NFTs: The Future of Real Estate? by Kevin Samkian
NFTs: The Future of Real Estate?
by Kevin Samkian
“NFT” has been an acronym of craze lately, fueled by hype surrounding multi-million-dollar digital art sales and the metaverse. But can NFT’s revolutionize the real estate industry? At the outset, this article does not discuss digital real estate sales on metaverse projects. The implications of those transactions, such as the recent sale of a virtual tract of land for $4.3 million on The Sandbox metaverse game, are a discussion for another day. Rather, NFTs can potentially make revolutionary advancements in the physical real estate market through blockchain technology and digital tokenization. However, like all bleeding-edge technologies, there are also potential risks and disadvantages.
What Are NFTs?
“NFT” stands for a non-fungible token. A token used here is defined as a digital representation of value, such as a currency or a digital or physical good. An NFT is essentially a digital certificate of ownership for unique items—hence non-fungible—that can be traced to an official owner. NFTs are stored on blockchains, such as the Ethereum blockchain, which provide a secure and transparent record of ownership of the underlying asset. A single NFT can only have one owner, and since its ownership is recorded on the blockchain, the ownership cannot be modified without a new transfer on the blockchain.
Although NFTs have become popular for the sale of digital assets, NFTs can also be used to represent ownership of real-world items and property through the tokenization process. For example, NFTs can represent ownership of intangible property like music and tangible property like artwork, collectibles, and real estate. However, when minted as an NFT, these assets have the potential to reap the unique benefits of the blockchain, such as transparency, security, and speedy transfers and transactions.
NFT’s and Real Estate
The real estate industry has taken notice of the potential advantages of NFTs. Although in its infancy, many developers believe that tokenization will become common in real estate transactions, bringing along with it a multitude of benefits.
One major benefit investors see in the technology is an increase in the efficiency of real estate transactions. For example, title companies currently have to go through title records that may be scattered in various physical places to determine the ownership history of a property, a process that takes between ten to fourteen days. On the other hand, the blockchain acts as a digital public digital ledger. Each transaction is recorded on an ongoing database that is always accessible and verifiable. This verification system could significantly speed up the title clearing process by providing direct and easily accessible title history. As one investor put it, “Liquidity of real estate is measured in months or years, and with NFTs, it’s days or hours.” This system could also improve transparency because “ownership history and any encumbrances, easements and liens could be written into the chain.”
Another major benefit investors see in real estate NFTs is fractional property ownership. Using tokenization, a property could be divided into many parcels, with each parcel an NFT that can be purchased individually. For example, a 100,000-square-foot office building with an estimated value of $1,000,000 could be split up into 100 equal parcels, requiring 100 people to invest only $10,000 for an equal share of monthly rents. The number of parcels can even be increased, say 10,000 parcels with a $100 investment each. This can provide both a new form of funding for property investments and allow for smaller investors to participate in the real estate market. In addition, it may also allow the creation of a liquid market that will enable people to buy and sell fractional shares in income-producing properties without a middle man.
Apart from ownership, NFTs can also be used to finance properties. In fact, mortgage lender LoanSnap announced that it will be minting seven residential mortgages as NFTs. The system operates under LoanSnap’s Bacon Protocol platform, which is built on the Ethereum blockchain. The platform allows homeowners to exchange a lien on their property for an NFT representing a portion of the property’s value. Borrowers then make mortgage payments directly to Bacon Protocol. Interests rates in the program range from 1.5% to 3.1%. LoanSnap co-founder and CEO Karl Jacob stated, “NFTs and smart contracts fit perfectly into the lending world as they are similar to many legal arrangements in real estate, with upgraded technology and features.”
Other companies and investors have also begun utilizing NFTs for real estate transactions. For example, a partnership between One Sotheby’s International Realty, Voxel Architects, and Meta Residence is creating “the first real-world NFT luxury mansion.” The group plans to build a luxury home in Miami, Florida, with a 1:1 replica in The Sandbox metaverse game. Ownership rights of both buildings will be minted in an NFT and sold at an auction through One Sotheby’s. Another example is blockchain startup Propy, which recently sold an apartment in Ukraine as an NFT. The company plans to bring its real-estate-backed NFT program to the United States and work on “the technological and legal framework to turn real estate properties into NFTs.”
However, with any new technology comes potential risks and disadvantages, and real estate NFTs are no exception. For NFT real estate to become widespread, it needs to be permitted and standardized throughout municipalities, likely depending on government acceptance. One hurdle is compliance with government regulations and approval of the blockchain as legally admissible records. However, multiple cities and states, such as Vermont, Arizona, and the city of Miami, are starting to become more accepting of the technology. With respect to using NFTs for fractionalization, there remain issues such as where the legal right to control the property would reside. As a funding method, there is also the question of whether NFTs would be different from real estate crowdfunding websites, which have had varied success. Finally, as a tool for financing, there are issues such as who can collect on a debt in the event of borrower default.
As provided above, there remains a number of issues and risks that need to be worked out before NFTs can have widespread adoption. However, investors should be informed because the real estate industry has recognized the potential of NFTs. The technology remains promising, and over time, NFTs may truly change the real estate industry.