Elon Musk’s recent announcement that people can now purchase a Tesla
NFTs, or Non-Fungible Tokens, are cryptographic “tokens” that represent something unique — such as a piece of art, music, or other collectible — and certifies ownership digitally. Prior to NFTs, it was almost impossible to authenticate and “own” digital art or music, since it’s so easy to take a screenshot or simply download a file. Since the NFT provides a unique, unforgeable signature, owners can now prove provenance, making this type of purchase a more lucrative and realistic investment.
So where does real estate fit in? There have been several “virtual” real estate sales. For example, the digital “Mars House” recently sold for $500K, there’s a Digital real estate twitter page that is selling virtual properties, and digital real estate is actively being bought and sold on virtual role-playing games such as Superworld. But, is there an opportunity to utilize NFTs in the physical world?
As a passionate advocate of cryptocurrency and blockchain, my answer is a resounding YES — because the blockchain technology ERC721 (NFT standard for unique tokens on Ethereum) and related standards enables frictionless, secure trading of digital assets to occur anywhere in the world.
I asked my company’s investor, the legendary venture capitalist, Tim Draper, what he thinks about this question: “I am excited about how NFTs in the virtual world are going to be applied to real estate in the physical world. I suspect that people will soon be able to buy a building, buy the air rights and buy the virtual rights of any physical space. The future is awesome.”
The current transfer of property ownership is extremely labor-intensive and expensive. Even an equity line requires a significant amount of paperwork. By “tokenizing” the property rights, it becomes much easier to trade and manage them.
“Imagine I could buy a house as an NFT, and instantly borrow against the NFT using DeFi or TradFi products with a 2-4% interest rate. Why would I ever go through the brain damage of using Wells Fargo
The real estate industry is notoriously slow in adopting new technologies. However, the very nature of real estate makes it ideal for blockchain applications – it is immovable and easily findable by third parties with blockchain-based claims on it as collateral or otherwise. I previously covered the topic on why in many ways real estate already behaves as a digital asset. Depending on the kind of real estate property (land, housing, commercial properties), there may be a need for a management company that will take care of maintenance, payments, and collection of rents. Still, the notion of “custody” as it applies to real property in the US is closer to an abstract function involving legal and accounting operations than the physical handling and warehousing required by movable personal property or commodities.
There are interesting challenges to solve for real estate NFTs to play a significant role in the industry:
- The issues that crypto tokens face such as hacks to smart contracts or lost passwords/cryptographic keys (if you forget your private key to bitcoin when you don’t use custody wallets like Coinbase or Abra, then you lose bitcoin forever). Potential rules for NFT transfers in real estate should consider locking the money but not the asset itself to avoid unclaimed property rights.
- Crowdfunding via NFTs is one of the exciting use cases but it triggers the need of filing with SEC, so either secondary trading of NFT securities will become more user friendly or regulations will need to change before the fractional ownership via crypto becomes commonplace.
Companies like mine are developing new ways to support and manage the application of NFTs such as homeownership transfer for entire homes, not fractions. It’s much easier to transfer 100% property rights for a real estate asset via blockchain without triggering the securities law violation. Properties have been sold via blockchain for several years now.
Here’s how a real estate NFT sale could work: First, there is a legal preparation for the sale of a property as an NFT. Then an NFT is “minted” that includes descriptive and legal data about the property, including paperwork, disclosures, reports, image files, and even videos. The NFT is proof of ownership. Legally, whoever has possession of the NFT, owns the property.
That NFT, which resides on a distributed ledger, can then be placed into an existing NFT marketplace for sale, such as OpenSea or Gemini’s Nifty Gateway, or into a future real estate NFT-focused marketplace. Potential buyers bid for the property. Once a winner is determined, the buyer pays for the property in fiat or crypto currency, most likely via a third party escrow service or smart contract designed to perform these escrow duties. In a limited time window, after funds are released to the seller and the NFT is transferred to a wallet controlled by the buyer, the buyer completes paperwork to finalize legal ownership transfer. Otherwise the transaction is reversed.
I’m thrilled to work on this innovation and to see NFTs having a “moment”. As the public becomes less confused and more aware of NFTs and other forms of cryptocurrency, real estate will catch up.
“This opens up an entirely new playing field for home ownership,” said Piper Moretti, CEO of The Crypto Realty Group powered by EXP Realty, “For years platforms have been attempting tokenization of real estate assets and closing processes with somewhat marginal success, but this adds a whole new level for democratizing real estate.”