Real estate tokenization is a complex process. If you require help understanding what it is, how real estate tokenization can benefit you or your business, the risks involved and more, get help from experts in real estate tokenization.
Real estate tokenization has transformed how people invest in real estate. There is increased access to capital, a wider pool of investors, and a securely efficient way of handling real estate transactions regardless of size.
To understand real estate tokenization and what it can do for you or your business, it's important to understand blockchain technology from a legal standpoint. Tokenization is a complex innovation that requires legal expertise to enjoy all benefits while minimizing risk.
Luckily, Blockchain Lawyer has a real estate tokenization team that can do just that. We have the know-how and latest on tokenization across multiple industries. Contact us to understand all there is about tokenizing real estate, from the benefits to the different forms.
Definition of Real Estate Tokenization
Tokenization is a term broadly used to describe the transformation (transfer and storage) of something valuable via blockchain technology. Tokenizing real estate simply means creating digital shares of property using blockchain technology. The process involves transferring a percentage of real estate into tokens on the blockchain.
The term blockchain refers to a decentralized and distributed ledger whose storage is distributed across a vast network of computers. This makes it impossible to change, alter or delete transactions recorded on the blockchain. When the technology is used to maintain and store tokenized real estate (property), the security of such transactions increases tenfold.
Real estate tokenization makes it possible for traditional property/assets to have a digital representation. This comes with many benefits, such as increased investment opportunities, liquidity, and reselling opportunities. Besides tokenizing actual property, it is possible to tokenize debt interest on property and shares on property.
Examples of Real Estate Tokenization
Assuming you want to buy a house traditionally, you would be forced to buy an entire home. The typical process involves placing a down payment which can be 10% of the property value, and then securing a loan for the remaining 90% via a mortgage.
Using real estate tokenization, the 10% down payment you pay upfront gives you 10% property ownership. The 90% remaining is then tokenized to investors. In simple terms, it is possible to buy a portion of a home, and the other portion is tradable to other investors. The other individuals would be mortgage lenders on your property, eliminating the need for banks to provide mortgage loans.
This process increases access to capital and investments in assets/property that are typically out of reach. In simple terms, anyone can be a mortgage lender through real estate tokenization.
What Are the Advantages of Real Estate Tokenization?
The main pros of tokenizing real estate include:
- Increased access to real estate: Tokenization makes it possible for every investor to participate in real estate property that is traditionally reserved for a few.
- Lower cost of transitions: Most real estate deals have been reserved for institutional investors in the past, given the high cost of capital and fees. Tokenization reduces transaction costs significantly.
- More access to capital: By opening the real estate industry to everyone including “small" investors, access to capital increases which is great for the industry.
- Quicker transactions: Benefits like increased access to capital reduces the transaction time for real estate investments.
- Tokenization beyond physical assets: Besides property, it is possible to tokenize ownership interests, company equity, and more.
How Is Real Estate Tokenization Done?
Step 1: Select the Real Estate
The first step is selecting the property to be tokenized. This is done by the person or entity seeking tokenization. As mentioned above, property and other non-physical assets like debt interest and ownership shares can be tokenized.
Step 2: Legal and Regulatory Requirements/Compliance
Once the property is identified, the next step is meeting the legal and regulatory requirements relating to the project. There may be registration and disclosure obligations that must be met. The terms of tokenization must also be agreed upon.
Security token offerings (STOs) are the most likely “vehicles" for tokenization. They mention the real estate in question, how it will be divided, and other details such as storage on the blockchain. Issuers also need to select their preferred blockchain network and other related details.
Step 3: Creating the Token and Plan
Once tokenization requirements are met, the token should be created. A plan should also be developed and issued to investors. It should have details like interest to be earned, liquidity details, secondary market trading, and more.
Step 4: Issuing Tokenized Real Estate
The last step is issuing the tokenized real estate. Those who take up the offer own a part of the underlying asset.
The Role of an Attorney in Real Estate Tokenization
You need a team of real estate tokenization attorneys and consultants experienced in blockchain and tokenization to guide you through technical and legal requirements. Contact us today for questions about any tokenization issues.
Since real estate tokenization utilizes blockchain technology, you should be aware of the federal regulations affecting such technologies. Real estate tokens can qualify as property subject to specific federal laws. Understanding and complying with such laws is critical to avoiding federal investigations and enforcement actions.
Tokenization offers greater investment opportunities that can be outside the control of centralized regulations. However, federal agencies have increased scrutiny on individuals and entities using blockchain-related technology. Before buying tokenized real estate or issuing real estate tokens, get legal counsel.
Blockchain Lawyer attorneys and consultants understand everything on the current regulatory landscape on real estate tokenization. We understand the benefits and risks of such investment opportunities for individuals and businesses. Call us today and get a free phone consultation.