Why Lofty Uses Blockchain Technology to Democratize Real Estate Investing

People have asked us why Lofty uses a blockchain instead of traditional approaches to fractional real estate investing.

On the surface it may not seem like a blockchain is necessary for Lofty’s business model.

However, when you look under the hood, you’ll see that leveraging blockchain is necessary for Lofty to fulfill its mission to democratize real estate investing.

While it’s possible to fractionalize ownership in real estate without using a blockchain, the process is often cumbersome and creates more friction for investors.

The Old Way: Inefficiencies, Restrictions, Built for the Wealthy

The traditional way to achieve this is to simply slice up a holding entity like an LLC into as many fractions as desired and sell those fractional ownership interests to real estate investors.

This seems similar to what we do even when using blockchain, but here is where the commonality stops.

When a company is selling fractional ownership in the traditional way, it has to deal with a lot of paperwork.

No More Paperwork Please

‍

Every time someone buys an interest in an LLC the traditional way, both parties have to mutually sign a purchase agreement and then the company has to update the government by adding the new owner as a member in the underlying entity.

The reverse is true for selling one’s ownership stake as well. More paperwork needs to be signed and executed.

The investor’s name then has to be removed from the holding entity’s list of members.

This process not only takes time, but also requires that the company has a dedicated back office operations team – this also means the process costs money in the form of salaries.

Investors Ultimately Pay for Back Office Operations

‍

The company now has two options:

It can either absorb this increased cost or pass this cost onto its customers.

As one might guess, a for-profit company usually passes this cost onto its users.

Next, the company faces another dilemma, if it wants to make the investment affordable to the common investor, it would need to increase the number of interests in the holding entity.

However, this means an increase in the number of paperwork it has to deal with, which further inflates its back office operations. So, to combat this problem, the company would opt to reduce the number of available interests for purchase, which causes each unit interest to be higher priced.

This is why one often sees traditional fractional investing platforms requiring a minimum investment of $1,000 to $50,000.

High minimum investments aside, traditional platforms also have many restrictions and penalties tied to long minimum investment hold periods.

If an investor tries to sell quickly or early on in the investment, they’re often charged extensive fees for selling early or have some portion of their income deducted as a penalty.

This is all because the back office work related to the paperwork is costly. Imagine someone buying and selling out of positions hundreds of times a week.

That would be hundreds of extra back office tasks for just a single user.

There’s no shortage of new platforms using legacy approaches to real estate investment but with a fresh coat of paint.

Look closely, and you’ll find the inefficiencies, restrictions, and penalties noted above. As a result, most people remain priced out.

Are companies with these policies really “democratizing real estate investing” as they claim?

Legacy Approaches Box Out Small Investors

‍

The New Way: Actually Democratize Real Estate Investing for All

On the other hand, Lofty does not have a dedicated back office because we have put the ownership of the holding entity on the blockchain.

It’s a public ledger that anyone can check and verify.

As a result, you are able to publicly see which wallet owns which property and how much of that property that wallet owns.

This means that we never have to update the holding entity’s membership ourselves when investors purchase or sell their ownership stakes.

Instead, the Operating Agreements of the holding entity would point to a specific token on a specific blockchain for its ownership information.

If any government entity has valid claims to request ownership information beyond wallet addresses in the blockchain, we can output investor names associated with the wallets automatically for them.

The time and labor cost saved by Lofty, without having to file any paperwork for member transactions, means we get to pass these savings onto our users.

This is one of the main reasons that we’re able to let anyone purchase ownership in real estate for as little as $50 USD, as well as letting them buy and sell as frequently as they’d like without any penalties or high transaction costs.

At Lofty, we believe this truly “democratizes real estate investing” and it’s all thanks to the use of a blockchain.

Lofty’s Marketplace Gives You Control

‍

The other reason why Lofty uses blockchain is for governance purposes.

Other companies that fractionalize real estate for investors operate much more like a REIT or a private real estate fund.

Investors give these companies money, and then these funds are allocated either to a basket of properties or multiple individual properties, and the investor receives a pro-rata portion of the returns.

However, in this model the investor is just a silent partner.

They do not get to decide on how the properties are managed, who they’re managed by, or when the properties should be sold.

Some companies don’t even allow their users to dictate which specific properties they can invest into.

Instead, the funds are distributed equally amongst all properties in a portfolio, even if the investor may only like and want to invest in a subset of the portfolio.

Lofty is fundamentally different.

We are a marketplace, which means we simply connect buyers and sellers of real estate. We’re not a fund or a REIT, which means we do not own or manage any of the properties on our marketplace.

Instead, investors in the underlying properties manage their own properties through our governance program, where one ownership token in a property equals one vote in that property’s governance.

Each property has a professional 3rd party property management company that works for the investors and handles repairs, finding tenants, and more –– all based on the investors’ preferences.

Our approach allows investors maximum freedom; they decide on which specific property to invest in, how much to invest, and how to manage that property after they become a part owner.

They’re the only one that can make management decisions regarding how the properties are run and operated, including when and how to perform maintenance, which third party property managers should be in charge of the property, how much to charge for rent and when to increase it, and much more.

If this governance program were built without the use of a blockchain, it would require significantly more work and manual intervention from Lofty, which increases cost and sacrifices decentralization.

Running a governance vote would require Lofty to draft up a vote, then send it out to all of its users in a given property.

However, in order for the users to vote successfully, Lofty will need them to sign for the votes, in order to prove they’re actually the ones voting. The votes would then have to be manually counted by Lofty, acting as a representative, and then the results would be reported to the membership.

This creates more paperwork and operations load, which means the cost either has to be covered by Lofty or be passed onto users.

It also means that everyone has to implicitly trust Lofty to not alter the votes in any way. While we would never do this, the simple fact that the question can be asked means this process is inefficient.

Snapshot of The Lofty Governance Survey

‍

Simply put, we are able to solve these issues by using a blockchain for property ownership.

Owners can easily vote for their properties using their ownership tokens.

One token equals one vote and Lofty does not need to verify the person’s identity. As long as the person has the correct tokens in a wallet they control, it means they’re the rightful owner of the property.

This cuts out the paperwork and labor required, so we can build the governance platform without having to charge fees to our users for running and hosting the votes.

Additionally, no one needs to trust Lofty in conducting the votes, because all the votes will be on a chain.

The results are immutable and not up for debate. This is a more efficient process and shines a light on how effective the trustless nature of a blockchain can be if used correctly.

While current governance votes are not fully on chain yet — this will arrive with the rollout of our governance 2.0 initiative — this is what we’re building towards.

At the outset of building Lofty, we recognized the importance of future proofing our governance program, which is one more reason why we started with Lofty on a blockchain.

Before we launched our product, the team spent countless hours considering a variety of different business models and technologies to use.

Our goal has been and always will be to make real estate investing affordable and simple for as many people as possible-to truly democratize real estate investing.

After we realized all the legacy issues stated previously, we realized that in order to fulfill our mission completely, we had to ensure that the real estate investing process had as few middlemen as possible and had as low of a fee as possible, which was only achievable through the use of a blockchain for transactions, ownership records, and voting records.