RISKS FOR REAL ESTATE BUYERS DIVIDED THROUGH SMART CONTRACT APPLICATION

RISKS FOR REAL ESTATE BUYERS DIVIDED THROUGH SMART CONTRACT APPLICATION

RISKS FOR REAL ESTATE BUYERS DIVIDED THROUGH SMART CONTRACT APPLICATION

RISKS FOR REAL ESTATE BUYERS DIVIDED THROUGH SMART CONTRACT APPLICATION

Huỳnh Minh Quân

MSc, Faculty of Law – Saigon University

Nguyễn Thị Hồng Phước

PhD, Faculty of Law – Saigon University

ABSTRACT

The model of dividing real estate through blockchain technology and smart contracts is making progress in the real estate sector today, especially during a period when the real estate market is experiencing many fluctuations. This article studies the role of smart contract applications in the model of dividing real estate, the current situation of applying this model, as well as the legal risks for real estate buyers today related to this model and proposes recommendations for buyers.

Keywords: divided real estate, blockchain, smart contracts, real estate business, buyers

I. INTRODUCTION

Blockchain and smart contracts have become prominent keywords in the financial technology and real estate industries in recent years. The application of this technology to real estate transactions not only improves transparency and security but also increases efficiency and reduces costs. Globally, especially in advanced countries like the United States, the United Kingdom, and European nations, blockchain and smart contracts are gradually becoming indispensable in real estate transaction processes. Platforms like Propy and RealT have pioneered the use of blockchain technology to conduct online real estate transactions, from listing properties to payment and transfer of ownership. These companies have demonstrated that blockchain and smart contracts are not just theoretical concepts but practical solutions that can be widely implemented.

In Vietnam, although the legal framework and market awareness of this technology are still limited, some companies such as KardiaChain, Sky Mavis, and VBee have begun experimenting and implementing blockchain and smart contract applications in real estate transactions. These projects are gradually changing the way traditional real estate transactions are conducted, bringing many benefits to buyers and sellers. By allowing the division of property ownership into smaller shares, this model opens up investment opportunities for many people and provides significant advantages for real estate buyers. Smart contracts can be used as tools to connect investors to co-purchase real estate.

II. SMART CONTRACTS

To understand smart contracts, it is necessary to first understand their basic foundation: blockchain – a type of Distributed Ledger Technology (DLT). In a typical distributed ledger, data records are continuously stored in a ledger (Government, 2016). Blockchain, however, is designed as a chain of securely connected blocks, each containing a collection of transactions. Starting from the first block in the ledger, also known as the “Genesis block”, a new block is added to form a chain (Elcom, 2023). This chain results in a chronological record of transactions, using complex encryption to ensure data security and integrity. The blockchain ledger is considered the official record, with all transactions immutably stored in the ledger and replicated across all validating nodes.

Blockchain relies on secure and orderly data storage blocks, with the basic component being Merkle trees, named after computer scientist Ralph Merkle (1982). A Merkle tree is a tree-like data structure where every leaf node is labeled with the hash value of a data block, and every non-leaf node is labeled with the hash value of its child nodes. Merkle trees allow for efficient and secure verification of large data structures. They are used in many blockchain platforms such as Bitcoin and Ethereum to verify data integrity by traversing the tree from the Hash Root. Bitcoin was the first blockchain to implement Merkle trees, introduced by Satoshi Nakamoto in 2008 and launched in 2009.

Ethereum, introduced by Vitalik Buterin in 2013, is the platform for developing smart contract applications. Smart contracts, originating from Nick Szabo’s idea (1994), are programs that run on the blockchain, performing automatic functions without intermediaries.

Blockchain is a distributed database system where information is stored in blocks and linked together using encryption. Each block contains information about transactions and is connected to the previous block by a unique hash, forming a blockchain. The notable features of blockchain are high transparency, immutability, and security, as all information on the blockchain cannot be changed or deleted without the consensus of the entire network.

On Ethereum, smart contracts are accounts that can transact and enforce rules through code, cannot be deleted, and their interactions are immutable. Smart contracts are segments of code deployed on the blockchain, automatically executing the terms and conditions of the contract when predefined conditions are met. This reduces risks due to human factors and increases the transparency and efficiency of transactions.

III. APPLICATION OF SMART CONTRACTS IN THE REAL ESTATE SECTOR

In the real estate sector, handling a large number of complex and frequent transactions is required. Managing and executing these transactions not only consumes a lot of time but also incurs high costs and is prone to fraud risks. In this context, blockchain technology and smart contracts emerge as advanced solutions that enhance efficiency and transparency in real estate transactions.

Smart contracts allow for the automation of the entire real estate transaction process. By using programming code, the terms and conditions of the contract are clearly and transparently established. When the conditions are met, the smart contract will automatically execute without human intervention. This helps eliminate manual steps, minimize errors, and speed up transaction processing. Investors and real estate buyers can significantly save time and costs, allowing them to focus on other strategic activities.

Automating transaction processes through smart contracts not only reduces processing time but also helps cut costs related to intermediaries. In traditional real estate transactions, intermediaries such as lawyers, banks, and notaries often play important roles and incur high costs. Smart contracts can replace the roles of these intermediaries, reducing dependency and associated costs, helping to optimize profits for investors.

One of the significant benefits of smart contracts is their ability to control and prevent fraud in transactions. Thanks to the transparency and immutability of blockchain, all information and transactions are recorded clearly and publicly. This enhances trust and transparency between parties involved, while reducing the risk of disputes. Additionally, with automation, smart contracts ensure that terms and conditions are executed precisely according to the initial agreement, with no changes or illegal interventions.

The advent and application of smart contracts in the real estate industry mark a crucial turning point in modernizing and optimizing transaction processes. Real estate developers and businesses are increasingly aware of the potential and benefits that this technology brings. In the future, the widespread adoption of smart contracts will not only enhance efficiency and cost savings but also create a more transparent, secure, and reliable transaction environment.

IV. APPLICATION OF SMART CONTRACTS IN THE MODEL OF DIVIDED REAL ESTATE

Currently, with the solution of divided real estate, investors only need to spend a small, reasonable amount of capital to invest immediately, especially small investors and those who want to diversify their investment portfolios (Hayes, 2024). This helps reduce financial barriers, allowing ordinary people or new investors to participate in the real estate market more easily. Moreover, many professional investors want to diversify their portfolios by “putting many eggs in different baskets,” meaning investing in multiple units and properties simultaneously (Lĩnh, 2022). This helps minimize risks by allocating capital to various projects, optimizing profits, and ensuring the stability of investment portfolios. Blockchain can assist in dividing investment units through smart contracts.

Smart contracts are being used as investment tools with three main models: business cooperation contracts, co-ownership, and real estate investment funds (Tần, 2023). The common method is that businesses divide the value of a real estate asset (house, land plot) into thousands of parts and “tokenize” it to sell to many people. In fact, this is just fintech technology for capital mobilization in the form of “business cooperation contracts”. Investors do not own or have their names on the real estate, nor do they own shares (or stocks) of the company (Tần, 2023).

Currently, many real estate businesses have developed online trading applications to enable many people to connect and co-invest in real estate. These applications often allow users to participate in real estate projects by purchasing units of ownership rights or equivalent tokens on the blockchain platform. This increases liquidity, reduces investment risks, and expands the scope of investment participation for various users in the market.

In June 2024, VPS Securities partnered with Fnest to sell fractional ownership of apartments and villas to investors at a price of only 10,000 VND per share. This service is executed through VPS’s SmartOne application, and customers must be VPS investors to participate. Each property is valued by the business unit and converted into shares for primary investors in Fnest units. Each Fnest is equivalent to 10,000 VND. For example, an apartment valued at 10 billion VND would be equivalent to 1 million Fnest.

With this model, “anyone can invest with just 10,000 VND” without worrying about renting or selling the property, as the unit will collaborate with a management company to optimize operational efficiency. Rental income can also be distributed to investors monthly according to the proportion of shares owned. Accordingly, Fnest has listed nine types of real estate, including apartment buildings, shophouses, and villas in projects such as Garden City, Arden Park, Khai Sơn City… (Vnexpress, 2024).

Dividing real estate through blockchain technology (tokenizing fractional ownership for sale) and smart contracts can increase asset liquidity. Tokenizing real estate allows for fractional ownership of assets, thus reducing entry barriers and opening up opportunities for many people to participate in a market previously considered exclusive to large capital investors. Partial ownership of assets through tokenization is creating a new investment model, where anyone can own a small part of a large asset. Investors can easily buy and sell digital tokens, enhancing transaction flexibility and reducing capital idle time. This is particularly important in the traditional real estate market, which typically requires significant initial capital.

Fractional real estate can also help minimize management and operational costs. Smart contracts can automate asset management processes such as rental income, distribution of profits, and other incurred expenses. This helps optimize operations and increase returns for investors.

V. RISKS FOR REAL ESTATE BUYERS DIVIDED THROUGH SMART CONTRACT APPLICATIONS IN VIETNAM

  1. Legal Value of Smart Contracts in Vietnam

Currently, Vietnamese law does not have specific regulations to govern smart contracts. Smart contracts can be considered a type of contract; therefore, smart contracts are binding on the parties when they meet the requirements for (i) the validity of civil contracts; (ii) the validity of electronic contracts; and (iii) the validity of smart contracts.

Up to now, Vietnamese law has relatively comprehensive provisions to ensure the validity of transactions established by digital signatures; however, the legal value of smart contracts has not been clearly recognized in the Vietnamese legal system.

Therefore, if there are any legal issues related to smart contracts, the provisions on contracts in the Civil Code and relevant specialized laws (e.g., the Law on Electronic Transactions, the Law on Consumer Protection, the Law on Commerce…), precedents, and equitable principles will be applied to resolve them.

As a result, for real estate transactions using smart contracts, if disputes arise in practice, the first issue to consider is the legal value of this type of contract. Currently, regulating smart contracts can be implemented through contract law provisions, ensuring the resolution of arising disputes.

However, since this type of contract is quite commonly applied worldwide, and many countries have concretized legal provisions to directly regulate this type of contract, Vietnam cannot stand outside this trend.

Therefore, if possible, the Civil Code and some other documents regulating contracts should be amended in the future to include direct provisions for regulating this type of contract like other common contracts.

  1. Legal Risks of the Divided Real Estate Business Model through Smart Contract Applications

Currently, the application of smart contracts in the divided real estate model brings many benefits but also comes with potential risks for buyers. Applications that call for joint real estate purchases are currently just fintech technology for capital mobilization in the form of “business cooperation contracts” rather than real estate investment (VOV, 2021). The ownership of coins or tokens by many people does not equate to real estate ownership, as it does not include ownership and possession rights, particularly the right to dispose of the property. If there is a dispute or legal issue related to the real estate, it cannot be resolved because investors do not have the rights of possession, use, and disposition to handle related matters.

Currently, the 2023 Law on Real Estate Business does not have clear and specific regulations on the transaction and ownership of divided real estate through new technologies like Blockchain and smart contracts. This creates a legal gap, making these activities not tightly regulated and potentially causing legal disputes. Therefore, the legalization of this form in the future needs to be specific and clear in guiding documents because this investment trend is becoming quite common in Vietnam.

Another legal issue affecting the application of smart contracts in divided real estate transactions is the 2014 Law on Real Estate Business, which requires real estate business contracts to be made in writing. The law still mandates that these contracts comply with standard contract templates. Additionally, there are no provisions addressing or explaining electronic forms of contracts related to real estate business. Such regulations indicate that lawmakers have not yet boldly recognized contracts executed in forms other than traditional paper documents. This regulation directly obstructs transactions executed by smart contracts, as it cannot formalize the smart contract agreements between investors or brokers with customers (Tần, 2023).

Furthermore, buying and transferring real estate through the blockchain system will not register ownership for the buyer, and the buyer will not be issued a Land Use Rights Certificate, ownership rights of houses, or other assets attached to the land. Therefore, such transactions do not comply with the legal provisions on real estate sales, posing significant potential risks for investors under this model. In traditional real estate transactions, notarizing contracts helps confirm legal validity and protect the parties’ interests.

Using blockchain may lead to disputes over the legal validity of contracts during execution and issues with evidence and proof in dispute resolution. It is essential to recognize and supplement equivalent forms for real estate business contracts, where one party is a real estate business, to enhance investment efficiency and minimize risks related to contract value for new investment forms on digital platforms—a current need of the real estate market in the 4.0 era.

The verification of real estate ownership through registration with the competent state authority is an important legal process that ensures the legality and protects the rights of the parties involved in real estate transactions. Clear and complete legal documentation is the basis for confirming real estate ownership. When ownership procedure regulations are not applied to this relationship, the certainty of real estate ownership is lost, leading to investor uncertainty and potential legal disputes.

Therefore, for this model to operate safely and effectively, a clear legal framework is urgently needed to protect the rights of investors.

VI. RECOMMENDATIONS FOR BUYERS OF DIVIDED REAL ESTATE THROUGH SMART CONTRACT APPLICATIONS

The application of smart contracts in the divided real estate model is becoming a modern trend, providing many conveniences for investors. In the context of an incomplete legal framework, investing in divided real estate projects to “own” tokens has been warned by experts to pose risks for many parties. The messages of investing in divided real estate by values recognized by blockchain technology are painting an appealing picture for capital mobilization and contribution in the real estate market. However, to ensure safety and optimize benefits when participating in this market, investors should consider the following recommendations:

First: Before investing, buyers need to understand the legal regulations related to real estate transactions and smart contracts. In Vietnam, buying and selling real estate through blockchain and smart contracts has not been specified in the 2023 Law on Real Estate Business. This can lead to legal risks if transactions are not recognized or do not comply with legal regulations. In necessary cases, buyers should consult lawyers or legal experts to better understand the regulations and avoid legal risks.

Second: The legality of capital mobilization and the projects must be clear. Investors wishing to participate must thoroughly research the issuance plan of the developer and examine the legal nature of the model when implemented by the enterprise. This means that investors must check whether the developer is authorized by the state to implement it and under which legal framework the developer is operating. Because in case of disputes, participating investors risk losing all the invested capital. This is a way to mitigate risks in the current stage that investors need to undertake.

Third: When investing in divided real estate projects, investors need to thoroughly consider the accompanying conditions to ensure benefits and mitigate risks. This ensures that the investment is safe and yields the best returns. It is necessary to understand the support policies from the developer or relevant agencies, such as loan support, insurance, or promotional programs.

Fourth: Smart contracts, utilizing blockchain technology, automatically execute terms without human intervention. Buyers should deeply understand how smart contracts work and the basic principles of blockchain technology. This helps them comprehend the transaction process, as well as their rights and obligations in the transactions. Researching the platforms that provide divided real estate services and use smart contracts to check reliability, reputation, and user reviews before participating is essential.

These recommendations will help buyers minimize risks and ensure financial safety when investing in divided real estate.

VII. CONCLUSION

The application of smart contracts in the divided real estate model opens up many attractive investment opportunities, but it also poses significant risks, especially legal risks. Investors need to be aware of the legal challenges and carefully select reputable platforms, check the legality of the real estate, and consult legal and financial experts. Only when investors are well-prepared and fully aware of the potential risks associated with this model should they proceed with investment activities.

REFERENCES

  1. Distributed Ledger Technology: beyond blockchain. (2016). Retrieved from https://assets.publishing.service.gov.uk/media/5a818d6fe5274a2e87dbe3dd/gs-16-1-distributed-ledger-technology.pdf
  2. Lĩnh, H (2022). Dividing Real Estate: A Popular Model in Many Countries. VTV Online. Retrieved from https://vtv.vn/kinh-te/chia-nho-bat-dong-san-mo-hinh-pho-bien-tai-nhieu-quoc-gia-2022110823383186.htm
  3. Hayes, A (2024). Are real estate syndicates a good investment?. Investopedia. Retrieved from https://www.investopedia.com/are-real-estate-syndicates-a-good-investment-8416965
  4. Joint Real Estate Investment Blockchain: Many Risks for Individual Investors. (2021). Retrieved from https://vovgiaothong.vn/mua-chung-bds-blockchain-nhieu-rui-ro-voi-nha-dau-tu-ca-nhan-d19977.html
  5. Tần, N. P. P (2023). Application of Smart Contracts in Real Estate Business Activities in Vietnam and Legal Obstacles. Journal of Law and Development. Retrieved from https://phapluatphattrien.vn/nghien-cuu-ly-luan/ung-dung-hop-dong-thong-minh-vao-hoat-dong-kinh-doanh-bat-dong-san-tai-viet-nam-va-nhung-can-tro-phap-ly-118232.html
  6. New Investment Model in Divided Real Estate with Capital from 10,000 VND. (2024). Retrieved from https://vnexpress.net/them-mo-hinh-dau-tu-bat-dong-san-chia-nho-voi-von-tu-10-000-dong-4758893.html

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