Non-fungible tokens have exploded in popularity in 2021 as investors and crypto enthusiasts find new uses for the underlying blockchain technology. NFTs are now used to tokenize everything from digital art to tweets. But what about real estate In Real Life?
KEY POINTS
- NFTs can work for real estate, however, tokenizing real estate is still in its infancy and much of the infrastructure and legal frameworks are nascent or non-existent.
- A real estate NFT is a kind of digital certificate of ownership, similar to a deed, that is published (“minted”) on a blockchain for the world to see and verify ownership.
- Case Studies show that Real Estate NFTs can work (and also not work!) in the real world.
- Future innovations using real estate NFTs, such as DeFi lending/borrowing, fractional ownership, crowdfunding, and more, have the potential to transform the industry.
NFTs seem to almost strike a uniquely intuitive chord in the real estate market. In a world where things like the chain of ownership, title searches, and transferability are critically important, particularly in countries where record keeping is lax, a technology that provides an immutable, world-wide ledger seems to be an ideal fit.
Tokenizing real estate through NFTs, however, is still in its infancy and much of the infrastructure and legal frameworks are nascent or non-existent.
That said, the future of real estate tokenization will go far beyond ownership transfers by opening up new avenues of innovation for real estate investors.
Why Bring NFTs To Real Estate?
To the uninitiated, it may seem like an odd idea, but using an NFT to secure real estate ownership is anything but.
After all, real estate ownership is traditionally transferred and represented by simple pieces of paper like deeds and titles. At its most basic level, NFTs can essentially take these agreements and move them to a digital, world-wide ledger allowing for a more transparent transfer of ownership.
But thinking about real estate NFTs as simply taking what we do today and moving it to this new thing called a “blockchain”, would be missing the possibilities that this technology holds.
But before we get to that, we need to understand how NFTs work.
How Does Creating a Real Estate NFT Work?
Let’s start with a conceptual understanding of an NFT.
Think of an NFT as a digital certificate that represents some asset (it could be a digital asset or a physical asset). Each NFT is unique (non-fungible) and contains certain metadata about the asset, such as its owner.
The NFT is published (“minted”) on a blockchain (in most cases the Ethereum blockchain) and, therefore, is available for the world to see and verify ownership.
So we could say we have real-world “Asset A” and that asset is associated with the digital “NFT A” (much like a property has its associated paper deed).
Notice here that “Asset A” is associated with “NFT A”.
While an NFT is a type of “smart contract”, think of it more as a tokenized version (a kind of verified digital certificate) of the property that people can interact with. An NFT itself is not a contract between two parties; rather, people can transact with the NFT in such a way that ownership can be transferred on the blockchain.
At this point you are probably wondering if this could actually work in real life. I mean, would courts even recognize NFTs as a kind of certificate of ownership?
The reality is that this is such a new concept that most of the issues surrounding real estate and NFTs have not been resolved.
But that hasn’t stopped people from trying.
Real Estate NFT Case Studies
Because this idea is so new, there are only a few examples of NFT real estate sales. However, here are a couple of examples that highlight some key issues.
Case Study 1: Hot California Real Estate Gives a Cold Reception to NFTs
Shane Dulgeroff, a California real estate broker, wanted to try his hand at auctioning a home as an NFT.
After all, he was sitting on a hot piece of California property, a two-unit duplex in Thousand Oaks bringing in 60K of annual rental income.
Surely an NFT would make this hot property sizzle with excitement.
Or would it?
Dulgeroff worked with Los Angeles based pop-artist Kii Arens to create a technical color digital representation of the property.
The digital art work was then minted as an NFT and put up for auction on the popular NFT platform, OpenSea.
The auction fell flat.
The highest bid he received was the equivalent of only around $100,000 worth of ETH (well below the value of the property).
So what happened?
Although we can’t get into the mind of the bidders of this property, we may be able to extract a few key concepts from this experiment.
A physical property has a certain gravitational pull on price that a speculative, digital asset does not.
The value of the physical property is fairly clear (just look on Redfin, etc. to get estimates). This puts a sort of cap on sky high valuations.
In addition, any speculator that still might be interested in the novelty of the first home to be sold as an NFT, would be stifled by the physical nature and legal apparatus of purchasing a piece of real-world property. For a speculator, purely digital assets are so much easier to flip.
In other words, the utility of this real estate NFT was not really there, since, in this case, there seemed to be no legal framework or process around this NFT sale. In addition, speculators might have found it difficult to flip this property for a profit.
Case Study 2: U.S. Tech Titan Sells his Ukraine Apartment as an NFT
Michael Arrington is best known for being the founder of the highly influential start-up and technology blog, TechCrunch.
In 2017, Arrington bought a one-bedroom apartment in Kiev, Ukraine using a smart contract on the Ethereum blockchain.
The transaction was not set up via an NFT, meaning that the apartment itself was not tokenized; rather a contract was made between the relevant parties with Ether (the currency used on the Ethereum blockchain) being used to make the purchase.
The purchase was facilitated by the blockchain technology firm, Propy (link opens new tab to external site).
At the time, it was a novel event as it was the first-time a home was purchased using smart contracts on the blockchain.
In June of 2021, Arrington put up the apartment for sale, with Propy again facilitating the sale.
This time the apartment was tokenized as an NFT.
And here is where things get interesting.
As noted in Case Study 1, one issue that may have contributed to that auction's demise could have been its lack of legal clarity.
In this case, however, Propy used a clever approach to help deal with the legal issues.
A U.S. LLC was set up and the LLC was made the owner of the apartment. Therefore, the property registered with the Ukrainian government would list the LLC as the owner.
The NFT was then set up as a tokenization of the LLC (which, of course includes all of its assets, including the property).
In addition, the LLC by-laws were set up to state that anyone that owns the NFT would automatically get ownership and all voting rights to the LLC.
In that way, the NFT could be transferred without having to change the owner on the actual deed to the property (since the owner remains the LLC with the Ukrainian government) and the LLC would transfer to the owner of the NFT.
In the end, the auction was successful and the NFT was transferred to a new owner for approximately $93,000 in Ether.
The sale even included an NFT digital art piece by a Kyiv graffiti artist, with the actual art piece painted on a wall in the apartment.
What Is the Future of Real Estate NFTs?
Although it is still very early in the real estate NFT game, mainstream adoption of this method of ownership could be just around the corner.
And the innovation it could bring with it could be immense.
DeFi Lending and Borrowing
Real estate NFTs open the door to “DeFi” (decentralized finance), that allows for peer-to-peer borrowing and lending.
With a real estate NFT, you can prove, on the blockchain, that you own a property, which means that it has the potential to be used as collateral in the crypto world.
Imagine being able to take a loan against your house without having to go through a middleman like a bank.
The market for DeFi for traditional crypto assets (peer-to-peer borrowing and lending of fungible tokens such as Bitcoin, Ethereum, and others) is already massive.
A single DeFi platform like Aave (link opens new tab to external site) already has billions of dollars worth of crypto assets being borrowed and lent (which means it is used a lot!).
With real estate NFTs, we could see the same sort of boom, which could fundamentally transform the way the industry works today.
Tokenization opens the door for new innovative ideas in real estate
The opportunities that NFTs could open up in the real estate world is endless:
What about having fractional ownership of a property that you can easily transfer to someone else?
What about crowdfunding real estate projects in such a way that even small investors can participate?
What about lease to own arrangements using a combination of smart contracts and NFTs?
What other innovations can you dream up?
Conclusion
It is more than likely that NFTs will play an ever-increasing role in real estate. Although the concept is in its infancy, NFTs offer a better way for buyers and sellers to transact as well as opening up new innovations in the real estate investing space.
The future is coming at us fast, and now is the time to rethink ownership in the digital age.
