Real Estate's Limitations
An overview of the current hurdles that are found in real estate. This section is dedicated to the detailed discussion of why each of these pain points exist and how they impact us today.
Current Pain Points
Slow, expensive, and difficult cross-border transactions
Limited ability to create fractional ownership
Absence of real time data.
High Capital Requirements
I. Slow, Expensive, Difficult Cross-border Transactions
Due to lack of unified laws governing international real estate transactions across borders and other factors, investment in real estate across borders get increasing complicated. The most common of hurdles impeding effective cross-border real estate transactions are language barrier, cultural variation, taxation, lack of knowledge of the current real estate laws of the foreign country and absence of unclear familiarity with the foreign country. Sometimes these transactions require the incorporation of local companies or for tax reasons, a company in a third jurisdiction, and multiple agreements among several parties in multiple jurisdictions.
II. Limited Ability to Create Fractional Ownership
Real estate in its current form does not allow for the fractional ownership at scale. Fractional ownership implies that the ownership of the asset is split among individual shareholders who own the usage rights, income saring, and priority access to the property. The fractional owners share the deed of the property, not necessarily the time that you can use in the property. Fractional ownerships most commonly seen in vacation rentals and real estate projects that require investor capital. While some companies participate in a real estate syndicate that allows them to raise money for new ventures, they are unable to vastly split ownership due to regulations and the high cost of legal work to add people as limited partners.
III. Absence of Real Time Data
Real time data is an overlooked metric that has the ability to simplify the real estate process significantly. Real estate is currently traded on a private market and therefore the value of an asset is only assessed on an "as needed" basis. There is no current public marketplace that would require the need for a constant price discovery. This lack of transparency led to the development of tools like Zillow's Zestimate being used to determine a home's value. Though the formula contains complex data and machine learning to determine an accurate representation of the home, it's unfortunately not a reliable metric when it comes to predicting what the value of the home is.
The Zestimate is not an appraisal and it should be used as a starting point. We encourage buyers, sellers and homeowners to supplement the Zestimate with other research such as visiting the home, getting a professional appraisal of the home, or requesting a comparative market analysis (CMA) from a real estate agent.
IV. Large Capital Requirements
Transactions are often slowed when a significant pooling of capital (usually in the forms of debt and equity) is required. This is part of the reason why approval for financing a home takes so long. Banks do extensive checks on credit history and income verification to determine if they're making a safe investment. Even once the credit and income verifications are passed, a property classified as non-owner occupied requires a down payment of 25%-30% of the purchase price. With the median existing-home price for all housing types at $309,900 in January 2021, up 14.1% percent from a year ago. As real estate deals increase in size, and friends and family capital are not sufficient enough, private funds need to be raised from investors. The SEC has special regulations on the pooling of capital found in Rule 506(b) and Rule 506(c) under Reg D for which funds can only be raised by accredited investors (someone with at least $1M in net worth, or at least $200,000 in income ($300,000 with their spouse) for the last two years.). Larger real estate deals require much deeper pockets, pricing retail consumers out of investing in real estate.
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