractional ownership. The main problems with this approach are that 1) it doesn’t really achieve anything that doesn’t already exist, and 2) this arrangement meets the definition of a security and is subject to SEC oversight (read more here). The obvious downside of SEC oversight is that they can kill the project at a moment’s notice and assess penalties for noncompliance with securities law.
The second category, “leveraging the value of your crypto holdings through a middleman,” is focused on allowing homebuyers to realize the value of their cryptocurrency holdings without selling and converting to dollars. This is important because banks typically won’t consider cryptocurrency as assets or income for underwriting purposes. As a result, someone who made $1 million in crypto and wants to use their crypto to purchase a property would have to sell and then make the actual purchase using fiat currency. The organizations that fall in this category will typically step in and accept crypto as collateral and then make a cash offer for the property on the owner’s behalf. While this is a valuable service, it falls far short of actually integrating real estate ownership and blockchain technology and is only available to the already-wealthy.
What is Required to Succeed?
There are four things or building blocks needed to truly develop a functioning real estate market that leverages the advantages of blockchain technology:
An open marketplace for exchange of any properties
A service/method to acquire properties
The properties themselves
A party willing to lend capital to buyers
These four points are present in every successful market across products, geographies, and time. This is the framework that guides Theopetra’s development, and improving and/or creating these components is the way we will unlock the potential of combining real estate and crypto.
If we consider the current state of things, the main reason that we haven’t seen real estate brought on-chain is that existing attempts to do so have only addressed one or two of these four requirements for a successful market. Outside of fairly narrow circumstances, it’s still easier and more convenient to purchase real estate the old-fashioned way than using any solution incorporating crypto.
Currently, there is a lack of a functional real estate marketplace that allows for frictionless property acquisition. While the crypto space is typically heavily in favor of decentralization, this is an instance where the pendulum has swung too far in one direction, and the real estate market is too decentralized to be efficient. Try to purchase a house a few states away (even a few towns away) and you’ll quickly feel the drag. (You can find an overview here.) The problem is so severe that we currently pay agents up to 6% of the purchase price just for the service of navigating this fractured market!
The second key component is a service to assist in the acquisition of real estate. The current process is multi-layered and inefficient. Home purchasers have to deal with multiple gatekeepers (escrow companies, title companies, real estate agents) that each extract value from the process and have exactly zero incentive to improve the process. Theopetra will streamline this process for homebuyers by improving both costs and headaches with our suite of future products, which will seek to vertically integrate the buying process.
Third on the list is the “product,” which in this case is the real estate itself. Theopetra will be using the proceeds from its donations to support T-Homes via the $REAT flywheel. This partnership will provide the backbone to Theopetra’s value proposition as a valueless utility fastpass to access housing. Much more on this to come in future posts.
The last needed component is capital and entities willing to lend capital to purchasers. As T-Homes grows its RE holdings, early capital raises and loans will have to be done so through a major financial institution. While the phrase “Banks are Zeroes” is often found in crypto, the reality is that there is little-to-no present competition to supplant them as a provider of capital for most real estate purchases. Ultimately, we believe that this will be a net positive for all parties involved. Interaction with banks will help onboard legacy industry participants who are interested in safer real estate solutions.
The only way to improve this fractured environment and chip away at the inefficiency is to strip the problem down to the studs and approach it from the beginning. How will Theopetra create or develop the building blocks for a successful solution?
The short answer is that Theopetra will directly address the first two requirements—the marketplace and the service to manage real estate—and will partner with other entities who will bring utility into the Theopetra ecosystem.
There have been some previous attempts to merge real estate and aspects of crypto, but they tend to be one-dimensional and only address part of the problem
US securities law is a huge deterrent to any solution based on issuing a token to represent fractional real estate ownership. Following all current securities law is a top priority.
There are four key components or building blocks for a functioning marketplace, and all must be present for the market to succeed
Theopetra is working to address this problem in a holistic way to improve market efficiency and reclaim the middle-class dream of homeownership