“Real” Estate: How NFTs and Cryptocurrency Are Reshaping the Real Estate Industry
Cryptocurrencies and non-fungible tokens (NFTs) are altering the real estate industry in a major way. It is now possible to invest, buy, or acquire a virtual “house” that only has a digital existence. Not only are the boundaries of the traditional real estate market being expanded by this technology, but new innovations have complicated what it means to truly “own” real estate. This article overviews the rapid advancements these technologies present in the real estate context.
Blockchain Fractional Real Estate Investment
Most real estate investors are familiar with the term “chain of title,” meaning the legal record of a particular property’s ownership, which is typically stored in a centralized location such as a county clerk’s office, and verified by that governmental authority. By contrast, blockchain is a decentralized database that acts as a ledger for many different types of transactions, most commonly in the context of cryptocurrency ownership and transactions. Blockchain technology is being used to “tokenize” real estate ownership. This means that a piece of real estate can be identified on the blockchain and divided into multiple, smaller units of ownership, or “security tokens”. In turn, each token or fractionalized piece of real estate can be freely bought and sold on the blockchain. These transactions are secured using the blockchain, which, through its permanent ledger of these transactions, mimics a traditional chain of title.
Certain blockchains are also capable of creating and executing “smart contracts”, which can automatically perform certain agreed-upon functions. Smart contracts have the capability of simplifying certain elements of complex real estate transactions. For example, a smart contract could automate the escrow and transfer of currency as part of a real estate transaction. The simplicity of this technology enables efficient trading of incredibly small investments in real estate, which could make fractionalized real estate investing much more accessible. This technology also potentially automates the function of institutions such as title companies, county recording offices, or even attorneys, adding potential for further cost efficiencies. As retail investing platforms such as Robinhood provided widespread access to the stock market through fractional share ownership with little to no fees, so too could blockchain real estate investment expand access to tokenized real estate ownership.
Dividing real estate ownership into smaller, more affordable investment units is not itself a novel idea. Real estate investment trusts (REITs) are tradeable funds that operate on largely the same idea. However, the use of blockchain to maximize the efficiency of real estate investing has caught the attention of even the large, publicly traded REITs. There are numerous benefits to utilizing the blockchain to facilitate a real estate transaction; lenders can verify information about the property and the borrower much faster or even automatically, holding deposits in escrow can easily be done via smart contract, and any jurisdictional complications are nonexistent on the borderless blockchain. Furthermore, the efficiency and permanence of the blockchain ledger can counteract potential fraud.
Investors should remain aware of the many regulatory burdens that are in effect for real estate transactions, and understand that the use of cryptocurrency does not nullify them. For example, the New York City Administrative Code was amended in 2019 to include a new subdivision requiring disclosure of the individuals behind an LLC involved in a real estate transaction, largely motivated by a transparency and enforcement rationale. The anonymous nature of the blockchain may spark action amongst regulators seeking to close any loopholes created by the technology. While blockchain offers many new ways to participate in the real estate industry, it should not be viewed or used as a way to circumvent the law.
Buying Real Property with Cryptocurrency
With Bitcoin and other major cryptocurrencies becoming more widely adopted, investors may turn to real estate when deciding what to do with their gains. However, buying property with cryptocurrency may not be as straightforward as many would hope. If you wish to settle a transaction in cryptocurrency, the biggest initial hurdle is likely finding a seller willing to sell their property for cryptocurrency. While there is a trend toward wider acceptance, potential buyers are still facing a relatively small pool of accommodating sellers.
The volatility of Bitcoin and other prominent cryptocurrencies such as Ethereum may create another barrier to reaching a deal. Even if a willing buyer and seller connect, the buyer should have their cryptocurrency readily accessible, as traditional real estate lenders at the time of this writing offers mortgages in cryptocurrency. Some institutions such as BlockFi provide the halfway option of allowing a borrower to use their cryptocurrency as collateral for a cash loan. Other services allow payments to automatically convert and settle into the currency preferred by the seller. There is also the issue of title companies being generally averse to cryptocurrency transactions, leaving only a small few available to provide title insurance for a Bitcoin-funded acquisition.
Virtual Real Estate
It may surprise some readers to find out that large sums of money are exchanged for fully virtual real estate; that is, a plot of “land” that is completely intangible, and only exists in a digital space that lives on a blockchain. Of course, the value of anything is whatever someone is willing to pay for it. For example, in the blockchain-based digital world called Decentraland, a fully virtual plot of land recently sold for over $913,000 USD (and was purchased using the in-world cryptocurrency called MANA.) Over a single 24-hour period, $3.5 million in “land” sales were completed in The Sandbox, another metaverse that runs on blockchain. A buyer of virtual real estate may find added value in the fact that, as represented by a non-fungible token (NFT), virtual parcels of land are unique and easily transferable. This means that each parcel can only have a single owner, verified by the blockchain, which can be immediately transferred or sold. While oxymoronic “fake real estate” may be too abstract for some investors’ comfort, that has not stopped the creation of dedicated virtual real estate funds, and the rapid rise in the price of these “parcels.”
Other Technological Innovations Impacting Real Estate
Technology is also increasingly being used to supplement the traditional real estate market. Virtual reality allows potential buyers to explore a property without ever even visiting it. Imagine viewing photos of a house for sale on the site of your choice. Now imagine stepping into those photos and seeing the property all around you, as if you were there. This was an option that has been available for a few years, but rapidly caught on during the pandemic, when in-person tours, staging, and open houses became highly impractical. Virtual reality showings are here to stay, as it allows for certain freedoms that the in-person option cannot (no appointments, no need to travel.) And that’s not all. Augmented reality technology allows you to use your smartphone to see different furniture in a space, and change or add to the décor that is currently in a home.
Technology is driving innovation across the real estate market and allowing buyers, sellers, realtors, and other stakeholders to do things they never could before. As the world increasingly adopts the blockchain for various purposes, the real estate industry stands to gain significant value from the increased accessibility and efficiency that it provides. While implementation is sure to cause some initial hiccups and pushback, increased public understanding of these innovations is crucial if the industry is to fully realize the potential benefits.
DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.