Real estate tokenization is the process of anchoring rights to a property with one or multiple crypto tokens that exist in a decentralized database, also known as blockchain.

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Technically, real estate tokens are not different from non-fungible tokens (NFTs) and fungible tokens (cryptocurrencies), except that their value is backed by real-existing properties.

During tokenization, a token or a group of tokens can represent one of the following rights:

  • Ownership of the entire property;
  • Ownership of a portion of the property;
  • Stake in the organization that, in turn, owns the real estate;
  • Receipt of debt and interest backed by the real estate;
  • Receipt of profits from managing the property.

For instance, the last option is utilized in the operating model of Sabai Property, the flagship product of the Sabai Ecoverse project. When employing this approach, the investor doesn't become the direct owner of the real estate but has the right to receive profits from it.

This model comes with several advantages. The primary one is that the investor is not obligated to report the acquisition of the property, especially if such requirements are imposed by the laws of the jurisdiction in which they reside. From a legal standpoint, they own not the real estate itself but a contractual right to receive profits from it.

How Does Real Estate Tokenization Work?

Tokenization is a relatively new process in the real estate market, as well as in any other market. Therefore, there are currently no widely accepted standards and models, and each individual tokenization case may have its own peculiarities. However, there are several common stages in this process that can be identified:

Selection and Verification of the Property

The tokenization process begins with the selection of the property and negotiation of the acquisition price. Thorough verification of the legal and financial integrity of both the real estate and the transaction is also conducted at this stage. This is necessary to protect future investors from potential unforeseen risks.

Preparation of Legal Framework

At this stage, lawyers develop the necessary contracts and agreements to establish the legal foundation for tokenization. This step is particularly crucial, as tokenization must comply with both international standards and local laws.

Token Creation

After preparing the legal framework, a limited number of tokens is issued. Typically, these tokens are created on the basis of an existing blockchain, allowing the platform to avoid the resources needed for developing and maintaining its own network. For example, Sabai Property tokens are based on the popular Polygon blockchain, known for its high security and low transaction fees.

Investor Registration

Typically, this is followed by the submission of applications from investors who wish to acquire real estate tokens and their verification to ensure compliance with requirements. This process notably includes verifying the identity of investors.

Establishment of the Technical Foundation

Real estate tokenization involves the development of not only a legal framework but also a technical one. It should encompass a series of smart contracts—automated software algorithms that will handle a significant portion of real estate operations, such as distributing rental profits among investors.

Token Sale

After all preparatory stages are completed, the sale and distribution of tokens to previously registered investors take place. Usually, the sale price is fixed and determined by an appraiser based on the market value of the real estate being tokenized.

Formally, at this stage, the tokenization process is complete, as investors have received their tokens. However, a crucial aspect is the creation of the opportunity for secondary trading of tokens. Typically, secondary real estate transactions do not take place on open crypto exchanges but on the platform of the company that tokenized the property.

This is necessary to comply with legal norms, as new investors seeking to acquire tokens on the secondary market, just like the initial ones, must have completed identity verification.

At Sabai Property, the secondary market is presented both in the form of trading between platform users and in the form of instant token buyback by the platform itself at 80% of their market value. This dual solution significantly enhances the liquidity of real estate tokenized by Sabai Property.

Diving into Tokenization's Benefits

While tokenization is not yet widespread in the real estate sector, it is rapidly integrating into the industry due to the numerous advantages it offers compared to traditional real estate ownership.