The real estate industry hardly saw many changes in the past but in recent times, it has evolved rapidly. There is a lot happening around and it is important to stay updated with all the developments and innovations. One significant breakthrough in the industry is the introduction of blockchain and cryptocurrency which has completely changed the way this market works. It has opened a plethora of opportunities for investors, buyers, and sellers. NFTs in Real Estate are one such opportunity that allows fractional ownership on a real estate property.
Although real estate NFT investing offers a lot of benefits, it is still important to assess their feasibility to represent the industry. There are several questions that need to be answered. So, here we go:
Is NFT Suitable for Real Estate?
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NFT or Non-fungible tokens have been a trending topic for quite some time now, making headlines every now and then. You can read about NFTs in newspapers almost daily, be it a million-dollar NFT art auction or some tactic by a fast-food chain. There is no denying that NFTs are paving their way across all industries, including real estate.
For people who are new to the concept, NFTs are a type of digital token that one can buy with fiat or cryptocurrency. The distinct feature of an NFT is that using blockchain technology, it gives the buyers sole ownership of digital assets. It is easier to track and sell NFTs in public. For now, NFTs are primarily used to sell digital art or music and transfer ownership with a unique, immutable signature.
Talking about NFT real estate, they are used in a different capacity as these tokens represent ownership of physical assets on blockchain networks. They are the perfect instrument to allow the sale and purchase of real estate properties.
Why Should One Learn about NFT Real Estate?
Many often wonder about the potential of NFTs in real estate and Real Estate Brokerage They seek information about the opportunities and practical examples associated with them. So, here are a few instances for you.
Michael Arrington listed an apartment in 2021 as digital real estate NFT on an online portal. He purchased this property through Ethereum smart contracts in 2017. It was known as the first real estate NFT in the world and was sold for over $93,000.
Another case in point is a real estate development firm, Prometheus, that sold two luxury properties through cryptocurrency. Also, it ensured ownership through NFTs.
Digital Real Estate vs. Physical Real Estate
Registering physical homes as NFTs is difficult but you can easily register digital real estate through these digital tokens. As digital real estate exists only in the virtual world, no rules apply to it.
These virtual spaces are called ‘Sandbox platforms’ or ‘Metaverse’ that allows users to sell and buy real estate NFTs, interact with others, and construct anything. One of the platforms with great potential for digital real estate is Minecraft and other names include Cryptovoxels, Roblox (NYSE:RBLX), Somnium Space, Axie Infinity (CRYPTO:AXS), and Decentraland (CRYPTO:MANA).
Similar to physical real estate where land has restricted space, digital platforms also have limited availability for designated parcels. Hence, creating scarcity just like available land in the world. For example, Decentraland has 90,601 individual plots available and each is traded as an NFT also called LAND. They can be bought through a cryptocurrency known as MANA.
How Do Real Estate NFTs Work?
Just like a regular NFT, real estate NFTs are purchased using a cryptocurrency selected by the seller, transferred into a digital wallet, and sold for a profit at the right price. Investing in NFTs is similar to stocks as they represent a share of a real estate project instead of a digital asset or a physical property. Profits are based on the share percentage like any other business. So, if you have 10 tokens from a real estate company, you will get 10% of the net profit.
You can choose to sell the tokens anytime but some crowdfunding and NFT-backed platforms may require you to hold your share for a certain time.
Reasons to Use NFTs for Real Estate
Real estate NFTs come with an array of benefits, including transparency, credibility, and immutable ownership proof. Unlike physical property that needs a lot of paperwork to purchase and transfer ownership, NFT transactions offer a more efficient and streamlined method. Buyers can get ownership of the asset within minutes.
Keeping away cyber frauds and infringements, real estate NFTs provide enhanced security and data integrity. Thus, giving sellers and buyers confidence to transfer assets online. Moreover, buyers can borrow against their NFTs on DeFi or traditional finance solutions on blockchain, which simplifies the process of raising loans on the property.
NFTs Use Cases in Traditional Real Estate Industry
● Real Property Ownership
Currently, people need agreements and deeds to represent ownership of physical property, they hire lawyers and employ insurance companies for authentication, and have to complete a lot of other formalities. NFTs provide an efficient way to bypass intermediaries as blockchains make it easier to identify encumbrances, verify ownership, and settle transactions.
● Fractionalized Investments and Loyalty Programs
As real estate involves capital-intensive investment, companies and entrepreneurs are using digital tokens and NFTs to raise funds for their big projects. In 2018, St, Regis Aspen Resort sold the hotel’s 18.9% stake through tokens of Aspen Coins. Omni-Psi is a real estate investment startup that raised funds by issuing ORT tokens. OXO Living, a boutique developer in Indonesia, sold NFTs as a representation of real homes they were selling in Bali. People with a crypto wallet can make an offer on the NFT.
It can even be used on a smaller scale as homeowners who need liquid money can use Vesta Equity or other platforms to raise equity by issuing fractionalized NFTs that represent fractional ownership interest. Moreover, brands are using this technology to award loyalty points to winners.
NFTs in the Metaverse
In 2021, Republic Realm, now known as Everyrealm, bought a virtual land in The Sandbox for a whopping amount of $4.3 million. It is the largest virtual land purchase till now. According to Grayscale, Metaverse is a trillion-dollar revenue opportunity across digital events, advertising, hardware, social commerce, and developer monetization.
● Virtual Land Ownership
There are Metaverse platforms like The Sandbox and Decentraland that sell parcels of digital land, each parcel representing an NFT. They use blockchain networks, such as Ethereum, to record transactions. Once a buyer pays for a virtual parcel, the transaction gets recorded on the blockchain and the NFT is transferred to the digital wallet of the buyer. To authenticate land parcel ownership, users have to link their digital wallets to the platform. They are also free to participate in governance if the platform works as a decentralized autonomous organization (DAO), giving token holders the right to vote on initiatives.
● Decentralized Finance
If digital property owners want to take loans by keeping their NFTs as collateral, they can use a platform like NFTfi that provides a list of entities that have the cash to invest. Once the borrower and lender decide on terms, a smart contract is used to finalize the loan without involving intermediaries.
● Tax Consequences and Risks with NFTs
According to the IRS, NFT tokens are taxable as property whenever a sale or other recognized event takes place. Although the legal framework for Metaverse is still in its initial stage, NFT sellers and buyers have to comply with all the legal requirements applicable to their transactions. If a person fails to adhere to the platform’s regulations and terms, they might lose their rights in the hosted NFT on that particular platform.
However, it may be challenging to determine the applicable laws because rules are still being finalized, jurisdiction could be asserted in different countries, and enforcement of remedies and rights can be difficult.
Use of NFTs in mortgages
Although NFTs are not widely used in mortgages, they are gradually gaining popularity in the sector. LoanSnap has offered the first-ever NFT mortgages as home equity loans. The company processes loans like regular mortgages but rather than creating mortgage notes with liens, it issues NFTs.
Till now, only a few NFT mortgages have been issued and are not available for mortgage notes or crypto investors. However, LoanSnap is planning to offer a stablecoin, referred to as bHome, to represent fractional ownership in NFT mortgage notes. Moreover, investors will provide additional NFT mortgages by offering sufficient funds to future borrowers.
Challenges for NFTs in Real Estate
Real estate is a slowly-evolving industry. If we compare it to other sectors, it has seen some basic technological advancements over the years. Even common techniques, such as virtual tours and 3D rendering have been introduced recently in the real estate sector. Buyers, sellers, and industry professionals are still struggling with new technologies. It is no wonder that people have concerns about NFTs in real estate and these digital tokens do come with their cons.
Firstly, there is obvious resistance to this unique technology and people have doubts about adopting real estate NFTs. Also, blockchain and NFTs eliminate the involvement of intermediaries, which are also title companies. So, there is still time to assess the fate of NFTs and their large-scale application in real estate.
Conclusion
Despite a few challenges and concerns, the future of NFTs in real estate looks bright and favorable. It mitigates the chances of fraud and inefficiency in the industry, which are mostly due to vulnerable proofs and complicated procedures. As non-fungible tokens provide solid proof of ownership, people can keep their worries at bay. NFTs ensure transparency and rightful ownership of properties. So, it’s time that you start exploring more about NFTs in real estate and prepare yourself to embrace them in the coming years.
