Blockchain advocates have long touted the technology’s ability to disrupt entrenched business models. Now, several companies want to use it for real estate crowdfunding in a bid to circumvent the banks.
Bermuda-based Viva Network wants to exploit the blockchain’s ability to store records and transfer value quickly across international borders. “Viva Network is a platform that has developed a peer-to-peer version of the mortgage-backed security, known as the Fractional Mortgage Share (FMS),” said founder Nick Thomson.
Targeting Bermuda as its first market, the company would use local mortgage professionals to run “mortgage hubs” that would evaluate and underwrite mortgages. It would divide each mortgage into 100,000 FMS units that could then be listed on the company’s blockchain-based exchange. Investors would purchase an FMS using Viva’s blockchain-based VIVA tokens and would harvest principal and interest payments from the property’s owner each month.
The company is not licensed to provide mortgages for Canadians, but chief marketing officer Wilson Carter presents it as an opportunity for Canadian real estate investors. “How it would benefit Canadians is that they would be able to invest in high-interest, low-risk mortgage lending,” he said, pointing to other countries’ higher interest rates. Aside from Bermuda, he also pointed to Panama as a potential market.
In Dubai, Etherty is a blockchain platform in development that would enable real estate investors to own a portion of a property, said co-founder and CTO Adnan Naeem. The company is working with local real estate crowdfunding network Durise to extend its operations to international investors on the blockchain. However, Naeem sees a market beyond home-loan financing.
“The biggest customer base for us comes from people who are interested in development and construction projects,” said Naeem. “There is a large number of developers and realtors who are looking for an easier and quicker way to find investment for their projects, and crowdfunding seems to be the answer.”
He acknowledges new developers as a key market but hopes to take it to more established players, too. “Even the big developers are quite keen on the idea because it helps them to get from project plan to development a lot faster,” he said.
Experts are skeptical of these initiatives. David Goncalves, founding partner at Toronto-based mortgage broker the Vine Group, is also head of the finance centre for the Real Estate Investment Network, a membership-based network of real estate investors across Canada. Funds of this type would fall under the syndicated mortgage model, he said.
Syndicated mortgages, in which multiple parties invest in a single property, have come under increased regulatory scrutiny in Canada after several investment scandals. In 2017, a CBC investigation found that investors had lost hundreds of millions of dollars in syndicated loans arranged by Black Bear Homes.
In February this year, the Financial Services Commission of Ontario fined several companies a total of $1.1 million in connection with syndicated mortgages for which Fortress Real Developments was a developer or consultant. Fortress was not among those fined, but in April, the RCMP raided the company’s offices as part of an investigation into possible syndicated mortgage fraud.
On July 1, amendments to the Mortgage Brokerages, Lenders and Administrators Act in Ontario will introduce an investment cap. The FSCO is also transferring the regulation of these mortgages to the Ontario Securities Commission, and the CSA has proposed a nationwide framework for regulating these mortgages.
“This type of asset is being used for highly speculative, higher-risk transactions,” said Goncalves. “It sounds like it will be a great return for the investor, but there’s not a lot of conversation about the risk in the deal, how to get your money back, and what’s the exit strategy?”
Viva Network’s documents state that it will handle the repossession of properties and redistribution of funds in the event of a default, but John Andrew, real estate professor at Queen’s University and director of the Queens Real Estate Round Table, also worries about the potential risk in such deals. “I look at these and say this just increases my uncertainty and risk manyfold,” he said. “It’s solving a problem that doesn’t exist as a real estate investor.”
Another potential concern for investors could be the legitimacy of crypto-tokens under developing regulatory conditions in Canada. In August 2017, the Canada Securities Administrators issued a Staff Notice outlining its approach to initial coin offerings (ICOs), which are the sales of cryptographically-generated tokens to support a business. It would view many such offerings as securities, it said.
“In many cases, when the totality of the offering or arrangement is considered, the coins/tokens should properly be considered securities. In assessing whether or not securities laws apply, we will consider substance over form,” it added. “If an individual purchases coins/tokens whose value is tied to the future profits or success of a business, these will likely be considered securities.”
Carter told the Financial Post that Canadians “can participate in our ICO,” before emailing an amendment, calling it a “token generation event” instead. “The only way Canadians would be eligible to participate in our Token Generation Event is if they are approved via our KYC/AML due diligence and agree to and comply with all of the Terms and Conditions of the Token Generation Event,” he said.
Although Thomson has a beta product in Bermuda, the terms and conditions document calls Viva a proposed, undeveloped project, and adds that the tokens offer buyers no guaranteed use or rights. Those buying them “may never receive delivery of VIVA tokens and may lose the entire amount of the contribution made to the Company,” it adds. Nevertheless, Thompson has said publicly that these tokens are intended for trade on multiple cryptocurrency exchanges.
Etherty’s Naeem could not tell us whether the company considered its tokens as securities or subject to Canadian regulation, and the company did not respond to several subsequent queries on the matter.
For more traditional real estate investors, Andrew highlights REITS and real estate mutual funds as vehicles for those interested in real estate who do not have the capital to buy a property themselves. Investors can also find international opportunities in the conventional markets without venturing into crypto-tokens, he adds. “There’s always a fund. They may have to go the NYSE to find it, but there’s always a fund for every real estate niche out there.”
While some companies try to use the blockchain to court international real estate investors, others are focusing on driving efficiencies into mortgage brokers’ back-end processes, especially when conducted on an international basis. In May, REIN signed a deal with RESAAS, a company that offers cloud-based social platform for mortgage professionals. Under the deal, REIN will create a version of RESAAS’ blockchain-based referral system for REIN members.
The blockchain software is based on a system that RESAAS acquired along with real estate blockchain firm Real-Block in February. RESAAS CEO Tom Rossiter explains that mortgage brokers currently pay each other manually for referrals.
“There’s no solution for that right now. It’s sticky and inefficient,” he said. “We wanted to make it more sophisticated and efficient by adding details of the referral into a smart contract.” The Real-Block solution will enable real-estate professionals to pay each other for referrals, he said, adding that he hopes to make it easier for real estate professionals to compensate each other for referrals internationally.
The payment part launches this year, using a mixture of fiat currency, along with the Ether and Bitcoin cryptocurrencies. RESAAS plans to launch a token of its own next year.