[Editor’s note: Adapted from an article previously published on Forbes by Natalia Karayaneva, the founder of Propy.]
Just months ago, the very first fully virtual house sold online—and for a rather significant $514,558. It won’t be the last to sell: A digital real estate twitter page actively sells virtual properties, and digital real estate is actively bought and sold on virtual role-playing games such as Superworld. The technologies enabling this (head-scratching) phenomenon—NFTs, or rather non-fungible tokens—are cryptographic “tokens” that represent something unique, such as a piece of art, music, or other collectible. 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 NFTs provide a unique, unforgeable signature, owners can now prove provenance, making this type of purchase a more lucrative and realistic investment.
As fascinating as the foray into digital ownership is, more intriguing is the opportunity to utilize NFTs in the physical world. The blockchain technology ERC721 (NFT standard for unique tokens on Ethereum) and related standards enable frictionless, secure digital asset trading anywhere in the world. The buzzy headlines of multi-million dollar virtual asset sales are merely setting the stage for a faster and more transparent way to transfer both money and ownership online of valuables in the real world—of everything from physical art to diamonds and wine to yes, physical real estate.
THE HOW
The process operates slightly differently than a traditional real estate sale: First, there is a legal preparation for the sale of a property as an NFT. Then an NFT is “minted,” which includes descriptive and legal data about the property, access to paperwork, disclosures, reports, image files, and even videos. The NFT is proof of ownership. Legally, whoever possesses the NFT owns the property.
That NFT, which resides on a public distributed ledger, can then be placed into an existing NFT marketplace for sale, such as seenhaus, 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 cryptocurrency, via a smart contract designed to perform an escrow function. 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 within minutes.
In the case of Propy’s recent NFT auction of Michael Arrington’s Kiev apartment, the ownership of the physical property was actually held and recorded in Ukraine as a US LLC–and the winner became the owner of the NFT, which gives the rights to the LLC. Arrington signed proprietary-developed legal papers for NFTs to transfer ownership to all future buyers. The collectible NFT included:
- Access to ownership transferred paperwork.
- The apartment picture.
- A unique digital art NFT by a popular Kyiv graffiti artist, Chizz (a physical painting of the digital artwork is painted on a wall of the apartment).
For that particular auction, Propy also partnered with Helio Lending to secure financing to future real estate NFT owners.
CHALLENGES EXIST
There are interesting challenges to solve before real estate NFTs can play a significant role in the industry:
- Crypto tokens currently face issues such as gaps in smart contracts, and 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 would need to consider locking the money, but not the asset itself, to avoid unclaimed property rights, as it was developed for the first real estate NFT for the Arrington’s property.
- The first NFT was done for the entire property, but it could be also done for fractional ownership, which is harder to accomplish due to the regulatory environment. Crowdfunding via NFTs is an exciting use case, but it triggers a need to file with the SEC, so either secondary trading of NFT securities will become more user friendly, or regulations will need to change before fractional ownership via crypto becomes commonplace.
Properties have been sold via blockchain for several years now—in fact, Propy conducted a transaction in which cyber-currency was used to buy an apartment in Ukraine and the title was registered on a cyber-ledger in 2017, and since the thousands of transactions with over $1bn in volume have been recorded on blockchain in the US. Propy, as well as other companies, are already developing new ways to support and manage the application of NFTs, such as homeownership transfer for entire homes, not fractions. It’s easier to transfer 100% property rights for a real estate asset via blockchain without triggering the securities law violation.
This is a no-brainer for Henry Elder, President of the International Blockchain Real Estate Association: “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 or Chase, with their months of nightmare due diligence?”.
FUTURE OF NECESSITY
The real estate industry is notoriously slow in adopting new technologies, even though it was the first industry to adopt e-signatures. 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.
It’s true. Many believe that blockchain technology isn’t necessary now and will become necessary as the world continues to digitize. Just like the Internet wasn’t necessary in real estate 20 years ago, and now neither consumers nor the industry cannot operate without the Internet. However, blockchain as a secure, lower cost, and more efficient technology should be added as a layer to the traditional closing flow, just like e-signatures were. This would eliminate wire and title fraud, and decrease transaction costs in favor of affordability issues.
The near-term future is automating transactions via smart contracts, that includes integrating escrow and title, and auctioning homes as NFTs with the help of forward-looking agents and cutting edge platforms.
NFTs are having a “moment,” and companies are already pushing this innovation forward. With Millennials, Gen Z’ers, and the connected generation much more comfortable with cryptocurrency and defi, real estate can once again be the industry adopting one of the most transformative technologies of our time.
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