Non-fungible tokens, or NFTs, haven’t been around too long, but they definitely shook up the collectibles market. For a little while, NFTs became the hottest niche in the blockchain space, selling for anywhere from $100,000 to millions of dollars and giving cryptocurrencies a run.
Less loudly, there’s another industry NFTs have been disrupting: real estate.
Real estate NFTs have quietly grown in popularity, and the NFT marketplace is rife with investment opportunities. But before you jump in with both feet, you need to know what you’re getting into. So, let’s talk about the nooks and crannies of investing in real estate NFTs.
- Aside from digital properties in metaverses, NFTs can now be used for physical real estate. Blockchain technology and smart contracts can make buying and selling real estate easier and faster.
- NFT real estate ownership can be full or fractional. Fractional ownership means dividing a property into several tokens, allowing people to invest in high-value real estate without using their entire life savings. Earnings and expenses are divided accordingly and can be automated through smart contracts.
- Investors interested in NFT real estate must perform due diligence and understand its complexities before entering the market.
What Is An NFT?
NFTs are digital collectibles containing components such as art, video, music, real estate, or even tweets on the blockchain, wherever the creator’s imagination can take them. For example, they can take the form of a jpeg or a video or audio clip.
Their charm is their unique nature in that they can only have one owner at a time, thanks to a code assigned to each token on the blockchain that makes them trackable.
Despite clamoring to the contrary, an NFT copied and pasted does not carry the same weight as the original to any serious collector, similar to how reproductions don’t carry the same value in the art world.
NFTs came on the scene 2017 with the rise of projects like CryptoKitties, an early blockchain game built on the Ethereum blockchain. TechCrunch likens CryptoKitties to a “digital version of Pokémon cards,” with the key distinction that they exist on the blockchain. They are also alike because of the non-fungible feature.
Popular NFT collections and pieces and their estimated values include:
- Bored Apes Yacht Club Collection: $612 million
- Cryptopunk Collection: $1.4 billion
- The Merge: $91.8 Million
- Everydays: The First 5000 Days: $69.3 million
So, How Do NFTs Work In The Real Estate Industry?
Real estate is considered non-fungible due to its unique nature. Non-fungible tokens are—as the name oh-so-subtly implies—also non-fungible. It doesn’t take a genius to connect the two.
But you might wonder what pictures of sleepy chimpanzees in different costumes have to do with the real estate market. Well, the answer lies in the blockchain and the transfer process.
How Does Real Estate Tokenization Work?
The first step to buying and selling real-world properties over the blockchain is transforming the real estate into an NFT.
An owner who wants to sell their properties can digitize, i.e., mint NFTs of their real estate assets through blockchain technology. This NFT will contain all relevant information like exact location, measurements, ownership details, and limitations (if any), which is now imprinted into your chosen public digital ledger (blockchain).
More importantly, the NFT can be a complete representation of the real estate property in every sense of the word—which means he who owns the NTF, owns the property.
Putting the “Smart” In Smart Contracts
Once minted, the property can be put up in an NFT real estate marketplace. In comes smart contracts.
Smart contracts are a series of automated actions that are triggered when certain predetermined conditions are met. They dictate the rules of any buy and sell transaction via the blockchain.
Buying real estate with smart contract functionality can have a lot of automation potential. They can include royalty payments, rental divisions, maintenance fees, dividends, and more.
How Do You Pay For Real Estate NFTs?The preferred payment method for NFT real estate is, of course, through cryptocurrency wallets. What you pay for those NFTs depends on the seller’s preference, and you can negotiate with them. That means you can buy a house or a property using another NFT. Once the payment is received, the smart contract automatically transfers ownership to the buyer. This way, the transaction is almost instant, tamper-proof, and recorded in the blockchain. The token or NFT in their wallet is a valid proof of ownership. It transfers all ownership rights to the holder according to the contract, including the right to resell the NFT to another person.
No More Waiting, No More LinesIf that sounds rather roundabout, it is. But there’s promise in the concept: blockchain technology allows instant transfers and can track a property’s ownership, potentially doing away with the mountains of paperwork and bureaucracy involved in researching title histories. Gone are the days of filling out forms, having deeds notarized, lining up to submit the necessary documents, and waiting for someone to finish the paperwork. NFT platforms now allow almost instantaneous transactions. You can shop around a real estate NFT marketplace, buy a property, and have it transferred to your name—all in one afternoon.
Types Of Ownership: Full vs. Fractional NFTAnother great thing about using NFTs in real estate investment is that they make dividing property easier through smart contracts. Fractional NFTs are portions of a full real estate token, which can be commensurately bought for significantly lower prices when compared to the whole thing. Fractional ownership in real estate NFT means several people can own parts of a single token and participate in its potential growth. People can also pool their resources to buy high-value properties as they would through syndications and real estate crowdfunding platforms. Additionally, smart contracts can make things easier by automatically dividing revenue among owners if they rent out the property. Fractional NFT ownership is excellent for dividing commercial real estate.
Physical Real Estate NFTs vs. Virtual Real Estate NFTsIn 2020, artist Krista Kim sold The Mars House for 288 Ether or more than $500,000 on the Superrare marketplace. The house is beautiful, with floor-to-ceiling glass walls, an open-plan design, and a bright, vibrant color scheme. Oh, and it is also completely digital. As much as I hate to think about it, there is a near-zero chance of some guy shelling out to buy a swanky four-bedroom, three-floor NFT real estate project —only to realize that he’d just bought virtual property. That’s not to say that virtual real estate is useless. Virtual real estate sales exceeded $1.4 billion by the end of 2022. But we’re talking about real-world properties here, so it’s best to clear up the distinction. So, before buying NFTs for real estate, you must ensure that what you’re looking at represents a physical property, not a virtual one.
Advantages of NFT Real EstateThe point of advancements in technology is to provide new benefits and conveniences. Real estate NFT is no exception. Take a look at the various advantages of buying and selling real estate via blockchains:
|NFTs provide indisputable proof of property ownership, reducing fraud and disputes.
|Allows for the division of property ownership into smaller, tradable NFTs, increasing liquidity.
|NFTs enable international investment in real estate without geographic limitations.
|Minimizes the need for middlemen, such as real estate agents, potentially lowering transaction costs.
|Properties can be bought or sold anytime, enhancing market efficiency and availability.
|Property details and ownership history are recorded on the blockchain, reducing data manipulation.
|Automated, self-executing contracts can handle payments, rents, and other property-related processes.
|NFTs can be easily traded on digital marketplaces, allowing for quicker asset liquidation.
|Tokenization of Assets
|Real estate assets can be divided into smaller NFTs, enabling more diverse investment opportunities.
|Global Investor Pool
|Attracts a broader range of investors, including those interested in smaller, fractional ownership.
|Blockchain provides a transparent ledger of property transactions, enhancing trust in the market.
|Lower Entry Barriers
|Enables smaller investors to participate in real estate markets with lower capital requirements.
Disadvantages of NFT Real Estate
NFTs can potentially transform the real estate sector, making transactions and ownership transfers faster, reducing middlemen, and increasing automated actions with smart contracts.
However, it comes with certain potential pitfalls that investors must be fully aware of.
|Ambiguous Legal Status
|NFTs raise questions about the legitimacy and recognition of property ownership, complicating legal enforcement and property rights.
|The potential for future regulatory changes threatens the stability and legality of NFT real estate transactions.
|NFTs experience rapid value fluctuations, making the real estate market unpredictable and risky.
|Potentially Costly Transactions
|High fees for minting, listing, and transacting NFTs increase the investment required for property acquisition. Additionally, investing in NFT real estate often requires payment in full, with limited financing options.
|Dependence on blockchain technology may face security risks and possible obsolescence.
|Limited Market Understanding
|A general lack of knowledge about NFTs and blockchain among traditional real estate investors and buyers hinders market growth.
|The emerging NFT market is vulnerable to scams and fraudulent activities, jeopardizing investor security.
|The novelty of NFTs in real estate can lead to inflated valuations that do not reflect actual property values.
|Reduced Human Intermediation
|Minimizing the role of real estate professionals could lead to challenges in negotiations and due diligence.
|Non-Stop Market Fluctuations
|The 24/7 nature of NFT trading can lead to constant market fluctuations, adding to investment risk.
|Immutable Record Rigidity
|The permanence of blockchain records can create difficulties in rectifying errors or updating property information.
|The perceived ease of trading NFTs may not align with real-world liquidity challenges in the real estate market.
|Barrier Reduction Issues
|Lower barriers to entry could lead to a market flooded with inexperienced investors, impacting stability.
Examples of Investing In Real Estate NFTs
To drive the point home, here are some recent, real-world examples of people buying physical real estate through NFTs.
- The first physical real estate NFT was sold in 2021. TechCrunch founder Michael Arrington sold his studio apartment in Kyiv, Ukraine, for the equivalent of $113,176. Propy, a digital real estate platform, facilitated the transaction.
- Propy also sold a U.S. property for $653,000 or 210 ETH through auction. The company says this is the first NFT-backed real estate property sold in the U.S.
- A house in Columbia, South Carolina, was sold as an NFT for $175,000 in 2022. All this was done on the Roofstock onChain NFT marketplace.
- Another property in West Columbia, South Carolina, was sold through Roofstock for $204,000. This is the fourth NFT property transaction on the platform.
Are NFT Real Estate Marketplaces About To Replace Traditional Real Estate?
Despite their novelty and shiny new features, NFTs, or tokenized real estate, are still in their infancy. The entire concept faces many challenges, and the hammer of regulation will fall upon it sooner or later.
Sure, there’s promise in the premise, but don’t expect your deed to arrive as an NFT anytime soon.♦
Are NFTs a passing craze or the beginning of a new boom? How do you see NFTs affecting the future of real estate transactions?
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About the Author
Gerelyn covered Wall Street for years as a financial journalist. After reporting for some of the top trade publications on investment banking, infrastructure, and retirement, she was drawn to decentralization in 2017 and shifted her coverage to write about cryptocurrency and blockchain for major cryptocurrency news sites.