Blog NFTs NFT Real Estate: A Real World Solution?

NFT Real Estate: A Real World Solution?

date May 31, 2022 time 5 min read 499 views

For as long as blockchain has been around, people have tried to solve all kinds of real-world problems with it, to varying degrees of success. One of the most interesting applications of this tech is in the space of real estate, dubbed NFT real estate. Not to be confused with “digital real estate,” which is land that exists in virtual space (AKA metaverse), this term refers to NFT representing real, physical land and building on the blockchain.

We’re covering the application of NFTs in real estate, not virtual land.
We’re covering the application of NFTs in real estate, not virtual land. (Source: Atelier.net)

NFT real estate is currently used in conjunction with deed and title to confer legal ownership, but advocates believe that NFT could someday replace these traditional methods entirely. However, there are many legal hurdles to overcome, and the law needs to catch up for us to see widespread adoption. NFT has the potential to disrupt the real estate industry and change how we buy and sell property in the future.

Introducing NFTs

A lot has already been said and written about this tech in the past year, but the main key takeaway is that NFT is a unique, digital token that is easily traceable and transferable. It is also unfalsifiable as is the nature of the blockchain, which is where NFTs are stored. 

NFTs are starting to play a vital role in real estate.
NFTs are starting to play a vital role in real estate. (Source: Forbes)

You’re probably still somewhat confused, so let’s break that down further:

Traceable 

Contrary to popular belief, most cryptocurrencies, and NFTs by extension, are not anonymous. The data is readily available to anyone with an Internet connection and basic understanding of what a block explorer does. 

By design, everything a user (i.e. wallet address) does on the blockchain is accessible to anyone, every transaction, every interaction with other wallets and platforms; they are all there for us to see. The tricky part is connecting the owner’s identity to their wallet(s) as it is not uncommon for a user to have multiple wallet addresses for various purposes.

Transferable

NFTs are designed to be easy to transfer between wallet addresses. All you need to do is sign off on the transaction with the private key to prove you have control of the wallet, and the blockchain will take care of the rest. It is fast, cheap, and efficient, especially when compared to the current way that title transfers work. 

Unfalsifiable

This is perhaps the main selling point of NFT with regard to this application. It would be near impossible to fake an NFT because its ID is unique on the blockchain. By design, no one else can mint another NFT with the same ID on the same blockchain, removing the need to pay a third-party to verify the proof of ownership once the legal framework for NFT has been set up.

Verifying the NFT’s authenticity could then be done by both parties with relative ease and confidence. The decentralized nature of blockchain makes it so that even if a fraudulent block, a group of fake/altered transactions which the attacker will use to sneak in the fake NFT, was submitted, it would have to be audited by other people (AKA validators) who also run the chain. 

They will then be punished through the mechanism of “slashing” or ignored entirely due to the lack of computational work. It would take an attacker tremendous resources to create an entirely new chain or take control over the majority of the validators just to carry out this form of attack.

Uses of NFTs in Real Estate

Real estate is commonly believed to be one of the safest forms of investment, and the 3 key features of NFT above would, in theory, be a natural fit by reducing fraud and simplifying the entire process. But what’s the reality like? 

Propy jumped on the hype but is it really using NFTs?
Propy jumped on the hype but is it really using NFTs? (Source: Propy)

So far, sales involving the NFT of entire properties have been a gimmick to create buzz and attract buyers, most notably by Propy. The actual transfer of ownership is still slow. There’s extensive paperwork, and there’s not enough regulatory clarity to make NFT ownership of real-world property legally enforceable in most cases.

More than just a gimmick

That said, there are still workarounds that companies in the space are employing. While the NFT cannot confer direct ownership of the property, the property can be owned by a legal entity (e.g. LLC) whose control is then tied to the NFT instead. By buying the NFT, the buyer can own the LLC which owns the property, giving them ownership. 

There are disadvantages to doing this. For instance, the tax obligation is higher than the traditional method of buying real estate as well as having to set up the required LLC for each individual property being sold.

What makes NFT real estate interesting is its potential interaction with decentralized finance (DeFi). As NFTs are crypto-native instruments, it could synergize well with real estate sales and even mortgages done via cryptocurrencies. For example, NFTs tied to property can be used as collateral to borrow crypto via peer-to-peer lending, effectively creating a line of credit that is encumbered by traditional means like mandatory Know Your Customer and credit check procedures. 

Lofty is one of several platforms incorporating NFTs into real estate investments.
Lofty is one of several platforms incorporating NFTs into real estate investments. (Source: Lofty.ai)

There are also many innovative companies pushing the envelope beyond just lending and borrowing. Platforms like Lofty, which is a real estate NFT marketplace, have sprung up to fill the demand for fractional ownership of real estate, making investing in this safe but expensive asset class more accessible than ever. And Bacon Protocol takes it one step further by creating a “Stable+” coin with tokenized mortgage liens as part of its backing.

Conclusion

The application of NFTs, in general and more specifically in real estate, is an ever growing discussion which goes beyond just cutesy Pokemon-like creatures and overpriced pictures of weird monkeys, and we have only just scratched the surface of what is possible. While real estate is a compelling use case for NFT, it has yet to stand the test of time. We highly recommend further research and consideration before investing in NFT real estate.

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George Schooling

George Schooling

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Tags: commercial real estate real estate nft marketplace

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